Wednesday, February 16, 2011

MPHB ... Feb11

Contrary to wide market expectations, Multi-Purpose Holdings Bhd (MPHB)'s plan to
relist its numbers forecast operator (NFO) Magnum Corp Bhd has been put on hold, as the company shifts its focus to reformatting its business structure.

MPHB managing director Datuk Surin Upatkoon said there is no plan to relist Magnum for the time being.

Following its proposed acquisition of the balance 49% stake it does not already own in Magnum Holdings Sdn Bhd, MPHB expressed its intention to make gaming its core business, while it would work towards the rationalisation of its non-core assets such as insurance and stockbroking through a divestment programme. It gave no hint of the widely expected relisting of Magnum shares on Bursa Malaysia.

MPHB planned to raise about RM1bil by selling its non-core assets to focus on gaming.
MPHB could look more attractive now, given increased contribution from cash-cow Magnum and the potential divestment of its non-core assets.

Based on MPHB's results for the third quarter ended Sept 30, 2010, gaming contributed 91% to the group's total revenue and 65% to pre-tax profit. MPHB's revenue for that period stood at RM850.7bil, while earnings were RM126.5bil. This compares with revenue of RM813.2bil and earnings of RM51.6bil in the previous corresponding period.

The acquisition expected to be concluded by May 2011, does not include rm675 million of nominal value RCULS in Magnum.

The deal essentially values Magnum at rm3.34 billion. This translates to 11 times of Magnum’s 2010 forecast earnings based on MPHB’s nine month profit before tax from its gaming operations.

While its is not surprising that CVC is looking to exit as the three year timeframe for its investment is up, its willingness to sell its stake at a relatively low valuation could be rather puzzling for some.

But close scrutiny reveals that CVC is making a least 60% return of its investment in Magnum within three years, plus it will still have about 10% to 15% in MPHB.

Given that CVC is letting go its valuation stake in Magnum at a lower valuation, CVC would most likely be betting on the potential value of the MPHB stake it will be getting from the deal.

As a result of the acquisition, MPHB will immediately be earnings accretive for MPHB even after taking into account the enlarged entity.

Although MPHB will raise its borrowings by another 809 million, do not expect any increase in interest expenses as the debts in Magnum that carry a 11% interest rate will be retired and likely to be financed at a lower rate.

MPHB would most likely take on borrowings to finance the rm809 million cash portion of the purchase consideration as its cash pile art end Sept 2010 totalled rm765 million against long term borrowings of rm1.85 billion. But this is widely expected to be secured against Magnum’s strong cash flow.

While investors may be disappointed that the much talked about relisting of Magnum did not materialize, the acquisition would see the incarnation of Magnum in the form of MPHB – shareholders of Magnum would have full exposure to the NFO via MPHB.

The acquisition would make gaming MPHB’s core business. This presents an opportunity to rationalize its non core assets through a divestment programme to be initiated later. MPHB plans to raise some rm1 billion by selling its no core assets to focus on gaming. If there is any divestment, the funds will be used to pare down any outstanding borrowings.

MPHB also has business in the financial services, securities broking and property and leisure segments. Its largest revenue contributor, however, is the gaming business. Its second largest revenue contributors is the financial services division. It has also large landbank within its property division.

The divestment and landbank development will be the next re-rating catalyst for MPHB.

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