MRCB has proposed a surprise rights issue of new shares with free detachable warrants. Based on indicative price of RM1.00, the exercise will potentially raise RM2.17bn for working capital, to repay borrowings and finance its property development projects. We downgrade the stock to HOLD from Buy following the share price outperformance and limited upside to our RM1.85 target price, based on 20% discount to RNAV.

Surprise Rights Issue

MRCB has proposed a 1-for-1 rights issue of new shares at an issue price to be determined later (at least 20% discount to theoretical ex-rights price (TERP)). Shareholders who subscribe for the rights issue will receive 1 free detachable warrant for every 5 shares subscribed. The warrant exercise price will be determined later (at least 20% premium to TERP). The rights issue comes as a surprise as MRCB just completed a private placement raising about RM408m cash.

Repay Debt and Finance New Projects

MRCB explained that the estimated RM2.17bn cash proceeds from the rights issue will be utilized to repay debt (RM826m), finance its property development projects (RM1.21bn), working capital (RM100m) and corporate exercise expenses (RM38.5m). The proposed rights issue will reduce the group’s net gearing of 0.71x to zero before utilizing the cash to finance its new property projects such as the National Stadium, Sentral Suites, Lot 94 Jalan Kia Peng, KL Sentral Lot F and 9 Seputeh.

Earnings Dilution

The repayment of debt will provide interest-cost saving after tax of about RM35m (average borrowing cost of 5.65%). But FY18E fully-diluted EPS will be diluted by the new share issue, leading to potential reduction of 32% to 6.2 sen. Our fully-diluted RNAV/share will be reduced by 25% to RM1.71 from RM2.30. But the earnings contribution from the new projects and interest cost savings will partially mitigate the dilutive impact on EPS.

Downgrade to HOLD

We downgrade our call on MRCB to HOLD from Buy as the cash call will lead to a short-term overhang while potential upside to our RM1.85 target price has narrowed. Key risk is slower property sales.

MRCB’s improved financial position post-rights issue will allow the group to bid for new projects such as Bandar Malaysia and gear up to develop its existing projects such as the Bukit Jalil National Stadium and MX-1 central business district at Kwasa Damansara.

Source: Affin Hwang Research - 18 May 2017