MRCB has proposed a 1-for-1 rights issuance with 1 free rights warrants for every 5 rights shares to raise up to RM2.9b . We are not surprised considering its high net gearing and payment obligations. While the move could be ROE dilutive, we view it as an essential move to address its high net gearing if it intends to continue its aggressive property development plans. Maintain MARKET PERFORM (Cum / Ex-TP: RM1.65 / RM1.32).

News. Recently, MRCB proposed a 1-for-1 rights issuance with 1 free rights warrants for every 5 rights shares to raise RM2.9b to fund its privatization project (Bukit Jalil Stadium) and address its net gearing issues. While the issue price has yet to be fixed, the illustrative price of RM1.00 implies a 27% discount to its theoretical ex-all price of RM1.27 based on yesterday’s closing price.

Not surprised… We are not surprised with the proposed rights issuance move by MRCB as they would require funds to pare down its debts given high net gearing of 0.73x (FY16), future working capital and payments for its land acquisitions. While we are not entirely positive with the exercise as it will cause severe dilution in ROEs, we believe that it is an essential move by MRCB to address its high net gearing if it wants to continue its aggressive property development ambitions. Post rights issuance, we would anticipate its balance sheet to turn into a net cash position from its 0.73x levels in FY16. However, we would expect our FY17-18E EPS to be diluted by 50%, while its FY17- 18E PER is expected to expand by 65% from 63.9x and 58.1x, respectively.

Briefing updates. Management has indicated that they would not expect any cash call in the next five years. However, we do not rule out any future cash call exercises depending on their aggressiveness in the property development sector especially landbanking.

Outlook. Moving into FY17, management has set their sales target at RM1.2b banking on their planned launches of Sentral Suites (GDV: RM1.4b), 9 Seputeh Phase 2 (GDV: >RM900.0m), Bukit Rahman Putra (GDV: RM100.0m) and Bandar Sri Iskandar (GDV: RM16.0m). MRCB’s remaining external construction order book stands at c.RM7.0b. Coupled with c.RM1.2b unbilled property sales, collectively these provide the group with at least four years of earnings visibility.

No changes in estimates. We are keeping our FY17-18E earnings at this juncture pending its upcoming 1Q17 results announcement and analyst briefing to be held this month.

Maintain MARKET PERFORM. Post rights issuance announcement, we adjusted our SoP-driven Target Price to RM1.32 (cum TP, RM1.65) on an "ex-all" basis after factoring in the above-mentioned exercise, while maintaining our MP call as we do not see any major catalyst in the near term except for their initiative in seeking an extension for another 15-30 years for the EDL highway construction from the government.

Downside risks to our call include: (i) weaker-than-expected property sales, (ii) higher-than-expected administrative cost, (iii) negative real estate policies, and (iv) tighter lending environment.

Source: Kenanga Research - 19 May 2017