News

• To sell Menara Shell. MRCB has entered into a Heads of Agreement with MRCB-Quill REIT (MRCB-Q) for the disposal of Menara Shell to the latter for RM640m. The said property in KL Sentral consists of a 33-storey office tower, 5- storey podium and 4-storey basement car park. The purchase consideration will be satisfied via cash and issuance of new MRCB-Q shares. However, the ratio of cash to new shares has yet to be determined.

Comments

• News is within expectations. This news does not come as a surprise as management has highlighted numerous times of its intention to inject Menara Shell into MRCB-Q. Another potential assent injection on the cards is Ascott Residences (RM250m).

• Making our assumptions. In our analysis, we have assumed that the purchase consideration of RM640m for Menara Shell will be satisfied via 64% cash (RM412m) and 36% in new shares (RM228m). This ratio is consistent with that used for the disposal of Platinum Sentral to MRCB-Q. If we further assume that the shares will be issued at a price of RM1.09/ share, then a total of 209m new MRCB-Q shares will be issued to MRCB.

• Impact to net gearing. We estimate that the disposal of Menara Shell will reduce MRCB’s net gearing from the current 113% to 86% on a proforma basis. However, this is unlikely to be the case that eventuates given that MRCB is in need of funding to undertake several large scale developments such as Kwasa Damanara MX-1, Cyberjaya City Centre and National Sports Complex redevelopment.

• Shareholding in MRCB-Q. MRCB currently holds a 31.2% stake in MRCB-Q. Should the purchase consideration be satisfied in accordance to the cash to shares ratio (64:36) that we postulated, this will see MRCB receiving an additional 209m shares in MRCB-Q. The former’s stake in the latter would then be raised to 47.7%.

Risks

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

Forecasts

• No change to estimates for now pending clarity on the timeline regarding the disposal as well as breakdown in consideration. Potential impact to net gearing is as previously explained.

Rating

BUY TP: RM1.63

• 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 of RM1.63 implies an expensive FY15 P/E of 50x but this reduces to 25.5x for FY16 once earnings growth sets in.

Source: Hong Leong Investment Bank Research - 4 Dec 2015