MRCB:Postulations or Wise Counsel?

And so it seems.

Malaysian Resources Corp Bhd (MRCB) considers it “a good time” for a cash call as the group has achieved a certain scale in terms of number of projects, and needs the capital to expand further, said group managing director Shahril Ridza Ridzuan.

“We are looking at a number of deals right now involving acquisitions of land-bank in terms of the property business as well as investments in new assets,” he told StarBiz. “We are raising funds right now so that we’ll be ready to expand.”

Shahril said the acquisitions may also involve overseas assets.

In what analysts described as a surprise move, MRCB proposed a renounceable one-for-two rights issue of new RM1 shares to raise gross proceeds of up to RM566mil based on the illustrative rights price of RM1.17 per share.

The proceeds will be used to fund expansion into environmental engineering and infrastructure business, acquisition of prime land for property development, as well as for MRCB’s 51% equity investment in Nu Sentral Sdn Bhd, a joint venture between MRCB and Pelaburan Hartanah Bhd to acquire and manage a seven-storey retail mall, Nu Sentral, at KL Sentral.


“Although we were aware that MRCB was evaluating funding options for its land-bank expansion, we were taken aback by its decision to go with a rights issue as we had expected the group to opt for bonds or a share placement,” said CIMB Research.

UOB KayHian said the fundraising exercise could bolster MRCB’s chances of acquiring “prized federal land-bank”.

As RM380mil or 67% of the rights proceeds is allocated for capital expenditure (capex), the rights issue would bolster MCRB’s balance sheet and allow it to participate in the Federal Government’s plans to sell or co-develop its prized landbank.

“Recall that Budget 2010 singled out two plots of land for such purposes – 100 acres in Jalan Cochrane, near Maluri Cheras, Kuala Lumpur city centre (market rate of RM100–RM150 per sq ft) and 2,000 acres in Rubber Research Institute of Malaysia in Sg Buloh, near an industry park in Kota Damansara (market rate of RM30 per sq ft),” it said.

The Employees Provident Fund (EPF), a substantial shareholder with a 30.6% stake, has undertaken to take up its full entitlement.

In the event the EPF subscribes to excess rights shares and its shareholding exceeds the 33% trigger, the fund has confirmed that it will comply with the provisions of the Malaysian Code on Take-Overs & Mergers, 1998 whereby it will be obliged to extend a mandatory general offer (MGO).

While CIMB Research expects EPF to seek a waiver from making the MGO, UOB KayHian believes the potential general offer is likely to happen.

UOB KayHian estimates EPF’s stake would be diluted to 28.8% from 30.6% after subscribing to its portion of rights shares based on an enlarged share capital of 1.45 billion (assuming full exercise of the employees’ share option scheme).

EPF needed an additional 4.2% stake in MRCB by subscribing to the excess rights shares to trigger the 33% level, which it could easily do as the shareholdings of MRCB were fragmented, it said, but added that EPF needed to cross the 50% stake for an MGO to be successful.

One analyst said MRCB’s share price was seen as undervalued, hence the takeover possibility should not be ruled out.

Shahril, when asked, said EPF would have to decide whether to seek a waiver or go ahead with an MGO if and when the situation arose. “But as stated in the announcement, it will comply with the code,” he said.

HwangDBS Vickers Research said given that 67% of the total proceeds would be used for expansion, this implied the group was confident of securing new contracts and possibly acquiring more land-bank.

Furthermore, net gearing is estimated to fall to 0.7 time post-rights compared with 1.1 times as of the second quarter ended June 30. The larger share base after the exercise would improve liquidity, which benefited higher beta stocks like MRCB, it added.

Undervalued shares at RM1.35? Bet your bottom ringgit for EPF to subscribe for excess shares. 2009 was a great year for EPF. It wants to be involved in property stocks giving good values in the long term.

The market rumours have it that EPF will likely announce a dividend of 5% for 2009.

As for an MGO, that we have to see.

Wall Street: On a Roll!

What is happening at Wall Street?

There are just too many analysts. That is my conclusion. Today, they get together and read the data one way;then the next they read the data differently. So the Dow yoyoed up and yoyoed down.

So what do you make of the last two out of three sessions of Wall Street? It was up ,up, up and away.

New York, Monday, 9th November saw the Dow Jones industrial average stormed to its highest level in more than a year.A falling dollar boosted prices for gold, oil and other commodities.

Stocks also jumped as investors grew more confident that governments around the world will keep interest rates low to help the global economy.

Energy and materials stocks led the market.

The major indexes rose 2 percent and the Dow jumped 200 points for the second time in three days, reaching its highest level in 13 months.

The advance was further proof that investors, at least for now, aren't troubled by the unemployment rate that has now passed 10 percent.

News that the Group of 20 countries will keep economic stimulus measures in place signaled to investors that rates will remain low.

With U.S. rates near zero, the G-20 news lessened demand for the dollar.

Even as investors are waiting for more signs that the economy is recovering, they've been focusing on the dollar when they make buy and sell decisions.

Investors around the world see the dollar as weaker than other currencies, and so they're using it for what's known as "carry trade," to finance purchases of investments in other countries.

That trend takes the dollar down further when those purchases are made.

But some analysts are questioning investors' stock moves given the still-weak economy, and warn that stocks and other investments could suffer big losses if the dollar were to turn higher.

"It feels like it's on fumes," said Sean Simko, head of fixed income management at SEI Investments in Oaks, Pa., referring to the market's advance.

"Although fundamentals are catching up, they're not caught up."

The market wasn't fazed Friday by the government's report that the nation's unemployment rate last month rose to 10.2 percent, the first double-digit jobless reading in 26 years.

Even though there are still concerns that consumers either unemployed or worried about losing their jobs aren't likely to spend freely, investors took the report as another sign that interest rates will stay low.

Simko said the dollar's drop and the current surge in stocks and commodities are making it hard for investors to get a clear picture of how fast the economy is rebounding.

Still, many investors like a weaker dollar because it helps U.S. exporters by making their goods cheaper to overseas buyers and giving the companies a boost when they convert profits from abroad to dollars.

The ICE Futures U.S. dollar index, which measures the greenback against a basket of foreign currencies, fell to its lowest level in 15 months.

The dollar rose last year and early this year but the index has been sliding for the past eight months since major stock indicators bounced off 12-year lows.

Commodities prices, meanwhile, tend to rise when the dollar is down, so gold topped $1,100 an ounce.

Crude oil rose $2 to settle at $79.43 per barrel on the New York Mercantile Exchange, helped in part by Tropical Storm Ida, which threatened the Gulf of Mexico.

Energy and materials stocks rose along with commodities prices, and investors' enthusiasm for those stocks spilled over to other industries.

Brian Battle, vice president of trading at Performance Trust Capital Partners in Chicago, said the strength of the carry trade is giving an artificial lift to a range of assets, including stocks.

"There's cheap money that's going to be pumping its way into the system," he said.

"That money is finding a home in the currency and commodity markets."

The Dow rose 203.52, or 2 percent, to 10,226.94, its highest finish since Oct. 3, 2008.

The Dow's gain of 455 points, or 4.7 percent, since Wednesday is its biggest four-day climb since July.

The index rose as high as 10,228.23, topping its previous 12-month trading high of 10,119.46 set last month.

The broader Standard & Poor's 500 index rose 23.78, or 2.2 percent, to 1,093.08, its sixth straight advance.

The Nasdaq composite index rose 41.62, or 2 percent, to 2,154.06.

Again, you can interpret the scenario as you like. Are we walking on eggs?

MRCB: Play It Again,Sam

Can we play this counter by sheer logic based on the quantum of funds that is to be raised from the impending rights issue?

This is a yes and no answer. A do or die proposition.

MRCB intends to raise some RM 566 million rights issue from its shareholders. On the expected basis of 500 shares per 1000 held, this will work out to something like RM1.172 sen per new issue.

At the current price of RM1.34 sen per share,this is certainly not amusing. To make it attractive, MRCB intends that this price is a good discount to the market price. Are they trying to do the impossible, given the current market conditions? Or do they have an ace up their sleeve which they will throw into the ring at the opportune time?

By any reckoning, astute shareholders will subscribe to the rights if the market price is dramatically higher than the rights price. Let me do an extrapolation here.

To be fair to the shareholders, I see at least a 15% price variation for shareholders to take up the rights. That would mean the market price of MRCB should be no less than RM1.51. Since no price have been fixed for the rights nor the apportionment, it is still early days. Anything can happen between now and the end of the first quarter of 2010 when the rights exercise should be over.

So until such time, expect some interesting developments in MRCB to shore up its prices.

As I have mentioned in an earlier post, there are speculative elements in MRCB. One of these is that part of the rights issue will be used 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.

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.

If the land deals should come through, then the indicative fair value of MRCB shares will be raised by 68% from RM1.02 to RM1.71, to reflect the potential massive 69 sen/share enhancement from the prime federal land in KL.

Many parties are recommending MRCB from under-performing to trading buy.Would you buy?

Unemployment versus Obama

So,will Obama overcome?

On Nov 8, Reuters did not surprised pundits when it said that the US jobless rate unexpectedly jumped to 10.2 per cent in October 2009, a historical 26-1/2-year high. Is there magic up the sleeves of Obama to tackle this unemployment issue?

The statistics released by the Labour Department on Friday told a tale of woe. Employers have cut 190,000 jobs in October, more than the 175,000 markets had expected but fewer than the 219,000 jobs lost in September.

Job losses for August and September were revised to show 91,000 fewer jobs were lost than previously reported, taking some of the sting out of the report.

While the revisions hinted at some improvement, economists had expected the jobless rate to rise to 9.9 per cent from September’s 9.8 per cent. A wider gauge of labour-market slack that includes unemployed Americans who have given up looking for work hit a record 17.5 per cent.

Speaking at the White House, Obama said the administration was considering infrastructure investments and business tax cuts to aid the economy’s recovery.

He said with confidence that Americans who want to find work can find work and all Americans can earn enough to raise their families and keep their businesses open.

Stocks on Wall Street ended higher after initially falling as investors looked past the jump in the jobless rate and focused instead on the moderation in payroll losses.

US Treasury debt prices rose as traders saw the data as supporting a prolonged period of low interest rates.

“Unfortunately, the problem is becoming deeper and more protracted,” Mohamed El-Erian, chief executive of bond giant Pacific Investment Management Co (PIMCO) told Reuters.

“It’s not just the increase in the headline number,” he said. “It’s also about the longer-term nature of unemployment, the increase in underemployment and the prospect for only a very gradual recovery,” he said.

While Obama sees job creation as his top priority, the scope for further steps to boost the economy is limited by record budget deficits.

Rising unemployment could pose problems for the Democrats who control Congress as they head into elections in November 2010. This week, Republicans wrested control of two state governorships away from Democrats in races where the weak economy figured prominently.

“President Obama promised jobs during his campaign for president and the elections in Virginia and New Jersey on Tuesday were a clear referendum on his failure to deliver on this promise,” Republican National Committee Chairman Michael Steele said in a statement reacting to the jobs report.


ECONOMY GROWING, LABOUR MARKET LAGS

The US economy grew at a 3.5 per cent annual rate in the third quarter, likely ending the most painful recession in 70 years, but the jobs data suggested employers are wary of the prospects for a strong, sustained recovery.

A report from the Federal Reserve showed households again cut their debt rather than spend in September, pushing down total consumer credit for an eighth straight month. That is the longest downward streak since 1943.

The US central bank on Wednesday held overnight interest rates close to zero and said it expected to keep them low for an “extended period.”

Short-term interest rate futures prices showed the implied chances of a rate hike by mid-2010 slid to about 66 per cent on Friday from 84 per cent late on Thursday.

“I don’t know how in the heck the Fed could justify tightening policy with the unemployment rate over 10 per cent unless we have an imminent inflation danger,” said Keith Hembre, chief economist at First American Funds in Minneapolis.

The US Labour Department conducts two separate surveys. Economists generally place more faith in the survey of employers, which found the loss of 190,000 jobs.

The unemployment rate, however, is based on a smaller household survey. That survey showed 589,000 jobs were lost, while few Americans left the labour force, leading to the big jump in the jobless rate.

Employer payrolls have declined for 22 consecutive months now and 7.3 million people have lost their jobs since December 2007, when the recession started. In October, 35.6 per cent of the unemployed had been out of work for six months or more.

However, the pace of layoffs has slowed sharply from early this year.

Job losses in October were widespread across almost all sectors, with education and health services and professional and business services bucking the trend.

Manufacturing employment fell 61,000 last month, while construction industries payrolls dropped 62,000. The service-providing sector cut 61,000 workers.

Offering a glimmer of hope, temporary help jobs increased by 34,000. It was the biggest gain in temporary employment since the economy fell into recession and suggested companies needed extra hands even if they were not prepared to hire permanently.

The average workweek, which yields clues as to when firms will start hiring, was steady at 33 hours. Average hourly earnings rose to US$18.72 from US$18.67 in September.

A separate report from the Commerce Department showed wholesalers reduced their stocks of unsold goods for the 13th straight month in September. Economists expect a rebuilding of depleted inventories to help support recovery.

So, what does the future holds in 2010?

The Lord's Prayer: For the Office

This is the perfect prayer for the office. Use it and you will be blessed!

Singapore: The Tourist Magnets of 2010

This is a good article from Ronald Tan,a casino gaming consultant who has been associated with the industry since the 1970s.

This is his article as reported in the Singapore Business Times Online Edition today
(Nov 7).

A few weeks ago, Singaporeans watched in awe the hoisting of a 700-tonne beam linking the towers of Marina Bay Sands (MBS) to form the Skypark — a vast rooftop garden — while at Sentosa, Resorts World Sentosa (RWS) was working on the finishing touches to the rides for its Universal Studios Theme Park.

Just how awesome these two integrated resorts (IRs) are is becoming more visible by the day. Together, they will cost in excess of S$13 billion (RM31.2 billion) when they are complete. Not only will they be iconic attractions, but within five years they could bring in 17 million top quality tourists who will spend in excess of S$30 billion and help create over 100,000 jobs, directly and indirectly.

Some sceptics wonder how Singapore's IRs will be impacted by Macau. But there is unlikely to be much overlap; moreover, the market is big enough for both.

For the last 65 years, Macau has been basically a gambling colossus and will always be, even with top attractions such as The City of Dreams, Venetian and the MGM Grand. It is amazing that with a mere three licences issued to Stanley Ho's Sociedade de Jogos de Macau Holdings, Sheldon Adelson's Venetian and Steve Wynn's Wynn resorts, Macau's gambling scene has evolved into 32 casinos. Most visitors cannot tell which are the ones with the original licences and which are sub-licencees or concessions.

Even within new casinos, you will find junket rooms of up to 12 tables operating on a joint venture basis, such as Star Cruise's Crockford Room and Putra Sampoerna's Mansion House — both located at the MGM Grand. The Macanese, in conjunction with their Hong Kong associates, have reinvented the game of baccarat, which represents close to 70 per cent of each casino's wagering.

Singapore's IRs are setting their sights on total entertainment with great experiences in gaming, gourmet dining, shopping, meetings and exhibition activities, great accommodation and dazzling shows.

Junket operators who bring high-rollers into Macau have introduced “parallel betting”, under which the operators use the outcome of bets at the casino table, but accept side bets from their clients that are a multiple of the actual table bet.

This effectively reduces the 39 per cent gaming tax rate which the casino pays, while the bettor will be able to settle either way with the junket operator when they return to the mainland. Junket operators have also introduced insurance such as the blackjack game to baccarat, which ensures the bettor a guaranteed win if he has a high-point card before the house draws the third card.

Junket operators are critical to the survival of the gambling industry in Macau. They enable casino operators to pay less punitive taxes, assist the bulk of mainland Chinese to make settlements back home, thus overcoming currency restrictions and provide credit to players.

Notable junket operators such as Amax and Neptune, both listed Hong Kong entities, are supported by many casinos. They raked in close to S$10 billion in gaming revenue in 2008. However, they are also facing strains — many are saddled with uncollectable debts, the Chinese government has been coming down hard on embezzlement and abuse by both Chinese officials and people in the private sector.

The practices that are rampant in Macau will not be found in Singapore's two IRs. The Singapore authorities have carefully planned the entire operation and have anticipated many of the possible abuses. Most important of all, there will be no sub-licencees, which effectively reduces the policing area.

Singapore's IRs are setting their sights on total entertainment with great experiences in gaming, gourmet dining, shopping, meetings and exhibition activities, great accommodation and dazzling shows. However, gaming will still be an important revenue source — up to 60 per cent. Singapore authorities must be careful not to derail this. Already, there are concerns about the admission levy for locals, the restrictions on ATMs and exclusion orders. People come into the gaming rooms of the IRs to have a great time. So our regulators must be practical in their enforcement.

Singapore's superb infrastructure and security has already attracted many high net worth families to make this country their second home. MICE operators are also already taking bookings to hold meetings and exhibitions in Singapore.

London is a good example of how casinos helped attract many Arab families to relocate there when their second homes in Beirut were overrun by the civil war in the 1970s. Of course, casinos were not the only attraction: London, like Singapore, has some of the best private schools, medical facilities and shopping. But for high net worth individuals, its casinos were an important part of its entertainment value. More than 5,000 high net worth families from Beirut and elsewhere in the Middle East moved to London during the late 1970s, causing a mini boom in the markets for housing and top-end services.

Today, many wealthy foreigners are choosing to spend time in Singapore — as evidenced by the notable levels of purchases of property by foreigners in recent years. With the opening of the IRs, it is likely that demand for high-end accommodation will increase further.

While the initial novelty and stunning attractions of Singapore's IRs could bring in considerable tax revenues as well as tourist dollars, Singapore cannot afford to be complacent. Other governments in the region are also eyeing the benefits of the casino gaming industry. Taiwan will soon approve casinos in Penghu Island. Tokyo is about to announce an IR at Odaiba in Tokyo Bay.

The Philippines is in the midst of building a massive IR in Manila Bay and soon, we may witness the legalising of illegal casinos in Vietnam, Cambodia and Laos. It may not be long before Thailand and Indonesia (Bintan) too approve licences for gaming operations within their jurisdictions. There are already no less than five casino ships trawling international waters around Singapore, drawing large numbers of patrons.

In the face of such competition, it will be a constant challenge for Singapore's IRs to keep reinventing themselves to draw in high-rollers from around the world and keep their attractions compelling to tourists.

For those who wants to envision where Resorts World Sentosa of the Genting Group will fare in the face of this potential wave of change in favour of casino business and tourism, remmeber Genting has first mover advantage. Helmed by Lim Kok Thay, expect Resorts World Sentosa to match the best in the world anywhere!

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!