Warrants Update: Longer-term view on MRCB-WA

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MALAYSIAN Resources Corp Bhd’s (MRCB) company-issued warrant, MRCB-WA, which is trading at a more than 50% premium to the underlying share, looks pricey at a glance. Its RM2.30 strike price is above all, but one target price of the nine analysts polled on Bloomberg.

Yet given MRCB-WA has four more years to run before expiring in September 2018, it might still be worth considering for investors looking for a cheaper proxy for MRCB and can afford to take a longer-term view.

Despite trading at a 54% premium to the mother share, MRCB-WA has gained 28% in the past five months — from its recent low of 21.5 sen on May 6 to Sept 24(Wednesday)’s 27.5-sen close. That’s four times the 6.3% gain MRCB shares saw over the same period, at their close of RM1.67 on Sept 24. MRCB-WA has a one-to-one conversion ratio.

Interestingly, Lembaga Tabung Haji has been accumulating MRCB shares. Filings with Bursa Malaysia show that in less than five months, LTH mopped up 31.94 million of them on the open market, raising its holding to 10.11% as at Sept 22, from 8.85% as at April 30. This is behind only the Employees Provident Fund’s 38.9% and Gapurna Sdn Bhd’s 15.45%, filings show.

Six of nine analysts polled on Bloomberg think MRCB is worth at least RM2 apiece; the most bullish being Kenanga Research, which has a RM2.48 target price. If these analysts are right, there is a 19.8% to 48.5% upside potential for MRCB over the next 12 months. Gains at MRCB could boost its warrant, especially if the latter continues to command a significant premium over the underlying share.

Hong Leong Investment Bank Research, which has a RM1.97 target price on MRCB, was among the research houses with a “buy” recommendation on the company, after attending a briefing by it on Project MX-1 — the mixed-use development with an estimated gross development value of RM8 billion on a prime plot in the planned Kwasa Damansara township.

“We believe this project will be successful in the long term, given that it will eventually be the nucleus of one of the largest parcels of land in Petaling Jaya,” writes UOB KayHian Research — which has a RM2.05 target price on MRCB — in an Aug 28 note. “Potential corporate exercises, including investment property asset disposals worth up to RM1 billion via a real estate investment trust, will provide positive newsflow.”

Assets that can potentially be injected into a REIT, include the Shell Tower, Plaza Alam Sentral, Sooka Sentral and Ascott Residences.

MRCB, which has been shortlisted for the planned Kepong waste-to-energy incinerator concession, is also expanding its pipeline of construction projects — another factor that could help shore up future earnings.

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This article first appeared in The Edge Malaysia Weekly, on September 29-October 5, 2014.