Malaysian Resources Corp Bhd (MRCB)’s proposed takeover of Nusa Gapurna Development Sdn Bhd and a few other companies controlled by businessman Mohamad Salim Fateh Din is being viewed skeptically by some analysts.
This centres on valuations for the deal and the fact that the well-connected Salim himself takes a key role in MRCB as managing director after he becomes the second largest shareholder behind EPF.
Salim’s vehicle Gapurna controls 60 per cent of Nusa Gapurna while the remaining 40 per cent is owned by the Employees Provident Fund (EPF). The EPF is also the single largest shareholder in MRCB with 42.2 per cent.
The crux of the deal involves MRCB taking over Nusa Gapurna which has four parcels of land measuring 32.74 acres under its belt, and construction company Gelanggang Harapan Construction Sdn Bhd for a total RM729 million. This will be satisfied via the issue of 398.7 million shares of MRCB, valued at RM1.55 per share and cash of RM111 million.
The land banks are located in choice areas such as Subang, Petaling Jaya (where the PJ Sentral is slated to be built) and in Old Klang Road. All in, the parcels of land have a gross development value of RM5.7 billion.
Another salient feature of the deal is the issuing of 113.9 million warrants to Nusa Gapurna on the basis of two warrants for every seven new MRCB shares issued, while existing shareholders will be entitled to one warrant for every three MRCB shares held. The warrants, to be issued free, have an exercise price of RM2.30, with a five year tenure.
While most analysts have been relatively positive on the deal due to the possible long term benefits for MRCB, there have been jibes at certain aspects of the deal.
The main issues
While the overall valuation of the three large parcels of land at RM345 per square foot (psf) is deemed fair, Hong Leong Investment Bank— despite being positive on the deal for MRCB— has a table which highlights a considerable disparity between the acquisition price by MRCB and the market price of the plots of land in PJ Sentral.
In a table the research house shows that one of the parcels under Gapurna, the 2.1-acre PJ Sentral Lot 8 is being acquired at RM870.3 psf or RM78 million when the market price is RM617 psf. This works out to a hefty 41% premium or RM253.3 psf.
Meanwhile 9.9 acres making up PJ Sentral Lot 12 is being acquired for RM199 million or for RM662.3 psf, while the market price is at also at RM617 psf. This works out to a premium of some seven percent or RM45.3 PSF.
In another report, a bank backed research house has the surplus valuation on all three landbanks at about RM200 million.
An analyst however, highlights that all approvals are in hand, and come with generous plot ratios of four to six times. But do the approvals justify the higher price tag?
Also in the spot light is the valuation of RM250 million for Gelanggang Harapan, a construction company that has posted paltry pre-tax profits, of between RM3 million to RM10 million over the past few years.
There is also likely to be a massive dilution of MRCB’s share base with the issue of 398.7 million shares and 133.9 million warrants to Nusa Gapurna, and 473.5 million warrants to existing shareholders of MRCB.
In a report CIMB said the exercise will dilute MRCB’s number of shares by 73%.
“Even after factoring into our RNAV (revised net asset value) the 33-acre new landbank based on surplus values (acquisition price less net book value) of RM187.7 psf for the PJ land, RM208.8 psf for the Subang Jaya Land and RM95.5 psf for the Old Klang Road land, our RNAV/share declines by 10% from RM2.50 to RM2.25,” CIMB added.
Other than these pertinent questions, there is also the burning issue as to why the EPF is resorting to Salim to manage MRCB, when for years now it has been professionally managed.
Convincing the minorities
Salim and perhaps EPF need to convince the minority shareholders of the merits of the deal.
The EPF which is considered a related party will not vote on the deal. The only other substantial shareholder in MRCB is pilgrim fund Lembaga Tabung Haji which has 8.2% equity interest, while the company’s free float is at 49.6%.
To be fair, some aspects of the deal appear fair. For instance the acquisition price pegged at RM1.55 per MRCB share was a 23% premium over MRCB’s trading price and a nine to 21 per cent premium over MRCB’s one month volume weighted average price.
The 113.9 million warrants issue to Gapurna is being issued on the basis of one warrant for 3.5 shares owned, while other shareholders get the warrants on a one for three basis. When converted at RM2.30, the Nusa Gapurna portion of warrants will also contribute some RM260 million to MRCB’s coffers, while the 473.5 million warrants to existing shareholders will rake in about RM1.1 billion for MRCB.
It is also noteworthy that Salim, who is slated to be the managing director of MRCB, will have a 16.8 per cent in MRCB if the deal goes through.
For its nine months ended September, MRCB posted a pre-tax profit of RM101.58 million from RM969.94 million in sales. Earnings per share (EPS) for the nine months in review stood at 4.55 sen.
As at end September last year MRCB had deposits, cash and bank balances amounting to RM592.33 million, while on the other side of the balance sheet the company had short term debt commitments of RM1.28 billion and long term borrowings of RM867.92 million.
MRCB had RM1.48 billion in shareholders’ funds as at end September last year.
A check on the company’s balance sheet however, also raised some flags, such as trade and other receivables of RM1.42 billion, up from RM1.1 billion for the nine months of FY2011.
MRCB closed at RM1.25 on Friday, slipping four sen to close at a two year low.
In an interview with KiniBiz, Salim said that the scepticism is not unexpected.
“We knew there would be a lot of queries. That is why the deal has taken so long (to be announced)— we want to give the advisers ample time to do the details and negotiate so we can come up with a proper deal, explain everything to everybody,” he says in Gapurna Sdn Bhd’s penthouse office in Brem Tower 2, Kelana Jaya.
Read KiniBiz’s interview with Salim tomorrow.