This article first appeared in The Edge Malaysia Weekly on March 26, 2018 - April 1, 2018

MALAYSIAN Resources Corp Bhd (MRCB) has taken another step towards reducing its legacy high gearing with the sale of a prime tract of land for RM323 million cash.

Its determination to tackle the problem saw gearing drop to 0.53 times in the fourth quarter of last year (4Q2017) from 1.1 times in 3Q2017, following a one-for-one rights issue. With the sale, gearing will dip to below 0.50 times, in line with the company’s target.

The land that once served as the site for the official residence of the German ambassador to Malaysia was acquired by MRCB three years ago and has now been sold to the Social Security Organisation (Socso) for a net gain of RM30 million.

Many find it odd that MRCB is selling the land just three years after its acquisition, but chief corporate officer Amarjit Chhina tells The Edge that it was an opportunistic sale that allowed the company to extract value from the asset and free up capital for its projects.

He says MRCB’s core transport- oriented development projects, such as Kwasa Sentral in Sungai Buloh, KL Sports City in Bukit Jalil and Cyberjaya City Centre, require substantial amounts of capital investment to fund the initial infrastructure works before development can take place, and before revenue can be generated.

“We are a very different company compared with 2015 when this land (in Jalan Kia Peng) was acquired, with a much larger GDV [gross development value] pipeline to fund. And, as you know, with our rights issue last year, one of the key issues concerning MRCB in the past has been our gearing level,” Amarjit says. “We don’t want our net gearing to balloon when we fund these large developments, as [it has] in the past.”

MRCB currently has a land bank of 393 acres with an estimated GDV of RM55 billion, of which 81% is derived from the transport-oriented developments.

“MRCB’s strategy now is to focus on creating a sustainable pipeline of revenue over the long term from its core transport-oriented developments, compared with developing small parcels of land where revenue would need to be replaced with other projects over a short period of time,” says Amarjit.

Going forward, there are still several assets that MRCB is looking to dispose of. One is Ascott Sentral, which has been valued at RM150 million to RM180 million. However, MRCB has not found a party that wants to take over the hotel for the price it has internally set.

“We are getting close, but we are in no rush to sell,” says Amarjit.

Another asset MRCB is looking to monetise is Menara Celcom in Petaling Jaya, which is still under construction and could be offered to MQREIT or sold to institutional investors in the future, according to Amarjit.

However, the most closely watched asset is the Eastern Dispersal Link, the group’s 8.1km highway in Johor that carries with it RM1.15 billion of debt, or 35% of MRCB’s total debt as at end-December last year.

The disposal has been long talked about and, if successful, would immediately transform the group’s financial position, according to a January report by UOB Kay Hian Research. It would also save the group about RM80 million in interest payments.

MRCB will also see its gearing reduced with the Employees Provident Fund’s RM1.14 billion injection into the property developer’s Bukit Jalil project, which was announced shortly after the cash call was made last year.

The retirement fund is acquiring an 80% stake in the 76.14-acre land in Bukit Jalil while MRCB will retain the remaining 20%.

To recap, the land was the government’s compensation to MRCB for undertaking the refurbishment of the National Sports Complex in Bukit Jalil that cost RM1.39 billion.

With the EPF as MRCB’s partner, the land will be injected into a special purpose vehicle, Bukit Jalil Sentral Sdn Bhd. The EPF has also agreed to appoint MRCB as the management contractor for the land development.

After the EPF subscription into the Bukit Jalil project — and if MRCB is successful in disposing of Ascott Sentral, Menara Celcom and the EDL — gearing should not be a worry for the company anymore.

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