Rights Issue Adjustment

The ex-date for MRCB’s 1-for-1 rights issue and 1 free warrant for every 5 rights share subscribed was on 2 October and the last day for subscription in 20 October. We recommend subscribing for the rights issue at issue price of RM0.79, given the attractive 15% discount to market price of RM0.925 and free warrant offered. The exercise price for the new warrant is RM1.25. We adjust our EPS forecasts lower by 19-29% for FY18-19E to adjust for the right issue dilution, partially offset by the lower interest expense. Maintain HOLD with the adjusted TP of RM0.94, based on 20% discount to RNAV.

EPS Adjustment

We lift our EPS by 5% for FY17E as the lower interest expense following the repayment of debt, utilising cash from the rights issue proceeds, which offsets the weighted average EPS dilution from the rights issue of new shares. But, the full-year impact of the EPS dilution from the rights issue led us to adjust our EPS lower by 19-29% for FY18-19E. The exercise price for the existing warrant A will be adjusted down to an indicative price RM1.68 from RM2.30 and 1 new warrant will be issued for every 2 existing warrants held post-rights issue. Given that the adjusted exercise price is 82% above the current share price and the impact if exercised is antidilutive, our EPS forecasts are not fully-diluted for the warrants.

Positive Long-term Prospects

The estimated cash proceeds of RM1.73bn assuming the rights issue is fully subscribed will reduce MRCB’s net gearing from 0.99x as at 30 June 2017 to 0.42x. This will reduce its interest expense and allow the group the flexibility to gear up to fund the development of new projects such as the KL Sports City in Bukit Jalil, transport-oriented development in Kwasa Damansara and Cyberjaya City Centre projects. Good long-term earnings growth prospect for MRCB, underpinned by its substantial construction order book of RM5.5bn and remaining property gross development value of RM55.1bn.

Adjusting TP to RM0.94

We adjust our TP down to RM0.94 from RM1.24 previously to reflect the dilutive impact of the rights issue. As the potential upside to our TP is limited, we maintain our HOLD call. Key upside/downside risks are stronger/weaker property sales and higher/lower construction margin.

Source: Affin Hwang Research - 3 Oct 2017