MALAYSIAN Mining Corp Bhd (MMC) is only too eager to pitch its appeal to investors. Instead of remaining in the shadow of its 75 per cent owned engineering and construction arm – MMC Engineering Group Bhd – it has chosen to wrest it away from public domain and fold it under its wing.
The plan works mighty well for MMC in more ways than one. It fits in well with MMC Group's strategy to be a premier engineering, infrastructure and utilities entity. MMC gets to fully enjoy the earnings of its soon-to-be wholly-owned subsidiary. At the moment, MMC Engineering contributes less than 10 per cent to MMC’s pre-tax profits.
Over and above that, there will be fewer distractions among investors from putting their money in MMC. “At least there will not be another layer of business or distraction. The earnings will go directly to the parent company that is hungry for it. This way too, we can build up the value of MMC,” says a source close to the deal.
So far, MMC group’s cashflow has largely been limited to dividends received from Malakoff and to a lesser extent from its 5 per cent owned Sime Darby.
A week ago, MMC put in a voluntary offer for all the remaining 7.9 million shares or 25.01 per cent stake in MMC Engineering not already held by it. The voluntary offer (VO) will be satisfied by cash payment of RM4.30 per share or two new MMC shares for every one MMC Engineering share. The share alternative makes it attractive to MMC Engineering shareholders as they could stand to benefit from the enlarged MMC Group's future prospects and to further tap the opportunities offered by the “high growth conglomerate.”
The fact, however, is this. MMC Engineering’s stock is rather illiquid, compared to MMC. As such, investors are not likely to miss a company they could barely get shares in. Presently, 74.99 per cent of MMC Engineering is held directly or indirectly by MMC with only 25.01 per cent available for trading on the exchange.
“It's ridiculous. MMC Engineering (Bhd) has a free float of only 25 per cent. It's so small compared to the abundance of projects it has in hand,” says the source. The real reason for taking MMC Engineering, however, is not so altruistic.
MMC Engineering had a rights issue on the cards. It has proposed a one-for-one rights issue of 31.63 million new shares at an issue price to be determined later. (It aborted the rights issue last week following the VO). Considering MMC has 23.72 million shares the exercise would have cost it more than if it were to take MMC Engineering private. On the contrary, the VO would cost MMC some RM34 million assuming all cash take up.
“Since MMC has to fork out so much money for the rights issue, it might as well take it private,” says a proponent of the deal.
Since the change in substantial shareholder in MMC, MMC Engineering has secured several lucrative contracts. It has a 30 per cent share (MMC has 20 per cent) in a joint venture with Gamuda Bhd for the KL flood mitigation project. It is also undertaking the refurbishment of armoured vehicles for the military and potentially rail-related projects (both double-tracking and urban light rail systems).
“These are all very good projects. Instead of spending some RM2 million which is the cost of keeping the company listed, it might as well be taken private and MMC can reap the huge benefits in doing so,” he says, adding that the move will make MMC more focussed in its businesses as well.
Also, it is believed that with an enlarged MMC Group following the VO, it will allow for a more flexible structure to carry out rationalisation programs to optimise the synergistic benefits and fully tap the economies of scale arising from the initiative.
Analysts too have found it hard to poke holes in the deal. “It’s a fair deal. The rationale, although not quite mentioned, is quite clear. Efforts are being taken to add value at MMC level,” he says.
MMC Engineering’s focus thus far has been largely on infrastructure, defence and rail-related engineering contracts as opposed to pure construction work. An analyst says MMC Engineering is keen to build a more recurrent revenue base from long-term contracts as opposed to lumpy one-off construction revenues.
The cash offer price was 4.4 per cent above MMC Engineering’s closing price of RM4.12 (pre-announcement). Based on MMC’s closing price of RM2.19, the share swap option had offered an upside of 6.3 per cent.
According to Mayban Securities, at RM4.30, based on the latest net tangible asset (NTA) per share of RM1.65 and annualised earnings per share 2003 of 18 sen, MMC Engineering’s price/NTA and price earnings ratio 2003 are 2.6 times and 23.9 times respectively.
The market wasted no time chasing up MMC Engineering’s price closer to the VO price. From RM4.12, the share climbed to RM4.30 on Wednesday and finished Thursday marginally lower at RM4.28.
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