Malaysian Resources Corp Bhd (MRCB) announced that it has entered into a Heads of Agreement to dispose the Menara Shell, consisting of 33- storey office tower, 5-storey podium and 4-storey basement car park, to MRCB-Quill REIT (MQ REIT) for RM640m. The purchase consideration will be satisfied by a combination of cash and issuance of new units in MQ REIT (company press statement).

Comment: As highlighted previously, MRCB was planning to dispose some of its property investment assets to reduce gearing and Menara Shell was one of the assets identified for disposal. Menara Shell has a book value of RM432m, which means MRCB will reap a potential gain of up to RM208m from the disposal (actual quantum will depend on the proportion of deemed disposal to MQ REIT).

This will potentially triple our current net profit forecast of RM105m in FY16E. We have assumed a valuation of RM600m for Menara Shell in our RNAV/share estimate of RM2.00. Potential upside of about 1% to our RNAV based on the slightly higher proposed disposal price.

We view this move to unlock the value of its assets and reduce gearing positively. We maintain our estimates for now as disclosed details for the deal is still sketchy and it is subject to approval of the authorities and both MRCB and MQ REIT shareholders. Maintain our BUY call on MRCB with target price of RM1.60, based on 20% discount to post-placement RNAV estimate.

Source: Affin Hwang Capital Research - 4 Dec 2015