News    An article in The Edge Weekly last weekend reported (quoted from an executive close to PKNS) that PKNS which is currently owned 30% of PJ Sentral  does not want to participate in the corporate exercise between MRCB and Nusa Gapurna Sdn Bhd (NGSB). In addition to that, PKNS instead  looking at buying back the 70% stake that owned by NGSB in PJ Sentral. 

According to the unnamed source, “this is on the instruction of Chief Minister Selangor, Tan Sri Khalid Ibrahim, who feels that if Gapurna wants out, the state entity should buy back the development”.

The article also stated that the supplemental agreement (i.e. MRCB and NGSB further agree that they may complete the sale and purchase of the shares of PJ Sentral at the same time or after the completion of the proposed acquisition of GHC, GGS and the NGD) that announced by MRCB on 3rd June 2013 is perceived as  “anticipation of problems with PKNS”. 

Comments   We view this news piece of news negatively, as it sparks question that whether the lucrative PJ Sentral deal of MRCB and NGSB will be postponed or called off. MRCB management is of the view that legally, NGSB honoured its agreement by exercising the “Dragalong notice” on 23rd April 2013 whereby PKNS is aware about the exercise when MRCB proposed to takeover the NGSB in 8 February 2013. The drag-along notice had  already been agreed by both parties (NGSB and PKNS) when they entered into an agreement in 2010 to develop the land.

Our base-case scenario suggests that this issue is going to be long-drawn, and potentially could only be settled in court as it is now matter of PKNS can really buys backs the NGSB’s 70%-stake in PJ Sentral. MRCB would precede other land deals (i.e. Gapurna Land and Gapurna Builders) with NGSB and defer the PJ Sentral Development until they reach the workable solution with PKNS. This  may  impact  earnings  visibility  of  MRCB  as  we  have  earlier assumed that the PJ Sentral will be the next “jewel in the crown” of MRCB after KL Sentral GDV  will last until 2015. Nonetheless, MRCB’s  management  will  ensure  that  the  PJ  Sentral  deal  will  go through.

Meanwhile, our worst-case scenario, the news is true and legally, PKNS can actually exercise the pre-emptive right to buy back the land. Even without PJ Sentral, our RNAV will only be reduced to RM1.88 from RM2.08, which is still an OP call at this juncture. 

Outlook   As the potential RM2.9b GDV of PJ Sentral has yet to be inked by MRCB due to PKNS, the next catalyst for MRCB would be the 1) forth front runner as a master developer of the RM10b Kwasa Damansara (Sungai Buloh RRI), 2) resolution of long-standing Eastern Dispersal Link (EDL) issues, 3) potential new contracts of rail-infrastructure  of  >RM1.0b,  and  4)  sale  of  another  highway asset. 

Forecast   Maintained as we have yet to impute any potential profits from NGSB in our earnings forecasts.

Rating   Maintain OUTPERFORM

We reiterate our OP call on MRCB pending more development on this issue.

Valuation   We are maintaining our Target Price of RM2.08 based on our RNAV-based valuation.

Risks   Potential called off of PJ Sentral deal

Delays in construction projects.

Source: Kenanga