THE sale of MPHB Capital Bhd’s 49% stake in its general insurance subsidiary, Multi-Purpose Insurans Bhd (MPI), to the Netherlands-based insurer Generali Asia for RM355.8 million was completed on May 7 but shareholders are still not sure what’s in it for them.
The disposal of almost half of MPI means that MPHB’s earnings this year will be halved. The insurance arm had contributed RM330.96 million or 89.4% to total revenue in the financial year ended Dec 31, 2014 (FY2014). Credit and investment businesses had accounted for the remaining RM39.12 million or 11.6% of revenue.
For the six months to June 30, MPHB’s net profit fell 87% to RM26.83 million, even though revenue rose 9.3% to RM191.9 million. The decline was due to the absence of exceptional gains from the sale of investment properties and loss arising from fair value changes of investment securities in the credit and investments divisions.
Analysts who cover MPHB believe the company should be looked at as an asset play rather than an earnings play. Yet, progress in unlocking the value of its rich assets has been slow and plans to distribute its growing cash pile remain unclear to the shareholders.
“The company is cash rich and has valuable assets, which it plans to distribute and realise eventually. But the point is this, you can have plans for everything but at what speed are these plans going to be realised? MPHB’s status has been the same and it is in no rush to change that,” an analyst tells digitaledge Weekly.
MPHB (fundamental: 1.90; valuation: 2.10) has not paid any dividends since FY2013. That was the year Bank Negara Malaysia rejected the company’s proposal to reward shareholders with a final dividend per share of five sen. MPHB disappointed shareholders yet again with no dividend payout in FY2014. This was despite its coffers being enriched by an extraordinary net gain of RM195 million from the sale of a piece of land in Balik Pulau, Penang, taking its cash balance to RM481.42 million as at end-FY2014.
In a March 6 circular, the company indicated that RM338.2 million from the MPI deal will be invested in viable businesses or assets to be identified. So far, no progress has been made on that front and shareholders are uncertain about what the extra funds will be used for.
Much of MPHB’s inability to reward shareholders is blamed on its need to meet capital adequacy requirements as a financial holding company under the Financial Services Act — a factor that will remain in play until MPHB pares down its stake in MPI and becomes a minority shareholder.
This can happen if Generali Asia exercises a call option to up its shareholding in MPI to 70% in the next two years, subject to Bank Negara’s approval. In a May 22 note, UOB Kay Hian says it expects this to happen in 2H2015 and collect another RM160 million to RM170 million for MPHB.
But if Bank Negara disallows the exercise of the call option, Generali Asia is likely to exercise its put option to dispose of its entire stake in MPI within five years.
“This means that when it comes to dividend payout, shareholders will still have to play a wait-and-see game. The fact that MPHB has not paid dividends in the last two years speaks for itself. This is not necessarily within the company’s control but it is difficult to tell when the situation will change,” says the analyst.
With regard to its rich assets, MPHB owns over 2,400 acres of prime land in Kuala Lumpur, Penang and Johor and had investment assets with a net book value of RM774 million and market value in excess of that as at Dec 31, 2014.
But realising some of its standout assets has been a slow process. While the redevelopment of Hotel Flamingo in Ampang has been postponed due to unfavourable market conditions, the company is embroiled in a long-drawn-out civil suit against the government on the compulsory acquisition of 2,841 acres in Pengerang in 2012 and another civil suit on the purchase of a 72,161 sq ft freehold parcel in Bukit Bintang.
That aside, MPHB is in a joint venture (JV) with Bandar Raya Developments Bhd (BRDB) to develop residential projects in Rawang, Gombak and Penang. The company is entitled to 22% of the development profits but does not bear any construction risk.
The JV projects, first entered into in 2011, are now active. A residential project called Taman Sari in Rawang with a gross development value of RM1.8 billion has just been launched. The development of its Penang tract (GDV: RM900 million) should follow, although it is facing some challenges in developing its Gombak land because of hilly terrain.
Still, none of the above has brought shareholders and investors closer to MPHB’s pot of gold. In fact, patience is wearing thin — the stock has lost 24 sen or 11.76% since the start of the year.
Maybank Research has a “hold” call on the stock and a target price of RM1.90 while UOB Kay Hian has an upgraded “buy” call on it and a target price of RM2.50.
When asked if now is a good time to accumulate the stock, the analyst says, “It depends. How long can you wait?”
This article first appeared in digitaledgeWeekly, on August 24 - 30, 2015.