MRCB:Knee-jerk Reaction to its Rights

The market reacted on hearing the proposed rights issue of Malaysian Resources Corporation Berhad (MRCB). By the day's close,it lost a staggering 7 sen, sliding from RM1.39 to RM1.32. This is a shaving of 5.04% of its market price!

Asking money in these times is such a No No. Perhaps,MRCB knows more than what the market does and it sees a market fund raising in this time window as most appropriate and the best way to move the company forward rather than resort to bank loans.According to MRCB, this rights issue will be utilized to fund future business expansion in property and infrastructure development.

MRCB proposes to sell RM566mil rights shares to its shareholders. Currently,the Employees Provident Fund (EPF), the company’s substantial shareholder, has provided a written irrevocable undertaking to subscribe in full the portion allocated to the fund. EPF holds about 30.6% equity stake in MRCB. This is good news as the new shares will be locked up by EPF as long term investment.
The basis for the proposed rights shares, as well as issue price had not been fixed at this juncture, as the “board wishes to have more flexibility in respect of pricing” in view of recent market condition, and the interest of MRCB and its shareholders, the company said.[What does it mean? They expect the price of MRCB to climb higher to ensure good returns to loyal shareholders? The bigger difference between the rights price and the market price must be the desire here.]
The maximum amount to be raised was based on an assumption that the rights shares would be sold at RM1.172 each on the basis of one rights share for every two MRCB shares held.[So, all these numbers are speculative at best!]

The actual amount to be raised would be determined upon finalisation of the proposed rights shares issue.

“Underwriting arrangements will be made by the company for the remaining portion of the rights shares for which no irrevocable undertaking to subscribe has been obtained from the other MRCB shareholders as of now.

The company said underwriting arrangements were expected to be in place prior to the implementation of the proposed rights shares issuance.

Of the amount to be raised, RM85mil would be allocated for equity investment in Nu Sentral Sdn Bhd (NSSB).

NSSB is a 51:49 joint-venture company between MRCB and Pelaburan Hartanah Bhd that was set up to manage a seven-storey retail mall, Nu Sentral, in the Kuala Lumpur Sentral development area.

The mall is currently under development and is targeted for completion in 2012.

To date, MRCB has invested RM38mil in Nu Sentral.

The bulk of the gross proceeds, RM380mil is earmarked for future business investments and expansion of MRCB’s principal activities.

MRCB said the proposed rights issue would allow the company to raise fresh funds without incurring interest expenses or having to service principal repayments.

It would also provide opportunity for entitled shareholders to buy new MRCB shares at a discount to market price. [ Ah Ha! Is this a catch?]

Numbers-wise, the RM558.1m net proceeds will reduce MRCB’s net debt and gearing of RM714.2m and 1.1x as at 30 Jun 09 to RM156.1m and 0.13x. However, the new shares will dilute MRCB’s FY12/10 EPS by 12% from 8sen to 7.1sen.

The fund raising exercise is targeted for completion in the first quarter of next year.

There are speculative elements in MRCB. One of these is that part of the rights issue will be to purchase some choice federal land for commercial development. The rumour mill has it that MRCB and its parent EPF have been given the green light by the Government to acquire and develop two prime federal land parcels in KL, namely: (1) 150 acres in Jalan Cochrane near the city centre; and (2)20-30 acres in Jalan Ampang Hilir near the Jalan U-Thant area. It has been suggested that this federal land deal could enhance MRCB’s valuation by RM624m or 69 sen per share based
on certain assumptions.

The indicative fair value is raised by 68% from RM1.02 to RM1.71, having reflected the potential massive 69sen/share enhancement from the prime federal land in KL. Many parties are recommending MRCB from under-performing to trading buy.

On a personal level, I have taken a tour of this extensive project. Believe me, when it is fully operational, it will have the biggest car park in the Klang Valley and will anytime rival the likes of Mid-Valley City and KLCC!