Cover Story: Reviving MRCB

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An-artist’s-impression-of-Kwasa-Sentral-Development-(MX1)

ONE can feel the bustle of activity at Malaysian Resources Corp Bhd’s (MRCB) new headquarters in Menara NU 1, KL Sentral. Fronting Jalan Tun Sambanthan, the new HQ is brightly lit, thanks to its open concept, and the staff members are in high spirits despite the lingering smell of fresh paint as some parts of the building are still being spruced up.

Typical of Tan Sri Mohamad Salim Fateh Din’s style — he always seems to know the time despite not wearing a watch — the meeting with The Edge was conducted with brisk efficiency. Immediately after, the management rushed to a signing with Pelaburan Hartanah Bhd on the sale of MRCB’s interests in Nu Sentral.

Having encountered Salim and his son, Mohd Imran, several times before, we know they do not like to drag things on or engage in long discussions. They always cover the key points in the shortest time possible.

That’s how things have been done at MRCB — at a fast pace — since the father-and-son team took up the reins in 2013.

Two years ago, the family injected certain prime property projects into MRCB, notably PJ Sentral, in exchange for RM729 million worth of shares and cash. This ultimately gave them a 16.7% stake in MRCB. Other key shareholders are the Employees Provident Fund with 38.4% and pilgrim fund Lembaga Tabung Haji with almost 10.1%.

The entry of Salim and Imran faced some scrutiny initially but over the past year and a half, they have managed to steer MRCB away from an uncertain path.

Focusing on the group’s Achilles heel — its high gearing — the duo pushed for the disposal of MRCB’s non-core assets while also partially divesting its investment properties to pare down gearing. At the same time, they didn’t hesitate to acquire strategic landbank that fit the group’s newfound occupation of urban developer.

The de-leveraging exercises have resulted in MRCB’s gearing dropping from a high of 1.8 times two years ago to 1.5 times, and it could drop further to 1.2 times with cash from the recently completed divestment of Platinum Sentral to Quill Capita Trust.

“From the perspective of borrowings and legacy issues, MRCB held on to too many buildings after it developed them. When you do that, the top line goes up but after you pay interest to the banks [to service the loan to develop the buildings], what is left is very little,” says Imran. “So, one of our key criteria was a debt-restructuring or de-leveraging exercise. We want to have a realistic debt ratio, which will allow us to grow bigger in the future, focusing on urban property development.”

Known as an operations guy, Imran had joined MRCB as chief operating officer in March 2013 and was made executive director in March this year.

Salim, who is known more as an entrepreneur than a numbers guy, says candidly, “Nothing was new to us when we took over [MRCB]. We were in property and construction but on a smaller scale. One of the key criteria that we had [when we came into MRCB] was the de-leveraging exercise.”

He was appointed managing director of MRCB in September 2013.

Having put the ship on an even keel over the past two years, the duo know that more needs to be done to tackle MRCB’s gearing, as analysts have pointed out.

“It [the gearing] was among the most important issues that they had to deal with but then again, they have just started with the de-gearing exercise,” says an analyst with a local bank-backed brokerage firm, which is one of five that have a “buy” call on MRCB.

High debt levels

As at the end of last year, MRCB’s deposits, cash and bank balances amounted to RM660.7 million while on the other side of the balance sheet, it had short-term borrowings of RM1.39 billion and long-term debt commitments of RM2.29 billion. This translates into total net debt of RM3.02 billion or roughly 1.46 times the company’s total equity of RM2.06 billion.

To put things into perspective, group finance cost for the year ended 2014 was RM171.2 million — up about 15.7% from a year ago and about 12.2% higher than the net profit for FY2014, which came in at RM152.6 million on sales of RM1.5 billion.

To de-gear, MRCB has been busy hiving off some non-core assets. Early last year, it divested its 30% stake in the Duta-Ulu Kelang Expressway (DUKE) to Ekovest Bhd for RM228 million cash. This transaction was reflected in its accounts as at Dec 31, 2014.

Earlier this year, the group completed the divestment of Platinum Sentral — consisting of five blocks of four to seven-storey commercial buildings, including a multi-purpose hall and two levels of parking, in KL Sentral — to Quill Capita Trust for a total of RM740 million.

Under this deal, MRCB will receive a cash payment of RM476 million and the rest in Quill Capita shares, which translates into a 30.3% stake in the latter.

Then, last month, MRCB disposed of its 51% stake in Nu Sentral Sdn Bhd — the manager and operator of Nu Sentral Mall, which is part of the company’s flagship KL Sentral — to Pelaburan Hartanah for a total consideration of RM120 million.

Yet to be reflected in MRCB’s Dec 31, 2014, accounts, the cash receipts from the divestment of Platinum Sentral and Nu Sentral are expected to further reduce the group’s gearing from the current 1.46 times.

Indeed, analysts expect more such divestments with the next assets to be injected into Quill Capita speculated to be Menara Shell and Ascott Residences, collectively worth over RM900 million. Both properties are located in KL Sentral, the heart of MRCB’s investment properties portfolio. If these asset injections materialise, MRCB’s gearing level could be significantly reduced to match that of other property players, say analysts.

Nevertheless, what may not be easily fixed is the chunk of MRCB’s debt — some RM1.3 billion — that is tied to its Eastern Dispersal Link Highway (EDL) in Johor. According to sources, the window to sell EDL back to the government has closed, forcing MRCB to find ways to monetise it, possibly via a listing exercise.

Salim and Imran say the key to unlocking EDL’s value is to monetise it, although they do not offer any details as the plans are still being firmed up.

EDL woes

An 8.1km expressway that connects the end of the North-South Expressway to the new Bangunan Sultan Iskandar, Customs, Immigration and Quarantine complex, EDL was awarded to MRCB Lingkaran Selatan Sdn Bhd in June 2007 with a concession period of 34 years. Construction was completed in end-March 2012 and the highway was opened to traffic in early April 2012.

In 2008, a MRCB subsidiary issued a RM845 million senior sukuk and RM199 million junior sukuk, and the proceeds were used to finance the EDL project. The senior sukuk’s tenure ranged from 10 to 17.5 years and the junior sukuk’s from 18 to 19.5 years from the date of issue. Carry profit ratios ranged from 6.3% to 8.3% per annum for the senior sukuk and 10% to 10.4% per annum for the junior sukuk.

At one point, the government contemplated taking over EDL for RM1.2 billion after a steep increase in toll charges drew a lot of criticism. The talks, however, fell through.

Motorists have used EDL without paying toll since 2012 with the government compensating MRCB for its losses. The company’s annual reports show that it received RM62.9 million from the government in 2014, RM100.3 million in 2013 and RM68.3 million in 2012.

“For EDL, we are exploring many options, but I cannot divulge the details because we want to study them first,” Salim says.

Analysts, however, suggest that MRCB is looking at setting up a business trust, although Salim would not reveal his plan. “What is important is that we pare down our debt. When we bring it down with the assets that we have, it will be easier to show profit,” he observes.

On a buying spree?

It is crucial for MRCB to de-gear as quickly as it expands its landbank, analysts note. Over the past year, the group has been aggressively acquiring choice parcels at what some consider to be high prices.

“We don’t want to come to a point where suddenly we don’t have any more land to develop,” Salim explains.

Last month, the company acquired a roughly 1.9-acre plot in Jalan Kia Peng that belonged to the German Embassy, forking out RM259.2 million or RM3,188 psf for it.

According to valuer CH Williams Talhar & Wong and Raine & Horne International Zaki and Partners, the price tag was about 6% higher than the market value. The estimated gross development value (GDV) of the 1.9 acres is between RM1.2 billion and RM1.6 billion.

Last August, MRCB announced that as the lead partner in a 70:30 joint venture with the EPF, it would pump RM816.6 million into developing Project MX1 in Sungai Buloh, Selangor, that has an estimated GDV of RM8 billion. MX1 is MRCB’s largest development, accounting for the lion’s share of its more than RM30 billion total GDV.

As the payment deadlines for the German Embassy land and the MX1 land draw near, some analysts speculate that MRCB may need to make a rights issue to raise cash.

But Imran says, “Not at this juncture. We believe that through debt gearing and internal funds, we have enough to finance the two pieces of land.” He adds that the group can match the progress of its de-gearing exercise with landbanking needs.

Salim chips in, “If we want to be a serious developer, we need to replenish our landbank. The longer we wait, the higher the opportunity loss, and cost [of land] goes up. We do gear up for some of the land we are buying but the banks understand that we have a very clear exit strategy.”

Some of MRCB’s property industry peers deem the group aggressive under the father-and-son team because it has committed itself to huge land purchases when the market is soft.

A rival developer that is familiar with the Sungai Buloh area says MRCB is paying a “very bullish” price for the MX1 land while an analyst with a bank-backed research house opines that the price tag for the German Embassy land is on the high side. “While I do agree that you need to buy land, you don’t need to pay sky-high prices for it,” says the latter.

But then, opinions in the analyst fraternity seem divided. An analyst with a local brokerage firm says, “The pricing may be high but the plot ratio may be good, and thus reduce the price [per plot ratio]. Many people don’t realise it but you have to look at the plot ratio as well.”

Meanwhile, news reports say MRCB is the front runner in the bid for an eight-acre parcel that currently houses the French Embassy. The company’s bid is RM3,188 psf, which works out to a staggering RM1.1 billion, according to the reports.

Salim is tight-lipped about his chances and declines to comment on the news reports. “We have bid for it but we are not privy to anything,” he says.

On whether MRCB is exposed to the high-end, high-rise property segment, which may not be the favoured products at the moment, Imran shrugs. “Everybody thinks we are exposed. We are CBD developers, TODs (transit-oriented developers). We have different products within the development, which is why we need the size. You can’t have multiple products with one acre of land but with 10 to 15 acres, we can meet different needs and criteria.

“For example, in KL Sentral, we can have low-rise, high-rise, campus style, SMEs, St Regis, government offices, MNCs. That is the TOD concept. You can see from the footfall and the people that utilise the space that the demand is there.”

A set direction, dividend play

While these acquisitions and their prices may be a moot point, what cannot be denied are the clear priorities and direction Salim and Imran have set for MRCB, which is to de-gear its bloated balance sheet and focus on urban, transit-oriented developments, riding its expertise gained from KL Sentral.

To be fair, the duo have achieved quite a bit in the short time they have been at MRCB. And they are eager to do more, not only to buy more land and build big but also to execute some of the regeneration schemes for the good of the public.

These include refurbishing KL Sentral and integrating the transport hub with Muzium Negara and the Lake Gardens by sky bridges, which is a considerable feat.

Another lofty goal Salim has set for himself is to have MRCB gradually step up its dividend policy to reward its shareholders, knowing clearly that this is a priority for major shareholders EPF and Tabung Haji.

In FY2014, the company proposed a 2.5 sen dividend, which works out to a payout of RM44.7 million, which Salim claims will be the highest in 10 years. “At the end of the day, shareholders, including me, want good dividends. We want the best for the group. We have pumped our own assets here [into MRCB], so there will not be any shortcuts… We take it step by step [to rejuvenate MRCB],” he concludes.

An-artist’s-impression-of-Kwasa-Sentral’s-connection-to-Kwasa-Sentral-Station

This article first appeared in The Edge Malaysia Weekly, on May 4 - 10, 2015.