KUCHING: Analysts took a negative stance following Mitrajaya Holdings Bhd’s (Mitrajaya) proposal of a one-for-five renounceable rights issuance followed by one free warrant and one bonus for every two rights subscribed.
The team at Kenanga Investment Bank Bhd (Kenanga Research) believed he exercise would raise close to the minimum of RM94 million, excluding further dilution on current share base from existing ESOS and Warrants-D given that their exercise price is above current market price.
Post rights and bonus, the enlarged share base will increase to 896 million from 689 million.
“We were negatively surprised by the rights issuance given that it would be dilutive for FY18E’d earnings per share (EPS) and return on equity (ROE) by six and seven per cent, respectively,” it outlined in a report yesterday.
“And, the rationale of using the rights proceeds to pare down debts despite manageable current net gearing levels of 0.34 times (as of 2Q17), while there are no clear expansion plans.
“Note that the last time Mitrajaya did a cash call – via rights issuance — was in the year 2000 where the proceeds were used for working capital purposes.”
Kenanga Research estimated that net gearing for small-mid cap contractors under its universe can go as high as 0.8 times, but the typical comfortable level is less than 0.5.
“Post-rights issuance, we expect net gearing position to decrease to 0.18 times, from 0.34.
“We believe their lighter balance sheet would serve the working capital needs for their current outstanding order-book of RM1.8b and we do not expect any major land banking activities in the near future.”
The research team at Hong Leong Investment Bank Bhd (HLIB Research) noted that the abovementioned corporate exercise would increase Mitrajaya’s share base from 689.5m to 895.6 m in the minimum case and 1.02 billion in the maximum case.
“The indicative rights price has been set at RM0.68, representing a 34 per cent discount to its previous close of RM1.03. The rights issue would raise total proceeds of RM93.7 million under the minimum case scenario and RM107.1 million in the maximum case,” it said in a separate note.
“Upon exercise, the free warrants would raise another RM79.2 million under the minimum case and RM90.6 million in the maximum case. For our analysis, we will use the minimum case scenario as the existing Warrants D are out of the money.
“The funds raised will largely be used for repayment of borrowings amounting to RM91.7 million and expense related to the corporate exercise of RM2 million. This is estimated to result to interest savings of RM4.7 million annually.
“We estimate that net gearing would reduce from 32 per cent in 2Q17 to 16 per cent on a proforma basis.”
On the company’s forecasts, HLIB Research said this was unchanged pending more specifics on the exact completion date.
Tentatively, the rights issue is expected to be completed in 1Q18.