MPHB stirs more interest?

Multi-Purpose Holdings Bhd’s (MPHB) move to acquire the remaining 49% stake in Magnum Holdings Sdn Bhd may be a prelude to more corporate exercises within the group, analysts said, adding that these may potentially generate more interest in the stock, which had been quiet over the past three years.

MPHB had said that after taking full control of its crown jewel in Magnum, it would embark on divesting or unlocking the value of its non-core assets such as landbank as well as financial services operations. Analysts’ view is that such an exercise is expected to attract attention to the group after a three-year lull in corporate exercises since it privatised Magnum in 2007.

First of all, investors see MPHB buying out the minority interests (MI) in Magnum as positive.

Pro forma calculations by ECM Libra Research show that the absence of a significant MI in MPHB’s books would increase the group’s net profit by 53% to RM437.4 million in FY10 ended Dec 31. Despite MPHB issuing new shares to fund the acquisition, the group’s earnings per share would still grow by 14% to 30.5 sen.

“Although the group will raise its borrowings by another RM809 million (to fund the acquisition), we do not expect any increase in interest expense as it will be more than covered by savings from the RM675 million RCULS (of Magnum) that has a very high coupon rate of 11%,” said ECM Libra.

To recap, MPHB is buying the remaining 49% stake in Magnum, a numbers forecast operator (NFO) for RM1.64 billion. The purchase consideration will be settled by 360 million new shares in MPHB plus RM809.2 million cash.

The vendors are CVC Asia Pacific Ltd, which owns 47% in Magnum, and certain members of the management in Magnum who collectively hold 2%. The acquisition also includes redeemable convertible loan stocks (RCULS) in Magnum.

“At the last closing price of RM2.68 (MPHB closed at RM2.66 last Friday), MPHB is trading at a massive 42% discount to our sum-of-parts (SOP) valuation of RM4.61 per share, after accounting for new shares to be issued. With Magnum valued at RM3.08 per share (in the acquisition), investors are practically buying Magnum at a discount and getting all other assets (in MPHB) for free! While some may argue that the conglomerate should trade at discount to its SOP value, we believe the non-core assets divestment programme and landbank development (by MPHB) will narrow this valuation gap,” said ECM Libra.

According to a note by RHB Research Institute, the acquisition valued the whole of Magnum at RM3.34 billion, which represented a price-to-earnings multiple of 8.8 times  based on the annualised nine-month operating profit of MPHB’s gaming operation, which is essentially Magnum.

In price-to-book value terms, the RM3.34 billion translates into a multiple of 3.1 times Magnum’s audited net assets of some RM1.07 billion as at Dec 31, 2009. In comparison, MPHB and CVC had privatised Magnum in 2008 at RM3.45 a share, which translated into a multiple of 4.2 times net tangible assets of 82 sen a share as at Sept 30, 2007.

“Although we do not cover MPHB, we believe this could present a trading opportunity for MPHB, given the relative inexpensive valuations for the acquisition and the potential for higher valuations should it relist Magnum at a later stage,” RHB said.

MPHB indicated in its announcement to Bursa Malaysia that it would focus on its gaming operations going forward, and the company plans to divest its non-core assets.

Apart from gaming, the group’s diversified portfolio includes financial services, stockbroking, hospitality, as well as real estate and property development.

The financial services unit is undertaken via Multi-Purpose Insurans Bhd, while the stockbroking comes under A A Anthony Securities Sdn Bhd.

MPHB, which owns the Multi Purpose Tower along Jalan Munshi Abdullah in Kuala Lumpur, undertakes its hospitality business under Flamingo Hotels and Management Services. In terms of property development activities, MPHB had in July last year signed three memoranda of understanding with Bandar Raya Developments Bhd as initial arrangements for joint ventures in real estate development on tracts owned by the group.

These include 107ha, and 130ha within Rawang and Gombak respectively in Selangor, besides another 32ha in Penang.

In an email reply to The Edge Financial Daily, MPHB chief operating officer Kheoh And Yeng said the group’s main intention for now “is to consolidate the gaming business”.

“It is still premature to give indications on MPHB’s plans to dispose of its non-core assets. Moving forward, as per the announcement, we will initiate the divestment and have it announced when the divestment is more certain. If there is any divestment, the funds will be used to pare down any outstanding borrowings,” she said.

News reports have quoted MPHB managing director Datuk Surin Upatkoon as saying the company has no intention to relist Magum for now.

Upatkoon also said MPHB planned to raise some RM1 billion from the disposal of its non-core assets.

Estimates by ECM Libra show that combined proceeds from MPHB’s asset divestment and land development come to RM2.2 billion.

ECM Libra said the disposal of MPHB’s non-core assets “made sense” due to favourable valuations, besides the lack of organic growth potential in the business segment.

The research house also said MPHB’s large landbank might be jointly developed with other developers.

“We believe these divestments and landbank development will be the next re-rating catalyst for Multi-Purpose,” ECM Libra said.

As at Sept 30, 2010, MPHB had a cash pile of RM764.81 million versus RM2.66 billion worth of debt obligations. This translates into a net debt of RM1.9 billion or net gearing of 0.8 times based on shareholders’ equity of RM2.29 billion.

Gaming operations made up 92% of MPHB’s revenue of RM2.71 billion during the nine months ended Sept 30, 2010.

MPHB’s corporate developments will be closely watched by in the investment fraternity in the coming months. - by Chong Jin Hun of theedgemalaysia.com