MPHB Capital Bhd
(Feb 21, RM1.91)
Maintain buy with target price of RM2.38: On Aug 21, 2013 MPHB entered into a sale and purchase agreement (SPA) with Twin Universal Sdn Bhd for the disposal of a 208-acre (84.2ha) land located in Balik Pulau, Penang, for RM226 million. Twin Universal paid a 10% deposit amounting to RM22.6 million, with the balance of RM203 million to be paid by Feb 21, 2014.

However, the buyer has an option to extend the deadline for the balance payment by six months, provided it pays another 10% of the total purchase consideration on Feb 21, 2014 and 8% interest per annum until the expiry of the extended deadline.

Referring to the SPA, MPHB announced on Feb 20 that it has entered into a Deed of Novation Cum Assignment with Twin Universal Sdn Bhd and PR1MA Corp Malaysia.

Under the deed, Twin Universal assigned and novated to PR1MA all the rights, liabilities and obligations under the SPA. In addition, MPHB also announced it has granted PR1MA an extension of the completion date of the SPA by six months to Aug 20, 2014.

Pursuant to the SPA, MPHB received another 10% deposit payment and a one month advance interest payment of RM1.36 million from PR1MA.

Assuming MPHB only receives the balance payment by the Aug 20 deadline, it will earn interest of about RM8 million over the six-month period.

While we are surprised by the announcement of the change in buyer, it has no material impact on our some-of-parts (SOP) valuation.

However, we prefer PR1MA as the new buyer, given its government-backed agency status which implies higher credibility. We believe it is highly unlikely the land disposal will delay beyond August 2014. PR1MA is a statutory body which develops affordable housing schemes for middle income households in key urban centres. MPHB is expected to recognise a disposal gain of RM194 million in the third quarter of financial year 2014 ending Dec 31(3QFY14) based on the land’s book value of only RM32 million.

MPHB recently announced it has been given approval by Bank Negara Malaysia (BNM) to commence preliminary talks with an interested party to dispose a minority stake in its insurance arm, Multi-Purpose Insurans Bhd (MPIB).

We gathered that an Italian leading insurer is currently studying the viability of MPIB fitting into its strategic plans in the region.

Channel checks suggest the foreign insurer could take up 49% of MPIB at price-to-book (PB) of 2.4 times to 2.5 times, which is higher than the average 2.2 times PB for the merger and acquisition transactions of general insurance companies over the past few years.

As such, there could be a significant upside to our SOP valuation which values MPIB at only 1.8 times PB. A 2.4 times to 2.5 times PB suggests MPIB accounts for 94 sen to 98 sen per share.

Furthermore, MPIB’s book value could top our assumption of RM280 million, which suggests a further lift in the value of MPIB.

Over time, we expect MPHB to be much more active in direct or indirect participation in property development due to its rich property assets. One of the key catalysts could be the redevelopment of its Hotel Flamingo and Plaza Flamingo office building in Ampang into a planned integrated property development with a joint venture (JV) partner.

In addition, MPHB has three JVs with Bandar Raya Development Bhd to develop its landbank in Rawang, Gombak and Teluk Tempoyak, with a total gross development value of RM4.2 billion.

The Rawang project is expected to be launched in mid-2014. Under the first phase, 170 units of 3-storey link houses will be built within a gated and guarded community.

Maintain “buy” and target price of RM2.38, assuming a 20% discount to our SOTP valuation of RM2.98 per share.

We foresee plenty of re-rating catalysts for MPHB in the next 12 to 18 months, which include a higher-than-expected valuation for its stake in MPIB and more disclosure on its potential property JVs and monetising exercises. — UOB KayHian Research, Feb 21.

This article first appeared in The Edge Financial Daily, on February 24, 2014.