MRCB - Walking the Talk

News Disposing Platinum Sentral to Quill Capital’s REITs
 Separately, MRCB announced that it has entered into a Head of Agreement (HOA) with Quill Capital Trust (QCT) for the disposal of one of its property investment asset, Platinum Sentral for RM750m.
 QCT will finance the acquisition via: (i) RM486m cash and (ii) issuance of new units in QCT at an issue price of RM1.32 per units for the remaining RM264m. MRCB is also buying about 41% stake in the QCT’s management at RM7.2m.
 This will make MRCB a single largest shareholder of QCT, owning 30-31% of the REIT.
Disposing 30% stake in DUKE Highway to Ekovest
 MRCB announced that it is disposing its 30% equity interest in Nuzen (holding company of Kesturi, the concession holder of DUKE highway) and all the highway’s-related instruments i.e. 585 Series A redeemable preference shares in Kesturi and
RM54m nominal value redeemable secured junior bonds in Kesturi to Ekovest for RM228m.
 The disposal is expected to be completed in 3Q14 and MRCB is expected to generate RM99.2m net gain from the disposal.
Comments  Injecting Platinum Sentral into Quill Sentral REITs: Firsts of many? Although MRCB buying QCT at a 10% premium to the latest QCT’s closing price of RM1.20, this deal is seen POSITIVE for MRCB as: (i) it will improve MRCB’s net gearing by 30% to about 1.4x from 1.7x currently after getting net cash of about RM479m, (ii) the price tag of RM750m is at 85% premium on its net book value of RM405m as at December 2012, implying a gross yield of 6.8% which consider decent compared to market gross yield rate of about 6-7%. (iii) it is the first time, MRCB will be owning a REIT and we estimate this will consistently provide dividend to MRCB at about RM24m- RM30m every year post transaction, and (iv) we estimate, if the deal transacted, our SoPderived valuation will increase by 29 sen to RM2.30 from RM2.02 currently.
 We understand MRCB will be transferring more assets to complete its plan to inject about RM1.7b – RM2.0b worth of property investment into REITs. Other than Platinum Sentral, MRCB has few more existing buildings namely Ascott Residence, Shell Tower, Plaza Alam Sentral, Kompleks Sentral, and Sooka Sentral.
 DUKE Disposal: Non-core assets disposal on track. After being widely reported in the media, the deal (MRCB disposing its 30% stake in DUKE highway) is finally happening. The price tag of RM228m works out to be RM760m which we believe is fair, given: (i) it is in tandem with latest valuation by the independent valuer, BDO appointed by Ekovest and (ii) 15% higher than our valuation of the 30% stake in the highway. Net gain of disposal stands at RM99.2m and it will be utilized to pare down debts.
 This is part of MRCB’s plan to divest its non-core assets that not contribute to the Group such as DUKE which is still making losses and will take about more than three years to break even, hence, a long way for MRCB to see returns from the highway.
 All in, we are POSITIVE on both deals as MRCB “walk the talk” in planning to turnaround the Group. Both deals will reduce net gearing level of MRCB to 1.4x from 1.7x and potentially will increase our SoP-derived valuation to RM2.31 from RM2.01.
Outlook  We now believe that MRCB is executing its turnaround plans which it shared in a previous analysts’ briefing. After selling the 30% stake in the DUKE highway and monetise Platinum Sentral, there are few more major developments in the pipeline that will accrete the Group’s value namely: (i) injecting its other property investment portfolios worth more than RM1.0b into REITs, and (iii) higher possibility of replenishing its order book of about RM1.0b this year driven by building and infra projects, and (iii) emerging as one of the frontrunners of Kwasa Damansara project.
Forecast  Maintained. We expect there will be one-off profit from the disposals this year.
Rating Maintain OUTPERFORM
 With the stock offering potential upside of 30%, MRCB could be a “Dark Horse” of the year after being bashed down by investors due to negative news/development (i.e. huge provisions of RM167m due to poor executions, EDL “limbo”, PJ Sentral’s NGD-PKNS court tussle) last year.
Valuation  We adjust slightly higher our SoP-derived valuation to RM2.02 from RM2.01 after reflecting the latest valuation its 30% stake in DUKE Highway. We will adjust for the Platinum Sentral – Quill Capita deal once they have reached a definitive agreement.
Risks to Our Call Delays in construction projects.
 Lower-than-expected property sales