News

• Embarks on private placement. MRCB has proposed to undertake a private placement of between 357.3m (minimum) and 493.6m (maximum) new shares (20% of share capital) at an indicative issue price of RM1.24.

• Commitment by major shareholder. Major shareholder Gapurna (16.7% stake) has committed to undertake 120m new placement shares with the balance to be placed to institutional investors. The placement exercise is targeted to be completed by 2Q16.

Comments

• Contrary to previous guidance. This placement exercise comes as a surprise. During its investor’s briefing last week, management mentioned that a cash call would be the last option on the cards. Instead, it guided that its landbanking requirements will be fulfilled via the injection of investment properties into MRCB-Quill REIT and setting up a property development fund.

• Utilisation of proceeds. At the indicative placement price of RM1.24/ share, MRCB will raise RM443-612m. This will be used for property development activities (61-63%), repayment of debt (14-15%), working capital (20-23%) and placement expenses (2%).

• Impact to net gearing. Based on our estimates, the private placement would reduce MRCB’s net gearing from the current 112% to 68-78% on a proforma basis.

• The pros and cons. While the placement would dilute EPS by 20%, it would enhance MRCB’s balance sheet with the much needed reduction in net gearing. If we were to strip out the Sukuk (which is ring-fenced to the Eastern Dispersal Link), MRCB’s proforma net gearing would be even lower at 32-40%.

Risks

• Execution (particularly on its construction jobs) is a key risk to keep an eye on.

Forecasts

• No change to estimates for now. Potential impact to net gearing is as previously explained.

Rating

BUY TP: RM1.64

• Whilst still in its early days, we reckon that MRCB’s new management is on the right path (albeit at a slow pace) to turn the company around. Expect more positive news flow in the coming months.

Valuation

• Our SOP based TP is reduced slightly from RM1.70 to RM1.64 as we impute the dilutive impact from the private placement which is partially offset by the cash infusion that it would generate.
• No doubt, this implies an expensive FY15 P/E of 37.7x but reduces to 24.8x for FY16 one its earnings turnaround sets in.

Source: Hong Leong Investment Bank Research - 17 Nov 2015