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Monday, November 29, 2010

MRCB to go big in the property sector

Malaysian Resources Corp Bhd’s activities are heavily concentrated in the Klang Valley with KL Sentral(pic) as its flagship project

PETALING JAYA: After nearly 30 years, Malaysian Resources Corp Bhd (MRCB) is poised to join the premier league of the property development sector via its proposed merger with IJM Land Bhd.

The company started in 1969, under the name Perak Carbide Sdn Bhd, with its core activity of carbide manufacturing. In 1981, it became known as MRCB, following a major shift in operational interests to property development and investment.

To recap, the government-linked company, with Employees Provident Fund (EPF) holding in excess of 40% stake, announced that it would team up with IJM Land under a newly incorporated company (Newco). The proposal will involve a share swap of MRCB and IJM Land with new shares in Newco.

Newco is expected to take over the listing status of both company in the second half of next year with implied market capitalisation of RM7bil and net asset of over RM3bil where it will emerge as the second-largest property developer in the exchange.

It was largely reported that it would be a synergistic merger given the different strengths of MRCB and IJM Land in the property market segments.

So, what does MRCB bring to the merger with IJM Land?

According to OSK Research, MRCB's activities are mostly in the commercial sector and heavily concentrated in the Klang Valley, with its flagship project KL Sentral with gross development value (GDV) of about RM12bil.

Its major shareholder, the EPF, is to undertake the development of the prized Rubber Research Institute (RRI) land in Sungai Buloh where we believed the merged entity may be the frontrunner to undertake the project on behalf of EPF, it said.

This announcement was made in Budget 2011, whereby the project would involve mixed development comprising affordable houses as well as commercial, industrial and infrastructure facilities. The entire development is estimated at RM10bil and is expected to be completed by 2025.

IJM Land, on the other hand, is more focused on township and residential developments in the Klang Valley, Penang, Johor, Negri Sembilan, Sabah and Sarawak with remaining landbank of 6,637 acres and remaining GDV of about RM22.85bil.

This landbank of IJM Land would complement the merger, as according to Kenanga Research, post-completion of KL Sentral, MRCB might not have another equally strategically located landbank and would only be counting on securing a role in EPF's RRI land development to have a significant new earnings stream.

OSK Research also believed the proposed merger might have been initiated by EPF as part of its efforts to consolidate its property exposure as well as to establish its own sizeable property arm.

Besides MRCB, EPF is also a common and significant shareholder in IJM Corp Bhd and IJM Land.

This, we believe, will enhance EPF's capability to achieve its goal of increasing its exposure in the property market as part of its investment diversification strategy, it said.

The EPF was recently quoted on the merging of IJM Land and MRCB as saying it would first have to evaluate the proposal before deciding on its position.

Based on current information, the EPF is slated to be the second-largest shareholder in Newco after IJM Corp, as the details of the new management structure has yet to be revealed.

On the offer price of RM2.30 per MRCB share on the merger share in Newco compared to RM3.65 per share for IJM Land, OSK Research said it's a fair offer price but not that attractive.

The RM2.30 offer price for MRCB offers only a 7% and 12.2% upside from the last closing price (before the merger announcement) and our previous fair value respectively.

As such, we view the offer price as somewhat fair, and yet not that attractive, owing to the rather limited premium or upside, it said.

Going forward, although Newco is expected to enter the premium league of property sector, the other players in the league are also stepping up in terms of size and capabilities apparent in the current trend of mergers and acquisition in the industry.

On Nov 4, UEM Land Bhd has proposed a merger with Sunrise Bhd, while last week Sunway Holdings Bhd and Sunway City Bhd received a takeover offer from Sunway Sdn Bhd for RM4.5bil in cash-and-share swap.

Thus, although the merger between MRCB and IJM Land is expected to create a giant in the sector next year, Newco is not alone in the battlefield as the other contenders would be equally strong.

By The Star

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