This article first appeared in The Edge Malaysia Weekly on October 9, 2017 - October 15, 2017

MALAYSIAN Resources Corp Bhd’s (MRCB) monstrous one-for-one rights issuance created an uproar among its minority shareholders when it was announced in May.

But the market appears to have a completely different take on the rights itself. Once the counter went ex last Thursday, a whopping 383.22 million MRCB rights changed hands off market, closing at 9.5 sen. MRCB’s shares closed at 88.5 sen the same day.

The following day saw 165.97 million rights traded, closing at 11.5 sen a piece; MRCB’s shares rose slightly to close at 92.5 sen.

“Many shareholders were looking to sell the rights, and it appears that some opportunistic investors and traders jumped in to take advantage of the volatility. There was also an initial mispricing between the ordinary shares and the rights, which created some arbitrage to be exploited,” explains one analyst.

The rights will trade until Oct 11, at which point, rights holders will have the option to fork out an additional 79 sen for an ordinary share. (Note: every five rights shares subscribed is entitled to one free warrant with an exercise price of RM1.25). Simplistically, the rights can be said to simulate warrants at this point, albeit with virtually no time value.

Either way, investors will have to take a view that MRCB will unlock value in the longer term, offsetting the dilutive effects of the RM1.7 billion cash call.

Keep in mind that MRCB is currently trading almost 41% lower than it did back in May prior to the announcement of the rights issuance.

Despite the negative sentiment surrounding the rights issuance, it is important to remember that MRCB has put together a healthy balance sheet, a sizeable land bank and a modest order book of construction work.

In short, it has most of the necessary ingredients for its next leg of growth. The only question that remains is whether management will be able to deliver. Of course, this won’t happen overnight.

Balance sheet prepared for the worst

Taking a longer-term view, it is important to note that MRCB will emerge from the rights issuance with a healthy balance sheet, something that the company has been struggling with.

Beyond this rights issue, another cash call should be a long way off.

“We have no need to tap shareholders for additional funds. We are confident that the strength of our balance sheet will be able to meet the needs of our projects in the pipeline,” chief corporate officer Amarjit Chhina tells The Edge.

He also emphasises that management plans to limit the group’s gearing to a maximum of 50% going forward. With more asset disposals anticipated in the pipeline, this gives the group ample headroom.

And looking ahead, it will be crucial for property companies to have resilient balance sheets to fall back on.

Once the proceeds of the rights are fully utilised as planned, MRCB’s net gearing is expected to drop to a mere 29% or 0.29 times. Keep in mind that the group’s gearing used to be a whopping 167% before the current management, led by Tan Sri Mohamad Salim Fateh Din, took over.

Last year, the MRCB’s gearing was still uncomfortably high at 73%.

In fact, MRCB’s gearing is expected to fall further with the Employees Provident Fund, a 33.5% shareholder, due to inject RM1.136 billion into the company in exchange for an 80% stake in the Bukit Jalil Sentral land.

The EPF deal will see MRCB’s net gearing fall to an almost net cash position, with a net gearing of only 5%. However, MRCB also has plans in the pipeline to acquire a 70% stake in a 64.3-acre tract in Sungai Buloh owned by Kwasa Land Sdn Bhd, a wholly owned subsidiary of the EPF.

The RM737.88 million deal will bring MRCB’s net gearing back up to about 20%, with RM1.69 billion worth of debt on its balance sheet.

Looking ahead, however, MRCB still has a pipeline of assets to dispose of. The most closely watched is the Eastern Dispersal Link, the group’s 8.1km highway in Johor that carries with it RM1.15 billion of debt.

It is a disposal that has been long talked about, and if successful, may prove to be a major catalyst for MRCB. It is understood the company is waiting for certain government approvals before the deal can proceed. Recall that MRCB has already announced interest from several parties, including PLUS Malaysia Bhd.

Other potential catalysts in the pipeline includes the disposal of Ascott Sentral, which has been valued at between RM150 million and RM180 million.

Meanwhile, another potential asset MRCB can monetise is Menara Celcom in Petaling Jaya, Selangor. The tower is still under construction but is expected to be completed early next year, by the latest.

It had previously been reported that the tower could potentially be injected into MRCB-QUILL Real Estate Investment Trust, especially if MRCB can secure a long-term tenancy agreement with the tower’s core tenant, Celcom.

If these deals materialise over the next 12 months, MRCB could easily find itself in a modest net cash position. Of course, a strong balance sheet is not very meaningful without earnings.

GDV of RM55 billion and order book of RM6.3 billion

With its balance sheet now in order, investors will be looking at MRCB’s income statement to see if the group can lift earnings per share and return on equity back up after the massive dilution.

The good news is that MRCB has aggressively accumulated a sizeable land bank over the past four years of nearly 400 acres, most of it in strategic locations (see table).

A figure that is often bandied around is the RM55 billion worth of GDV that this land bank can generate, though investors are taking that with a pinch of salt.

After all, the GDV depends heavily on the company’s ability to execute and monetise the land. Furthermore, it does not factor in the cost of compounding interest on debts that may be used to acquire the said land. The soft property market doesn’t help much either.

While Amarjit acknowledges that the property market has become increasingly challenging, he says MRCB has been able to maintain a gross margin of about 20% for the division.

“We are aiming to match last year’s sales numbers this year, about RM1.2 billion,” he notes.

The group is on track to meet this target, with almost RM991.8 million already booked in this year.

On top of this, MRCB has also accumulated a respectable order book of RM6.3 billion. This year alone, it bagged RM613 million worth of work. For the full year, analysts are expecting MRCB to secure about RM800 million in new jobs.

Looking ahead, Amarjit is coy about the projects that the group is bidding for, but points out that the MRCB is bidding for about RM4.8 billion worth of work.

“If there is a big infrastructure project, we will be bidding for it. If it involves transport, we want to be involved,” he says.

Naturally, the one project that has tongues wagging in the market will be the East Coast Rail Link. All the major construction companies are vying for a slice of the action. With its track record in transport-related infrastructure, MRCB is expected to be a contender for the project’s civil works as well.

In summary, MRCB still has a long way to go to lift earnings back to levels that can justify better valuations. However, the low share price at this juncture presents an opportunity for new investors to enter at a cheaper level.

While earnings growth is expected over the longer term, there are a number of catalysts over the horizon to consider as well.

Additionally, most of the group’s legacy troubles will soon be a matter of the past. Now, all eyes will be on management’s ability to deliver.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.