MRCB’s disposal of DUKE too low?

PETALING JAYA (Jan 31, 2014): Analysts have expressed approval of Malaysian Resources Corporation Bhd's (MRCB) disposal of its 30% stake in the concession holder of the Duta-Ulu Kelang Expressway (DUKE) but opined that the pricing of the deal, at RM228 million, could have been better.
According to MIDF Research head of equity Syed Muhammed Kifni in his note to investors, the RM760 million paid for the entire stake in DUKE came in below his estimated valuation of RM1.4 billion.
"Although the price tag of RM228 million is below our estimates, we opine its valuation is fair considering the surplus book value of assets over its cost of investment," he said.
He added that the deal is still expected to generate a gain of some RM100.5 million, as the original cost of MRCB's investment in DUKE is about RM127.5 million.
However, the deal has led MIDF to downgrade its rating on MRCB to "neutral", with a revised target price of RM1.45 after taking into consideration the price tag of the DUKE disposal.
Hong Leong Investment Bank (HLIB) research analyst Jarod Soon concurred, saying that the price tag for its DUKE stake is 21.9% lower than its own estimation, adding that the highway is still in the early growth stages.
However, Soon agreed with MRCB's decision to sell DUKE and redeploy its cash into its core property development business. This is because the highway is due for a Phase 2 extension worth RM1.18 billion which would require additional funding from its shareholders, which would put further constraint on DUKE's future cash flow.
HLIB maintained its long term "buy" call on the stock, but reduced its target price by 1.9% to RM2.02, reflecting DUKE's lower valuation.
Kenanga Research analyst Iqbal Zainal was of a different view, opining that not only was the price tag for the stake fair, but it is in fact 15% higher than his own estimation. He added that the disposal value is also in tandem with the latest valuation by an independent valuer appointed by Ekovest.
Kenanga maintained its "outperform" rating on the counter, while raising its target price to RM2.02 from RM2.01.
The announcement on the disposal of the DUKE stake came on the same day MRCB announced plans to inject its flagship KL Sentral project, Platinum Sentral, into Quill Capita Trust (QCT)'s real estate investment trust (REIT) for RM750 million. The deal would effectively give MRCB a 30% to 31% stake in the REIT.
Soon opined that QCT is likely to issue an additional 10% private placement to avert a situation where MRCB might emerge with a 33.9% stake, triggering a mandatory general offer.
QCT will provide an avenue for future degearing given MRCB's upcoming list of assets while QCT has the potential to become one of the largest REITs in the country, Soon added.
Iqbal, on the other hand, expects MRCB to transfer more assets to complete its plan to inject between RM1.7 billion to RM2 billion worth of property investment into REITs. Other than Platinum Sentral, MRCB has a few more existing buildings namely Ascott Residence, Shell Tower, Plaza Alam Sentral, Kompleks Sentral, and Sooka Sentral.
"For the first time, MRCB will be owning a REIT and we estimate this will consistently provide dividend to MRCB at about RM24 million to RM30 million every year after the transaction," Iqbal said. Once the deal is completed, MRCB's valuation will increase to RM2.30 from RM2.02 currently, he added.
MIDF was positive on MRCB's REIT exercise, explaining that the asset injection into the REIT and its subsequent shareholding in it, would work to unlock the assets value and generate higher recurring distribution from QCT.
"We expect the net proceeds of RM478 million (from the REIT exercise) and DUKE's disposal net gain to help pare down the group's net debt of RM2.9 billion by about 20% and consequently reduce its net gearing to 1.4 times from 1.7 times," Syed Muhammed Kifni said.
MRCB's share price closed 1 sen or 0.66% up at RM1.53 yesterday. Some 1.6 million shares changed hands.