MRCB on a growth trajectory

MALAYSIAN Resources Corp Bhd (MRCB) took the market by surprise this week. The developer of transportation hub KL Sentral announced that it is undertaking an almost RM2.2bil rights issue in an attempt to shore up its balance sheet.

The market did not respond well to the proposal, as the share price fell on a day when sentiment was already poor.

Following these developments, StarBizWeek sent questions to MRCB to delve further into why there is a need for the proposed rights issue that will see the company’s share base doubling.

Below are the email replies:

The market has not taken the proposed rights issue well. It may be due to poor market sentiment or other reasons. Do you think the timing is not right at the moment?

There’s never a right time to call for a rights issue, and so the share price performance following the rights announcement was expected.

As pointed out, it was exaggerated as sentiment on Thursday was very weak across all other Asian markets. It is quite normal to see price weakness immediately after a rights call.

Given the size of MRCB’s rights issue and the very weak market sentiment on Thursday, the price drop did not come as a surprise – indeed the price has already rebounded 2% this morning.

We would also like to point out that MRCB’s share price has strongly outperformed the index year-to-date (up 15.7% versus the index’s 7.8% increase), and over the last one year (MRCB is up 30.5% as opposed to the index’s 8.7% rise), and therefore, it was susceptible to some profit-taking at some stage. The weak market, coupled with the announcement, provided this opportunity.

Minority shareholders generally don’t like to put more money into a company unless there are compelling reasons. What would be the main selling point from management to minorities on why they should put in more money?

MRCB has a bright future and is on a growth trajectory. This rights issue has been called to fund that growth. It is the unassailable leading transit-oriented developer (TOD) in Malaysia, with a gross development value of RM49bil, excluding the transport terminal in Bandar Malaysia.

It has grown from a one-project business, namely, the KL Sentral development, to five large-scale TOD developments. In essence, another five KL Sentrals, which will sustain both revenue and profit for another 10 to 15 years.

With its strong transportation credentials, it is also strategically very well-positioned to capitalise on the national development priority of rail infrastructure.

In addition, our construction division has an external order book of RM7bil with strong rail transportation and infrastructure credentials, having constructed the light rail transit (LRT) Line 2 extension project, and its current role as project delivery partner for LRT3 in joint venture with George Kent (M) Bhd, as well as construction packages for the mass rapid transit (MRT) 2 project.

MRCB’s earnings over the last two years were helped by disposal of assets. With the additional capital put in, can shareholders expect earnings to support the larger capital base?

Disposals are an integral part of our business model. Like all other property developers, we add value to our land bank and recognise profits through the disposal of buildings that we have constructed. The only difference is that we are not focused on township development, which entails building and selling mostly double-storey houses.

We are an urban developer with a high-value urban land bank, building mostly bespoke high-rise commercial buildings such as Menara Shell, which results in lumpy disposal gains.

Disposals will, therefore, continue to be a feature of our future earnings, and are essential to the sustainability of our business model.

Considering that the cost of equity is higher than the cost of debt, why are other forms of raising funds such as long-term bonds not an option?

The cost of equity is higher than debt. However, for the nature of our business and the scale of our projects, our capital base is just too small. Given the market’s previous concerns regarding our gearing, any fund-raising involving the issuance of bonds would not have been palatable to both shareholders and the market, given that the market’s key concerns in the past have been MRCB’s high debt and gearing levels.

The exercise will result in MRCB having virtually zero gearing. Why is there a need to have such a low gearing? What are MRCB’s plans in future with a healthier balance sheet?

The financing of our present project pipeline cannot be executed merely by using the funds that we are raising, and would require us to gear up our balance sheet in the future, albeit not to the high levels of gearing witnessed previously.

The gearing will move up gradually over time, as the group utilises the proceeds for the identified property projects, as well as future drawdowns of project loans. The company intends to sustain a mid to long-term net gearing level of about 0.5 times. The disposal of the Eastern Dispersal Link will contribute further to lowering our gearing.

The amount to be raised is estimated at RM2.17bil. Will the company consider a lower amount to be raised?

You cannot keep going to shareholders to raise money; it’s imperative that you raise enough when you do. Given the scale of our project pipeline, we felt that it was important to make sure that we raise adequate funds to finance all our present projects from this fund-raising exercise. The amount we are raising will achieve this.

The last fundraising was completed in 2010 followed by a placement more than a year ago. Does the company foresee any more fundraising in the near future, considering that MRCB’s order book is growing with the slew of new projects?

Based on our present project pipeline, we do not foresee the need to raise additional funds.

Considering that the construction order book is growing, would the management consider a separate listing for the construction arm for it to fund its capital requirements in future without depending on the holding company?

Construction is not a capital-intensive business, so any future strategy to list the construction business would not be due to this. If the board were to choose to list the construction business in the future, it would be purely driven by the desire to extract more value for shareholders.