This article first appeared in The Edge Financial Daily on January 19, 2018

Malaysian Resources Corp Bhd
(Jan 18, RM1.19)
Maintain hold with a higher target price (TP) of RM1.10: Malaysian Resources Corp Bhd (MRCB) started off the year with a significantly healthy balance sheet, which could further be improved should the Eastern Dispersal Link (EDL) issue be resolved. The EDL accounts for about RM1.06 billion in debt, and bleeds about RM40 million from MRCB’s net earnings. Successful monetisation would immediately transform the group’s financial position. 

Last Apr 16, MRCB announced that the Employees Provident Fund Board (EPF) had indicated its intention to purchase an 80% interest in a 76-acre (30.76ha) parcel of land that would be used as a payment in kind for the refurbishment of the Bukit Jalil Stadium. The refurbishment for Phase 1 of the project has been completed. An extraordinary general meeting (EGM) would be convened this quarter for shareholders to approve the divestment to EPF. The divestment would be positive, as it would bring in cash inflows of about RM1.1 billion to MRCB, further strengthening its balance sheet. 

While the expressway is positive at the earnings before interest, taxes, depreciation and amortisation (Ebitda) level, it continues to be a drag to the group on a net basis. The potential disposal of the EDL would see a net positive financial impact of about RM40 million per annum for MRCB. Presently, we expect the expressway to record an Ebitda of about RM65 million. However, after taking into account finance and amortisation costs, the expressway is expected to drag the group’s earnings down by about RM40 million. Also, assuming the group manages to dispose of the EDL in 2018, our back-of-the-envelope calculation indicates that MRCB’s 2018/2019 profit after tax (PAT) could rise by about 27% to 25%, bringing prospective price earnings (PE) down to 23 times (from 29 times currently). 

The EDL makes up about 35% (RM1.06 billion) of the total RM3.4 billion worth of debt that MRCB is holding in its books. Assuming the EDL is disposed of at RM1.55 billion (on par with our valuation), we estimate its net gearing level would drop to 0.75 times from the current 1.1 times (before the rights issue). The group would also save about RM80 million worth of interest payments (at about 7% per annum).

Financing cost for the EDL stands at an average of 7%, or about RM83 million per annum. The financing cost is significantly higher than that of other expressways as borrowings have yet to be refinanced since they were first raised, which was before the construction of the EDL. Hence, the blended financing cost of 7% would also have implicitly taken into account the other risks associated with the expressway, particularly the construction risk at that time.

Maintain “hold” with a higher TP of RM1.10, based on a 20% discount to our sum-of-parts valuation of RM1.35 per share. Our TP implies 29.6 times 2019 PE. While the prospective PE multiple is above its long-term average, we think share price has partially priced in the forthcoming EDL disposal. Assuming the disposal materialises, its 2019 PE could drop to 23 times due to the RM40 million net profit impact. — UOB Kay Hian Research, Jan 18