Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on June 5, 2017 - June 11, 2017

HOT on the heels of its RM2.17 billion cash call, Malaysian Resources Corp Bhd announced last week that the Employees Provident Fund (EPF) will be injecting RM1.14 billion into the former’s Bukit Jalil development project.

MRCB will see a net RM749 million in cash from the deal with the EPF.

In total, this means that MRCB will potentially receive RM2.92 billion in cash this year. The rights issue alone would have put MRCB’s net gearing at near-zero levels. The EPF’s cash will put MRCB in a net cash position of about RM700 million.

At face value, the market has been far more receptive to the EPF’s entry into the Bukit Jalil project than it was for the rights issue. MRCB’s share price recovered 5.8% to RM1.44 last week on the announcement.

This should not come as a surprise. For the most part, the deal is good for MRCB since it will allow the property developer to recapitalise the bulk of its RM1.39 billion Bukit Jalil project, with minimal pressure on the group’s cash flow.

To recap, the 76.14 acres in Bukit Jalil was the government’s compensation to MRCB for undertaking refurbishment works for the National Sports Complex in Bukit Jalil that will cost RM1.39 billion in total — equal to the value of the land.

The entire project was held under MRCB’s 85%-controlled Rukun Juang Sdn Bhd. The remaining 15% is controlled by Rasma Contractors Sdn Bhd, a vehicle ultimately controlled by former Federal Territories minister Datuk Seri Raja Nong Chik Zainal Abidin.

This project would have weighed down MRCB’s balance sheet, since the group would have to fund the entire refurbishment works upfront. Meanwhile, monetising the land would take time.

However, the EPF’s entry flips this equation. The retirement fund will be acquiring an 80% stake in the land while MRCB will retain a 20% stake.

The land, free from encumbrances, will be injected into a special purpose vehicle — Bukit Jalil Sentral Sdn Bhd. MRCB will simply capitalise its existing advances to Rukun Juang to convert it to a 20% stake in the SPV. On top of that, the EPF has agreed to appoint MRCB as the management contractor for the land development.

Also recall that MRCB will advance about RM975 million from the rights issue to Rukun Juang to use for the refurbishment work. However, the EPF’s RM1.14 billion injection will allow RM749 million in cash to be recycled back to MRCB. Based on MRCB’s announcement, this money will be used for working capital and land acquisitions.

Separately, based on the utilisation of funds by Rukun Juang, it is interesting to note that only MRCB advanced money to the former. This implies that none of the EPF’s RM1.14 billion will be used for repay Rasma Contractors.

 

Better than a loan?

A key rationale for the massive rights issue is that it would reduce MRCB’s once-problematic gearing. With low gearing, some might argue that MRCB could have used borrowings to partially fund Bukit Jalil.

After all, if the group believes the plot of land is prime, why dilute its holding to 20%?

In fact, the deal with the EPF could prove costly as well since it comes with call and put options. For the first two years, MRCB has the right to buy back at least 51% equity in the SPV from the EPF, albeit at an internal rate of return (IRR) of 10% per annum.

Between year two and year three, once the call options expire, the EPF will have put options — the right to sell at least 51% in the SPV back to MRCB at an IRR of 8%.

Subsequently, the EPF will have another put option window between year seven and eight, but this time with an IRR of 9.5%.

With the IRR, the EPF’s investment looks more like a hybrid financing instrument. However, it is not uncommon for EPF to include these sort of terms to mitigate risk.

Although interest rates from debt might be cheaper, this structure is better from a cash flow perspective. MRCB won’t have to service any interest or principal unless EPF exercises the put options.

On top of that, between year three and year seven, the EPF will not be able to exercise the options. This gives MRCB a big window, interest free, to develop the land as management contractor.

Meanwhile, MRCB has even more cash to pursue other land banks. Perhaps the money could be used to reduce borrowings for its 70% stake in the Kwasa Sentral development that cost it RM816.6 million. Similarly, the EPF controls the other 30% in the 64.07-acre project in the Kwasa Damansara township.

Going ahead, however, it will be interesting to see if MRCB will be able to strike up similar partnerships with other parties.

 

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