News

MRCB announced private placement of 493.6m shares, or 20% of the issued and paid-up capital.

The placement shares are proposed to be placed out to: (i) Gapurna Sdn Bhd, and (ii) independent thrid party investors.

The proceeds will be utilised for property development activities, repayment of borrowings, and general working capital which will also help avoid overstraining MRCB’s balance sheet.

Comments

We were taken by surprise, considering that management had stressed that there will be no ‘cash call’ option in the recent briefing.

However, management clarified that the main purpose of the proposed placement is solely to maintain its status as a listed Bumiputera company and not meant to seek more cash from its existing shareholders.

The main rationale for the placement is part of a requirement by Ministry of Finance (MOF) to increase MRCB’s Bumiputera shareholdings and maintain its Bumiputera Controlled Public Listed Company status which requires a minimum 35% Bumiputera spread vs. 28% currently (refer overleaf).

Benefits of being a Bumiputera company status include additional business opportunities as most government contracts have a quota for Bumiputera contractors (i.e. MRT 2 with 45% of contract value for Bumiputera contractors).

The placement shall be issued at a discount not exceeding 10% of the 5-day VWAMP which will be determined in due course (est. by 1H16). Assuming a 10% discount to the 5-day VWAMP, and an indicative issue price of RM1.29, we estimate that MRCB could potentially raise RM638.8m from this exercise.

Assuming MRCB places out all 20% of issued and paid up capital (493.6m shares) in FY16, the FY16E EPS will be diluted from 3.8 sen to 2.9 sen.

Positively, it will lower FY16E net gearing to 1.26x from 1.89x post (i) Bukit Jalil land swap, (ii) Cyberjaya City Centre (CCC) development, and (iii) payment of Kwasa Land (RM0.7b) and German Embassy Land (RM0.3b).

All in all, we are neutral on this placement. Although the near term impacts of the placement are dilutive, the classification of MRCB as a Bumiputera company will increase its prospects of more jobs in the future, and as such we view this as a long-term positive.

Outlook

MRCB plans to launch at least c.RM1.0b worth of development projects in the immediate-term, consisting of “affordable” residentials in Kajang (GDV: RM234m), high-end residences near KLCC namely The Grid (GDV: RM387m), and office buildings in Putrajaya (GDV: RM336m). However, given the weak property market, we would not be surprised if the group scales back launches.

It has a remaining external construction orderbook of c.RM1.7b, coupled with c.RM1.7b unbilled property sales providing the group with at least two years of earnings visibility.

Forecast

We make no changes to earnings for now pending finalisation and approvals of the relevant proposals for the placement.

Rating

Maintain MARKET PERFORM

Valuation

Maintain MP and TP of RM1.63 based on the average 6-year historical mean Fwd P/NTA of 1.73x on FY16E NTA/share of RM0.94.

We are pegging it to average level on the group’s turnaround efforts which we expect will further improve investors’ sentiment on the stock as their plans unfold.

No changes to our FY15-16E earnings as the orderbook replenishment of RM1.6b and RM3.1b which is staggered over 12 years are still within our FY15-16E replenishment assumptions of RM1.0b-RM1.8b.

Risks

(i) Weaker than expected property sales, as well as (ii) Lower than expected sales and administrative cost

Source: Kenanga Research - 17 Nov 2015