News

Rukun Juang Sdn Bhd (RJSB), a 85%-owned subsidiary of MRCB Land Sdn Bhd and MRCB, accepted the Letter of Intent (LOI) from EPF to purchase 80% interest in an entity (Entity 1) for RM421.5m. The entity will be directed by RJSB to hold the Exchange Land 1 after it has been delivered pursuant to the terms of the Privatisation Agreement while MRCB will subscribe for or purchase the remaining 20% interest in Entity 1.

This announcement is in relation to the previous proposed privatisation agreement between MRCB’s subsidiary RJSB and the Malaysian Government, for the refurbishment of facilities in the National Sports Complex, Bukit Jalil for a contract sum of RM1.6b, in exchange for 92.5ac (3 pieces of leasehold land) in Bukit Jalil that has a potential GDV of RM14.6b.

Exchange land 1 only comprises of the first piece of land of 28.1ac worth RM496.3m.

Additionally, the 1st tranche of the private placement has been completed (refer overleaf).

Comments

We are neutral on the near-term impact as MRCB would still have to front the initial cost of RM499.2m (Project 1) of the refurbishment of the National Sports Complex as stipulated in the earlier announcement dated 28th Oct-15 (refer to Table 1), which will be funded by internally generated funds, causing net gearing to increase in the near term as MRCB may only be able to realise the value upon completion of Project 1.

However, we believe this news is a mild longer term positive for MRCB as EPF’s 80% stake in the new Entity 1 (which refers to ownership of Exchange land 1), likely by 4Q17, helps lock in land cost at current prices and also alleviate burden straining MRCB’s balance sheet (refer overleaf).

We believe the rationale for this deal is in line with management’s previously highlighted strategy of exploring the option of developing land on a multi-party JV structure to avoid over-taxing MRCB’s balance sheet as contracts associated with land swap deals imply that value realization will take much longer while cash will be tied up in these assets.

This will help to alleviate MRCB’s debt burdens in the longer run through value realisation as current net gearing is high at 1.27x, but could increase up to 1.78x in FY17 post the: (i) Bukit Jalil land swap, (ii) Cyberjaya City Centre (CCC) development, and (iii) payment of Kwasa Land (RM0.7b).

Outlook

MRCB plans to launch at least c.RM1.0b worth of development projects in FY16. 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.RM2.5b, coupled with c.RM1.6b unbilled property sales providing the group with at least two years of earnings visibility.

Forecast

We make no changes to earnings for now pending a detailed announcement which will be made upon the execution of the agreements.

Rating

Maintain MARKET PERFORM

Valuation

Maintain MP and TP of RM1.39 based on FY16E NTA/share of RM1.10 and a Fwd. P/NTA of 1.26x which is -1SD to the average 6- year historical mean.

We apply a below average Fwd. P/NTA due to weakening sentiment on the stock arising from: (i) dilution of existing shareholdings from the new placement, and (ii) RAM’s downgrade of the Southern Link’s junior sukuk. We maintain our valuations although earnings may be weak in the near-term due to its compelling turnaround plans.

Risks

(i) weaker than expected property sales, (ii) lower than expected sales and administrative cost, (iii) negative real estate policies (iv) tighter lending environments

Source: Kenanga Research - 26 Apr 2016