MRCB: News flow thwarts GO

Malaysian Resources Corp Bhd (MRCB)

(April 5, RM1.69)

Maintain buy at RM1.68, with a higher target price of RM2.25: Our view that minority shareholders should shun the conditional takeover offer at RM1.50 per share by the Employees Provident Fund (EPF) has turned out to be correct with MRCB’s share price having overtaken the offer price.

Our reasoning was simple in that something was brewing when the majority shareholder sees more value in the stock by launching a GO (general offer) exercise.

The recent announcement by the prime minister that the EPF and the government will form a joint venture to develop the 3,400 acres (1,376ha) of RRIM land in Sungai Buloh has derailed the EPF’s conditional takeover exercise. This is because MRCB’s share price is clearly above RM1.50/share on expectations that MRCB will be formally appointed as the master developer of this land.

Nonetheless, we read the EPF’s market moves as it being serious in seeing this conditional takeover materialise and it solidifying its shareholding prior to a formal material announcement. In our view, this could be a sizeable government land deal or even the EPF injecting some of its lucrative assets into MRCB.

We believe the key risk for MRCB is the timing of the award of the government land. We understand that various GLC-linked developers have made presentations to the government and approval for the award of land is now at the cabinet level. There are expectations that the award will materialise in June to coincide with the tabling of the 10th Malaysia Plan.

We do not discount the EPF raising the offer beyond RM1.50 per share as it is unlikely that MRCB’s share price will drift back to its offer price until the expiry on April 13. At our previous base case target price of RM1.80/share, we estimate that the EPF has to fork out an additional RM209 million to raise its stake by another 8.5% to 50% for the offer to become unconditional. This is by no means a small amount considering it is a pension fund and has certain obligations to its contributors.

Should the takeover materialise, we think the EPF will retain its stake at 50% to avoid triggering the creep-up rule. We provide in this report a scenario analysis on our previous sum-of-part-derived (SOP) target price of RM1.80/share assuming MRCB clinches the various government land that are up for grabs.

This is not an exhaustive list as we understand MRCB is also bidding for other parcels that we are not privy to.

Among the scenarios include an additional 25 acres in KL Sentral, which would raise our SOP value to RM2.20. We think this is a highly probable scenario.

Another scenario involves the additional 3,400 acres of RRIM Land, where with the EPF’s involvement, MRCB will likely be appointed the master developer for this whole parcel of land and will receive fee income. Besides this, there are a myriad of possible scenarios in terms of how this large tract of land will be parcelled out and whether MRCB will be joint landowners, contractor or developer.

This will raise our SOP value to RM2.70 per share assuming a development duration of 20 years and pre-tax margins of 15%.

The general perception of MRCB is that it is a high-beta leveraged proxy to the sector with historically very patchy earnings delivery. With three quarters of above average earnings deliverance and three-year earnings per share (EPS) compound annual growth rate (CAGR) of 40%, we think MRCB is transforming itself into a credible GLC-linked property/contractor with its strong KL Sentral franchise and now solid earnings support to boot.

With the EPF’s involvement in the RRIM land having exponential spillover effects on MRCB, we are comfortable in raising our target price to RM2.25 per share based on our revised SOP value. — HwangDBS Vickers Research, April 5

This article appeared in The Edge Financial Daily, April 6, 2010.