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MRCB (AmResearch) hold; fair value RM2.13

Proposed merger an enticing proposition

Investment Highlights


• We reaffirm our HOLD rating on Malaysian Resources Corp Bhd (MRCB) for now, with our fair value of RM2.13/share for the stock currently under review as we await further details regarding the proposed merger with IJM Land Bhd.

• It was announced on Bursa Malaysia yesterday that the group had signed an MoU with IJM Land with a view of a merger between the two entities.

• Pursuant to the MoU, both parties aim to enter into a definitive agreement for the proposed merger within three weeks from the date of the MoU. Further details would then be disclosed.

• Essentially, we understand that the merger between the two companies would be carried out via the establishment of a newly incorporated company (Newco) which would become the listed holding entity.

• Both IJM Land and MRCB shares would be exchanged for shares in Newco or for a combination of shares in Newco and cash. The exchange will be done based on an offer price of RM3.65/share in IJM Land and RM2.30 per MRCB share.

• The offer price of RM2.30 per MRCB share offers an 8.5% upside to the last closing price and only a 4% discount to our revised sum-of-parts value of RM2.40 per MRCB share – following our revision to earnings in the last report dated 23 November 2010. There could be further upside for minority shareholders, given that our SOP valuation only assumes a conservative 20% stake in the estimated GDV of RM10bil for the Sungai Buloh land development – of which we think is quite prudent.

• Despite our HOLD rating, we believe the proposed merger is attractive and thus advocate MRCB’s minority shareholders to migrate to the Newco:

• (1) Shareholders would be migrating to a larger entity – with an expected market capitalisation of over RM7bil – making it the 2
nd largest listed property company. Liquidity would in turn improve with an expected strong following from institutional funds.

• (2) Newco would be a pure property player and would be reaping from stronger earnings due to stronger margins and there will be no drag on earnings from meagre construction margins.

• (3) Earnings will be diversified as there will be exposure to township development – a case in point, Seremban 2 & Canal City – given that MRCB’s property earnings would have mostly been driven by KL Sentral development.

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DETAILS OF MERGER

It was announced on Bursa Malaysia yesterday that Malaysian Resources Corporation Bhd (MRCB) had signed an MoU with IJM Land Bhd with a view of a merger between the two entities.

Pursuant to the MoU, both parties aim to enter into a definitive agreement for the proposed merger within three weeks from the date of the MoU. Further details would then be disclosed.

Essentially, we understand that the merger between the two companies would be carried out via the establishment of a newly incorporated company (Newco) which would become the listed entity.

This Newco could become a pure property company following a rationalisation exercise whereby MRCB’s non-property assets are expected to be parked under IJM Corporation.

Both IJM Land and MRCB shares would be exchanged for shares in Newco or for a combination of shares in Newco and cash. The exchange will be done based on an offer price of RM3.65/share in IJM Land and RM2.30 per MRCB share.

The offer price of RM2.30 per MRCB share offers an 8.5% upside to the last closing price and only a 4% discount to our revised sum-of-parts value of RM2.40/share– following our revision to earnings in the last report dated 23 November 2010.

The exchange price of RM2.30/share was arrived after taking into consideration the following:

(1) A premium of 10.2% to the 5-day VWAMP of MRCB shares up to and including 19 November 2010
(2) The audited consolidated net assets per share as 31 December 2009 of RM0.74, representing a P/B ratio of 3.11x,
(3) The unaudited consolidated net assets per share as at 30 September 2010 of approximately RM0.88, representing a P/B ratio of about 2.6x, and
(4) The audited consolidated EPS for FY2009 of RM0.04, representing a PE multiple of 61x.


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