We agree with MPHB's plan to decouple its gaming and nongaming assets to unlock value. This is not unexpected although  management's earlier plan was to dispose off the non-gaming assets. MPHB is expected to turn into a net cash company after the demerger exercise. Our analysis shows that the gaming asset could value MPHB at RM3.39/share, with a 56 sen special dividend. The valuation could reach RM4.52/share should MPHB gets to have the same Beta as BToto. In summary, MPHB will be an attractive yield play with a targeted earnings payout of 80% from 50% currently. As such, we continue to rate MPHB an OUTPERFORM with a price target of RM3.72/share, a 10% discount to its RNAV.

Decoupling to unlock value. Yesterday, Multi-Purpose Holdings Bhd (MPHB) announced a demerger proposal to decouple its gaming and non-gaming assets. The gaming asset will remain at MPHB while a SPV will take over all the non-gaming assets, which will eventually be listed on Bursa Malaysia, from MPHB with an offer price to be determined later. Upon completion, MPHB will use the proceeds to reward shareholder by way of a capital repayment. The entire demerger exercise is expected to be completed by end of the year. Post demerger, MPHB is committed to pay out at least 80% of its gaming earnings. 

It is well expected by the market.  All these while, MPHB has been trading at a 20%-30% discount to its rival,  Berjaya Sports Toto Bhd ('BToto', MP; TP: RM4.52).  This is because being a conglomerate (albeit c.75% of its earnings are derived from the NFO business), it typically commands a lower valuation compared to a single-purpose business entity. As such, this announcement is not unexpected although the earlier plan of the management was to dispose off all the non-gaming assets. With this, it has the same effect to unlock its value without selling off any assets especially its valuable property assets.

Non-gaming assets valued at RM1.44b. We have estimated that the non-gaming assets could be worth c.RM1.44b, which will enable  MPHB to redeem all its outstanding borrowings and turn the group into a new cash company. With the net proceeds, MPHB would be able to distribute 56 sen as a one-off special dividend to the shareholders. Nonetheless, we believe this number is still conservative given that our RNAV model values its property assets/lands based at their NBV only, with their market prices likely being much higher.

MPHB could be valued as high as RM4.52/share.  Besides the one-off special dividend, the regular GDPS would jump to 24.9sen (6.4% net yield) based on its 80% dividend payout policy, from 17.2sen (4.4% net yield) based on a 50% payout previously. In addition, a gaming-only MPHB would be valued at RM3.39/share with a potential rise to as high as RM4.52/share should MPHB gets to have the same Beta as BToto of 0.710 from its current Beta of 1.092. Low Beta is valid, especially so when the company becomes a yield stock as it would then be less sensitive to the overall market performance.

1+1>2?  Existing shareholders of MPHB will be offered to take up the SPV shares in proportion to their shareholding in MPHB. As such, at net basis, shareholder's wealth would remain the same in theory if they use the capital repayment to subscribe the SPV shares. However, we believe the total values for the two separate entities could be higher than the pre-demerger value given the potential re-rating on the gaming asset.

OUTPERFORM maintained. MPHB is trading at an undemanding CY13 10.6x PER, a 27% discount to BToto's 14.2x. Hence, we believe it is a good time to buy MPHB now before it gets re-rated after the completion of the demerger exercise. We maintain our OUTPERFORM  rating and price target of RM3.72/share, which is at a 10% holding company discount to the RNAV.