This article first appeared in The Edge Financial Daily on November 13, 2018

KUALA LUMPUR: Shares in Malaysian Resources Corp Bhd (MRCB) surged as much as 9% to hit an intraday high of 83 sen yesterday — its highest level in two months as investors reacted positively to a RM1.32 billion settlement by the government for the termination of the Eastern Dispersal Link Expressway (EDL) concession.

Analysts estimate that the group’s gearing could be lowered by more than half.

AmInvestment Bank Research analyst Thong Pak Leng expects the compensation received to reduce MRCB’s gearing ratio to 0.22 times from 0.55 times as of Dec 31, 2017.

“The money received will be used mainly to repay the sukuk issued and reduce its gearing. The group’s gearing ratio is expected to reduce to 0.22 times [after the compensation is received] and this is positive for MRCB,” he told The Edge Financial Daily.

“Also assuming an effective interest rate of 5% to 6%, the [repayment of debt] would also result in interest [expense] savings of RM65 million to RM78 million,” he added.

Thong is not expecting any special dividend payout to MRCB shareholders from the compensation, given that a large portion of the money would be allocated for debt repayment.

Affin Hwang Capital Research senior associate director Loong Chee Wei is of the view that the compensation payment and subsequent de-gearing exercise represent a main hurdle that has been cleared for MRCB.

“We believe this is a good deal and is positive for MRCB as it would be able to clear [most of] its debt on its balance sheet,” he said.

According to its announcement yesterday, MRCB intends to allocate RM835.7 million of its proceeds for the repayment of senior sukuk, RM238.52 million for junior sukuk repayment, RM226.58 million for repayment of shareholder’s advances (the amount owing by MRCB Lingkaran Selatan Sdn Bhd [MLSSB] to its immediate holding company MRCB Prasarana Sdn Bhd is RM227.3 million), RM23.13 million for general working capital, and the remaining RM1.86 million for estimated expenses related to the concession termination.

MLSSB, an indirect wholly-owned subsidiary of MRCB via its interest in MRCB Prasarana, was awarded the EDL concession by the government pursuant to a 34-year concession agreement signed on June 26, 2007.

Under the concession agreement, MLSSB was granted the right to design, construct, manage, operate and maintain the EDL, the administrative office and the ancillary facilities on the EDL, as well as to demand, collect and to retain toll from all vehicles liable to pay toll.

Tolling on the EDL is based on an “open” concept, where motorists entering and exiting the causeway will be charged a flat rate, depending on their vehicle classification.

As part of the financing for the construction and development of the EDL, MRCB Southern Link Bhd (MSLB), which is a wholly-owned subsidiary of MLSSB, on June 23, 2008 issued a senior sukuk in the aggregate nominal value of RM845 million and junior sukuk in the aggregate nominal value of RM199 milllion pursuant to the terms of the trust deed between MSLB and CIMB Islamic Trustee Bhd dated June 5, 2008.

Other than the senior sukuk and junior sukuk issuances, MSLB also obtained a term loan facility of RM220 million for the construction and development of the EDL. The term loan was fully settled in the financial year ended Dec 31, 2017. The EDL was completed and the “Sijil Kesempurnaan Pembinaan Lebuhraya” was issued by the Malaysian Highway Authority in March 2012.

But on Dec 22 last year, MLSSB received a letter from the works ministry, informing it (MLSSB) of the abolishment of toll collection on the EDL effective Jan 1, 2018, and that the concession period of the EDL would end on Dec 31, 2017 and that the government would take over the EDL thereafter.

The government also revoked the authorisation previously granted to MLSSB to collect toll on the EDL, effective Jan 1.

As at Nov 8, the total cost and net book value of EDL service concession assets stood at RM1.33 billion and RM1.13 billion respectively.

The concession termination is subject to approval by MRCB shareholders at an extraordinary general meeting to be convened, and approvals from the senior and junior sukuk holders.

MRCB shares closed up 1.31% at 77.5 sen yesterday after trading resumed at 2.30pm. A total of 83.39 million shares were traded, making it the second most active counter on the local bourse.