News

• Rights priced fixed at RM0.79... MRCB announced that it set its 1-for-1 rights issue price at RM0.79. The rights price represents a discount of 33.6% to its last traded share price of RM1.19 (20% discount to its last theoretical ex-rights price). The rights will commence trading on 5 Oct.

• …and warrants exercise price at RM1.25. It has also set the exercise price of its free warrants (1 free warrant for every 5 rights shares subscribed) at RM1.25.

Comments

• Lower than expected. The fixed rights price of RM0.79 is lower than what was earlier indicated at RM1.00. Based on this fixed rights price, MRCB will raise RM1.7bn under the minimum case scenario. We will apply the minimum case scenario for our analysis as the existing warrants are out of the money.

• Utilisation of proceeds. In MRCB’s initial announcement on the proposed rights issue in May, it mentioned that the bulk of the proceeds will be used for the National Sports Complex (NSC) privatisation and repayment of debts. Assuming the sum allocated for the NSC remains unchanged at RM975m, as earlier indicated, this would leave a balance RM742m for debt repayment (ignoring other incidental expenses).

• Net gearing to reduce. We estimate that the rights issue will reduce net gearing from 99% (2QFY17) to 47% on a proforma basis. Interest savings is expected to amount to RM47m on a full year basis from this.

Risks

• Inconsistency in quarterly core earnings delivery and significant EPS dilution from the rights issue.

Forecasts

• Unchanged pending the exact enlarged share base resulting from the rights issue. In any case, EPS is estimated to be diluted by 50% from the rights issue.

Rating

Maintain HOLD, TP: RM1.00 (ex rights)

• Whilst there is certainly no lacking of catalytic projects that MRCB has in hand, the issue here as always, is about core earnings delivery and a long term sustainable management of its net gearing.

Valuation

• While there are no changes to our earnings forecast, we lower our ex rights TP (SOP derived) from RM1.09 to RM1.00 after adjusting our assumed rights price from RM1.00 to RM0.79.

• Our TP implies an expensive FY17-18 P/E of 75x and 54x respectively.

Source: Hong Leong Investment Bank Research - 20 Sept 2017