Massive cash call sparks MRCB selldown

KUALA LUMPUR (May 19): Malaysian Resources Corp Bhd’s (MRCB) proposed rights issue did not go down well with shareholders.

MRCB succumbed to heavy selling yesterday on concerns that some shareholders might be reluctant to pump fresh cash into the conglomerate. Shareholders who decline to subscribe may suffer from up to a 50% shareholding and earnings dilution.

Yesterday’s selldown sent the stock down as much as 12% to an intraday low of RM1.53, with 67.42 million shares changing hands — making it the third most active stock. Some RM436 million of market value were wiped off in one day.

The counter closed at RM1.54, down 20 sen or 11.5% from Wednesday’s closing level, giving it a market capitalisation of RM3.36 billion.

MRCB on Wednesday announced a one-for-one rights issue of shares to raise between RM2.17 billion and RM2.86 billion. Being the largest shareholder, the Employees Provident Fund (EPF) will inject RM716 million into MRCB, while Gapurna Sdn Bhd RM362 million through the rights issue.

EPF, which holds a 33.4% stake, and Gapurna — the private vehicle of MRCB’s group managing director Tan Sri Mohamad Salim Fateh Din — holding a 16.7% stake, have pledged to fully subscribe to the rights issue.

The cash call was sweetened by free detachable warrants on the basis of one unit for five shares subscribed. MRCB plans to issue up to 2.86 billion in rights shares, together with up to 571.34 million warrants.

The cash raised will go towards funding its property development projects such as the National Sports Complex (NSC) in Bukit Jalil here (RM1.21 billion) and partially reduce borrowings (RM826 million), which caught analysts by surprise.

Hong Leong Investment Bank Research analyst Jeremy Goh noted that MRCB has had a change of tune between now and its investor’s briefing in November 2015.

“During its investor’s briefing in November 2015, management reassured that no cash call will be required to fund the [NSC] project as it was mulling to set up a property development fund, coupled with proceeds from the disposal of Shell Tower. As such, this rights issue is certainly a significant change to the tune of what was earlier guided,” he said in a note to clients yesterday.

Goh said he is not upbeat on the proposed rights issue as MRCB’s earnings per share (EPS) will be diluted by 50%, while the benefits of the NSC project such as the development profits will only come in at a much later stage once the facility is completed.

He is putting the stock “under review” from a “sell” rating previously, with a RM1.25 target price (TP).

In November 2015, the government awarded the RM1.6 billion NSC project to MRCB. This involves the group refurbishing the NSC in return for 92.5 acres (37.43ha) of land in Bukit Jalil.

“We are surprised by the proposal. On the positive side, the proposal will have an immediate impact on reducing the gearing of MRCB, which will translate into lower interest costs for the group, and better earnings trajectory,” said AmInvestment Bank analyst Azman Hussin.

“However, we believe the substantially enlarged share base of MRCB may have a dilutive impact on the earnings per share of the group moving forward, which will be negative for the shareholders,” he said.

Nevertheless, Azman is maintaining his “buy” call on MRCB, with an unchanged fair value of RM1.89.

CIMB Investment Bank analyst Sharizan Rosely estimates a 24% to 39% dilution to MRCB’s EPS for the financial year ending Dec 31, 2017 (FY17) and 28% to 43% dilution in FY18 after taking into account potential interest savings and income from warrants proceeds.

“We acknowledge the longer-term benefits of this deal for the group’s ongoing and new property and construction ventures, mainly in Kuala Lumpur Sentral, Cyberjaya, Kwasa Damansara and Bukit Jalil. However, a rights issue of this magnitude typically weighs on sentiment and could create an overhang in the share price over the short term,” he noted.

Affin Hwang Capital Research analyst Loong Chee Wei pointed out that the proposed rights issue will reduce the group’s current net gearing of 0.71 times to zero before utilising the cash to finance its new property projects such as the National Stadium, Sentral Suites, Lot 94 Jalan Kia Peng, Kuala Lumpur Sentral Lot F and 9 Seputeh.

As at end-2016, MRCB’s total bank borrowings stood at RM2.94 billion, while its cash balance was at RM592.77 million.

Loong has also downgraded his call on MRCB to “hold” from “buy”, saying the cash call will lead to a short-term overhang while potential upside to its RM1.85 TP has narrowed.

This article first appeared in The Edge Financial Daily, on May 19, 2017.

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