MRCB - MRCB-Gapurna deal finally announced HOLD

- It was announced that MRCB had acquired Gapurna’s property, construction and security infrastructure businesses for a value of of RM729mil. 

- This deal would be settled via: (1)RM110mil cash and (2) 398.7 million new MRCB shares priced at RM1.55/share together with up to 113.9 million free detachable warrants – on the basis of 2 for 7. 

- Further to that, to mitigate the potential dilution, MRCB also proposed free issuance of new warrants to its existing shareholders on a basis of 1 for 3. This deal is expected to be completed by 1HFY2013.

- This exercise would result in Gapurna having 16.8% stake in MRCB which in turn, would not surprise us, if the former’s MD, Datuk Mohamed Salim and his son Imran having a major role in MRCB’s management.

- The key highlight from this deal is the injection of 33acres of prime Klang Valley land (PJ, Old Klang Road, and Subang) for average pricing of RM324psf which we think is fair given all approvals are in hand and come with generous plot ratio of 4x-6x. There will be further upside as there is FROF and call option on the remaining landbank within Klang Valley – circa 36acres - held by Nusa Gapurna.

- The injection of the landbank also means the increase in orderbook for MRCB’s construction arm by RM3.6bil given the bulk of this value is inhouse property job. This should bring MRCB’s orderbook to almost RM5bil. And there could be an additional RM4.3bil worth of jobs should DO is obtained for two jobs – National Film Dept and Lot 1&2 in PJ.

- While the concerns mainly centres on potential massive dilution – 29% to 31% increase in share capital – this is somewhat compensated by immediate development potential of Gapurna’s prime landbank. 

- Further to that we understand Gapurna is in advanced talks for few more enbloc sales at PJ Sentral. Based on its deal making capabilities we think this is probable.

- We reaffirm our HOLD recommendation on Malaysian Resources Corporation (MRCB) with our fair value is currently placed under review.  MRCB is currently trading at about 20x its FY13F earnings which is at the low end of its PE band. Although the prime land injection would somewhat offset the dilution, given they are launch-ready, we think the stock will trade sideways given the election risks.  

Source: AmeSecurities