MPHB: Looking good with Magnum ownership

Multi-Purpose Holdings Bhd (Aug 16, RM2.84)
Initiating coverage at RM2.77 with a buy call and target price of RM3.60: We initiate coverage on Multi-Purpose Holdings Bhd (MPHB) with a "buy" call and RM3.60 target price (10% discount to RM4 sum-of-parts per share). Its current share price reflects only Magnum Corp's value without any value ascribed to its other businesses. We expect 14% three-year forward earnings compounded annual growth rate with 100% ownership of Magnum Corp. A major re-rating catalyst is the gradual disposal of non-core assets which could enable it to pay up to 44 sen in special dividends per share (DPS) and 20 sen in recurring net DPS, offering a whopping 7% net yield.

MPHB is involved in gaming, financial services, stockbroking, hospitality and property. We estimate that gaming, via Magnum Corp, will contribute 80% to group net profit in 2012 (first full-year of 100% ownership). Magnum, a numbers forecast operator (NFO), has only 485 outlets or 32% of all outlets in Malaysia but commands RM3.6 billion in gross NFO revenue or 40% market share.

Earnings growth will be driven by 100% ownership of Magnum effective June 10, 2011. There is also upside to earnings via its joint ventures in property development with Bandar Raya Developments Bhd, which could contribute RM40 million per year to group net profit commencing 2014. Also, potential development of its Jalan Imbi land into a RM3 billion mixed retail and residential development has not been imputed into our earnings estimates.

It is no secret that MPHB is embarking on a non-core assets disposal exercise. We estimate that some RM2 billion can be raised. Assuming two-thirds goes towards debt repayment, net gearing will fall to 23% and if the remaining one-third is returned to shareholders, investors can expect up to 44 sen per share in special DPS. A pared net gearing level also allows MPHB to pay higher recurring dividends. Assuming 75% net dividend payout ratio (2010: 24%), it can pay 20 sen net DPS or 7% net yield.

We like MPHB for its cheap valuations at 10 times forward price-earnings ratio against Berjaya Sports Toto's 13 times. Its current share price reflects only Magnum Corp's value. Potential disposal of non-core assets could re-rate this stock, albeit, gradually via special dividends and stronger recurring dividends. In the end, MPHB will be a gaming group with property exposure generating free cash flow per year of 25 sen per share or a whopping 9% FCF yield. — Maybank IB Research, Aug 16