News

• Rights issue with free warrants. MRCB has proposed (i) rights issue of up to 2,856.7m new shares on a 1 for 1 basis and (ii) 1 free warrant for every 5 rights shares subscribed. It has also proposed that its major shareholders EPF (33.6%) and Garpuna (16.8%) be exempted from making a mandatory offer as a result participating in the rights issue.

Comments

• Significant cash call. We regard the 1 for 1 rights issue to be relatively significant, doubling MRCB?s share base from 2,173m to 4,346m under the minimum case scenario (we analyse the minimum case scenario as the existing warrants are out of the money). Based on the indicative rights price of RM1.00 and the 5-day VWAP of RM1.5424, the theoretical ex rights price would be RM1.27.
• What is it used for? At the indicative rights price of RM1.00, this would raise total proceeds of slightly below RM2.2bn. This will be used in the following manner (i) RM975m to finance the privatisation project of the National Sports Complex (NSC), (ii) RM826m to repay borrowings, (iii) RM233m for property and construction projects, (iv) RM100m for working capital and (v) RM39m for expenses related to the right issue.
• A change of tune. To recap, the NSC privatisation (RM1.6bn) was awarded to MRCB in Oct 2015. This involves MRCB constructing the NSC in return for 92.5 acres of land in Bukit Jalil. During its investor?s briefing in Nov 2015, management reassured that no cash call will be required to fund the project as it was mulling to set up a property development fund coupled with proceeds from the disposal of Shell Tower. As such, this rights issue is certainly a significant change in tune of what was earlier guided.
• Net gearing to reduce. We estimate that the rights issue will reduce net gearing from 76% (4QFY16) to 27% on a proforma basis. Interest savings is expected to amount to RM47m on a full year basis from this.

Risks

• EPS dilution by 50% resulting from the rights issue.

Forecasts

• Under review pending 1QFY17 results which will be released on 29 May. Rating Under Review
• Our rating on the stock is Under Review. The previous rating was a Sell with RM1.25 TP. We are not upbeat on the rights issue as EPS will be diluted by 50% while the benefits of the NSC project (i.e. development profits) will only come in at a much later stage once the facility is completed.

Valuation

• Our SOP based TP (25% discount) of RM1.25 implies an expensive FY18-19 P/E of 42x and 33x respectively.

Source: Hong Leong Investment Bank Research - 18 May 2017