Saturday February 16, 2013
Touch of Salim fortune for MRCB
By B.K. SIDHU
FROM an air steward to property broker, and now the man with the exciting deal in town.
That is Datuk Mohamad Salim Fateh Din (pic), who made his fortune by selling and buying property after serving people on board Malaysia Airlines. However, it was a passenger on board a flight he served who talked him into property deals and that changed his life.
That was in 1985 and a year later he ventured into the property business, but not before dabbling in the sale of wholesale petrol to industry players. Soon he was selling land for petrol stations to the multinationals such as Shell, Esso, BP and Caltex. He was also involved in designing and building their petrol stations and later went into building malls for Giant hypermarket and A-class buildings that are eco-friendly.
Last Friday, he inked a major deal that would change his fortune and that of Malaysian Resources Corp Bhd (MRCB). He injected 33 acres of prime land into MRCB that now gives the property developer and construction company earnings visibility after the KL Sentral project is fully completed by next year.
His vehicle is Gapurna Sdn Bhd and the land is held by its 60%-owned unit Nusa Gapurna Development Sdn Bhd (NGD) The Employees Provident Fund (EPF) holds the remaining 40%. Incidentally, EPF also has 40% stake in MRCB.
In return he gets a 16.8% stake in MRCB via Gapurna. He will sit in the driver's seat at MRCB as its new managing director in the near future, pending all the necessary approvals. In essence, MRCB will be his flagship and listed vehicle, something he has been wanting as he grew his business.
But the 33 acres is not the only land he has. In fact, Salim has about 40 acres all over the Klang Valley and is said to be in prime locations. The question is ... will he inject more land into MRCB?
“We are open to discussions. At this moment I am satisfied with the 16.8% shareholding in MRCB. It is good enough for me and my company,” Salim tells StarBizWeek.
Analysts see the deal as a positive catalyst for MRCB. CIMB Research says the 33 acres with a total gross development value (GDV) of RM5.7bil addresses MRCB's depleting landbank.
Its order book will increase tremendously by about RM7.2bil of internal construction jobs, adds Salim's son, Imran Salim, who is a director of Gapurna.
Imran says the boost will be from NGD (via Gelanggang Harapan Construction), whose existing construction order book is worth RM3.2bil and it will be increased by a further RM4bil construction jobs in the future.
MRCB's current order book is said to be worth RM212mil.
The 55-year old Salim started selling and buying property 25 years ago and later ventured into property development, often with a partner. And now he is fast-tracking himself to be a big developer by taking a substantial stake and management control of MRCB. It is the name of MRCB that he really wants.
“I always wanted to do business but while you are in the airline, you cannot concentrate on that job and still do business. I had to make the choice and I chose to get into business,” he says.
His made his break when he sold a piece of land to Exxon for a petrol station in 1989, three years after venturing into the property business.
“It was a rather small deal worth RM1.5mil, but in those days that kind of money was big. Even RM100,000 was big,” he says.
In 1991 he set up Gapurna Sdn Bhd, which is his holding company.
His relationship with MRCB dates back to 2006 but little did he know then that he would be the managing director of MRCB one day and Imran will take over as chief operating officer.
It was then that he sold a piece of land to Shell and got to build 348 Sentral, the headquarters of Shell and the Ascott premium service residences at KL Sentral. MRCB was his partner.
“It was when I formed a joint venture (JV) with MRCB that I started my working relationship with it. I found it to be a reliable partner and it has good branding,” he says. For the Shell and Ascott buildings he formed NGD, in which he has 60% shareholding and EPF 40% to bid for the Shell job and MRCB was the JV partner in the deal.
To him, MRCB is a group “good at urban regeneration” going by what it is doing with KL Sentral as it can replicate the same model in other areas.
It was that relationship that led to more deals and eventually the tie-up between both companies. Despite being familiar with each other, the Gapurna-MRCB deal did not materialise easily. Both parties were haggling over valuations for nearly six months.
But last Friday in a private ceremony they inked the deal at Hilton Sentral.
MRCB is paying RM729mil via a cash settlement of RM111mil and the issuance of 398 million new MRCB shares valued at RM1.55 each for NGD and some of its units. MRCB has also entered into a right of first refusal and call option agreement with NGD for a further 36 acres in the Klang Valley.
Affin Research says the implied acquisition price of the four pieces of land, with a total GDV of RM5.7bil, looks fair ranging from RM165 per sq ft (psf) to RM870 psf of land cost, from RM18 psf to RM74 psf of gross floor area, and from RM39 psf to RM173 psf of net floor area.
EPF will remain the largest shareholder with a direct stake of 38.4% in MRCB.
CIMB Research says in a note that the issue price of RM1.55 per share represents a 23% premium over last Friday's close, and a 9%-21% premium over the stock's one-month volume-weighted average price. Based on MRCB's financial year 2011 earnings per share (EPS) of 6 sen, the deal entails an implied price earnings of 26 times, double the 13 times average for the property sector, and a price-to-book value of 1.6 times.
What MRCB gets from the deal with Gapurna is the security that its earnings stream will not be compromised once its KL Sentral project is completed.
That assurance will take form in the PJ Sentral project, a replication of KL Sentral and is located next to the PJ Hilton hotel. It is envisaged that the development of PJ Sentral will give Petaling Jaya a new skyline.
“We are going to develop PJ Sentral and the other pieces of land that we have. PJ Sentral will be another urban re-development project, with a transportation hub, office blocks, and lifestyle shops and service apartments. All the buildings will be eco-friendly,'' Salim says.
Under phase one, this tract of land will be developed into PJ Sentral Garden City with an estimated GDV of RM2.9bil. It is a mixed development of six blocks of office towers, a hotel and a 4-storey basement car park.
Work will start when MRCB has all the approvals for the Gapurna deal, expected in the second quarter of 2013.
On the Subang piece located on 3.2 acres with a GDV of RM378mil, Salim says it will be turned into a commercial district, while commercial and residential units will be built on the 17 acres (GDV of RM2.4bil) at Old Klang Road (opposite Mid Valley and near Seputeh).
CIMB adds that over the next 4-5 years, development plans will focus on the first phase of PJ Sentral. The first launch is slated for April 13 and will target long-term anchor tenants. Overall, this acquisition will inject RM5.7bil worth of potential new GDV into MRCB. NGD has been in negotiations with potential buyers for an en-block sale of one of the office towers at an undisclosed price.
Funding is no issue for the developments as Salim says all that will be “sourced from the local banks.”
Most of the construction work will be done in-house where both Gapurna and MRCB have their expertise given their track records with KL Sentral.
The deal also involves MRCB acquiring NGD's Gelanggang Harapan Construction, which has a track record in designing and building structures for Giant hypermarket, mainly in the Klang Valley.
Separately, MRCB has proposed to issue 473 million free warrants on the basis of 1 warrant for every 3 shares held by existing shareholders and 2 warrants for every 7 shares to new shareholders. This is to cushion further dilution arising from the issuance of detachable warrants. The free warrants are expected to raise up to RM1.2bil cash.
“The free warrants offer a good value proposition to the existing MRCB shareholders,'' says Imran.
Gapurna is also giving MRCB a RM50mil profit guarantee as part of the deal on its construction unit, Gelanggang Harapan. This will be RM15mil each for 2013 and 2014 and RM20mil for 2015.
Though Imran says Gapurna is confident that its construction unit will report RM30mil in profit by the end of 2013.
Affin Investment in its note says the operating performance and profit guarantee for Gelanggang Harapan will translate into a net profit contribution of at least RM16mil a year from financial year 2013. The profit guarantee will boost 2013 earnings forecast for MRCB to RM127mil from RM111mil.
With all the projects lined up an analyst expects significant profit contribution from the development of the four pieces of land over the next four to ten years, subject to the timing of launches and sales takeup. Subject to further contributions from development of the land, he feels that the proposals will initially dilute the 2013 forecast EPS, arising from the issuance of new shares, from 8.1 sen currently to 7.1 sen.
Salim says challenges for PJ Sentral are there though he feels he can source tenants for the future buildings that MRCB is going to build. He admits those challenges have to be mitigated. “Challenges are part of life and we have to just overcome them. In the process, it gives you a lot of knowledge and experience to handle situations.”
Though analysts are saying the deal is good for MRCB, its share price has only posted a marginal one sen increase from RM1.24 on Wednesday (the day of the announcement) to RM1.25 yesterday.
They feel the stock's current price, is “richly priced and there is not much potential upside.''
M&A Securities adds “We view this transaction positively as the group is trading its overvalued shares for prime land” but the outlook is weak due to the general election (concerns, which also reflects the sentiment of the broader market)
It may be for the immediate term but certainly not for the longer term since Salim and his son, Imran, has the entrepreneurial spirit to drive MRCB forward.