PETALING JAYA – The sale of a highway to Johor that forms a vital link to Singapore and an office building in Kuala Lumpur is expected to shave off almost 50% of Malaysian Resources Corp Bhd’s (MRCB) debts.

Sources said the company was looking at its gearing coming down to a more palatable level of 0.7 times from 1.28 times once the sale of the Eastern Dispersal Link (EDL) and the disposal of Menara Shell to its real estate investment trust (REIT) is completed.

“The current gearing is 1.28 times. The EDL is one-third of MRCB’s gearing cost. Its disposal will put the company on a strong footing,” he said.

The company is hoping to complete the disposal of the highway and the building by the middle of next year or sooner, according to a source.
Apart from paring down its debt, the source said the exercise would boost MRCB’s ability to recycle its capital and reinvest in its property development business.

MRCB announced last Friday that it had received two indications of interest, one of which is from PLUS Malaysia Bhd, to acquire its equity interest in MRCB Lingkaran Selatan Sdn Bhd, the concession holder of the EDL expressway.

The other party, according to MRCB in a filing with Bursa Malaysia, is from a client of ZJ Advisory Sdn Bhd.

The source said the disposal process could take up to half a year to complete.

If MRCB accepts the offer from PLUS, it will be a related-party transaction because the Employees Provident Fund (EPF) is a substantial shareholder of PLUS and MRCB.

Hence, MRCB would have to seek shareholder approval and appoint an independent adviser.

The EPF has 34.73% and 49% stakes in MRCB and PLUS, respectively.

“The whole process is expected to take four to six months. On top of that, MRCB also needs to get government approval for a change in shareholding in the highway,” said a source.

MRCB shares closed up four sen to RM1.36 yesterday.

The EDL expressway concession was awarded to MRCB’s wholly-owned MRCB Lingkaran Selatan Sdn Bhd on June 26, 2007 to design, construct, operate and maintain the highway. It is the first fully private sector-funded highway.

Previous news reports also stated that MRCB viewed EDL as a non-core business and wanted to monetise the highway concession to fund its other infrastructure and property projects with a total gross development value of RM50bil.

By holding on to the EDL, MRCB incurs an annual depreciation cost of RM40mil, according to the source.

RHB Research Institute, in a recent report, said the RM1.18bil debt associated with the EDL had been a drag on the company’s balance sheet and profit and loss account, given an interest rate of 7% for the bond.

The research house pointed out that its removal from MRCB’s books would significantly strengthen its financial position.

UOB KayHian Research in a report yesterday said while the expressway is positive at earnings before interest, taxes, depreciation and amortisation (Ebitda) levels, it continues to be a drag for the group on a net basis.

“The potential disposal of EDL would see a net positive financial impact of about RM50mil per year for MRCB. Presently, we expect the expressway to record an Ebitda of about RM65mil.

“However, after taking into account finance and amortisation cost, the expressway is expected to drag the group’s earnings down by about RM50mil.

“Assuming that the expressway is disposed of at our RM1.55bil valuation, we expect the yearly savings of RM50mil would flow back to its bottom line.”

If the deal is completed by next year, the research house said its back-of-the-envelope calculation indicates that MRCB’s 2017 net profit could rise by about 30.2%, bringing the prospective price-to-earnings ratio down to 14 times from 17.5 times currently.

MRCB has been monetising its assets this year with the sale of Menara Shell to MRCB-Quill REIT for RM640mil.

In the pipeline is Menara Celcom, which will be up for sale in the second half of 2017. The office building is worth about RM640mil and the construction will be completed early next year.

EDL, the 8.1km expressway, connects the end of the North-South Expressway at the Pandan Interchange to the new Bangunan Sultan Iskandar/Custom Immigration and Quarantine complex in the city centre.

Commenting on the outlook of the company, an analyst said MRCB would bode well despite the current economic slowdown. “Because MRCB is not predominantly a housing developer, it’s predominantly a commercial developer and most of its commercial properties have matured.”