KUALA LUMPUR: CIMB Equities Research is maintaining its Reduce call on 7-Eleven Malaysia Holdings Bhd
after it proposed a rights issue via the issuance of new warrants.
It said on Thursday it retained its Reduce call and kept its end-2017 target price at RM1.15 (or 97 sen fully diluted ex-warrants), based on an unchanged CY18F P/E of 22 times in line with the average price-to-earnings (P/E) of its regional peers.
“7-Eleven is currently trading at 37 times FY17F and 33x FY18F P/Es, which, in our view, seems rather excessive against its modest three-year EPS compounded average growth rate (CAGR) of 11.5%,” it said.
7-Eleven has proposed to undertake a renounceable rights issue of up to 616.7 million new warrants at an issue price of RM0.10/rights share on the basis of one warrant for every two existing 7-Eleven shares. The warrant’s exercise price is RM1.
The group also intends to procure irrevocable undertakings from its substantial shareholders to subscribe in full their respective entitlements, which is equivalent to 253.4 million warrants (41% of total warrants).
Assuming 100% take-up rate, the issuance of warrants could raise up to RM61.7mil while the exercise of the warrants (expiring in 10 years) could raise up to RM616.7mil. The proposed exercise is expected to be completed by 3Q17.
CIMB Research said the rationale for the rights issue include: i) raising funds for its working capital, ii) increasing the shareholders’ and hence improving gearing level and; iii) strengthen the capital base of the company as well as improve the trading liquidity of the group’s shares with the exercise of the warrants.
The group’s working capital requirements includes payments to suppliers as well as the financing of its operating expenses, such as rental, store utilities, insurance, store maintenance and royalties payable, within three months of the issuance of its warrants.
“We are not too surprised by this proposal in view of its high net gearing level of 3.29 times as at end-Dec 2016.
“The group will only raise up to RM61.7mil from the issuance of warrants while the balance of RM616.7mil will only be received if the warrant holders decide to convert their warrants. Post conversion of all the warrants to shares; net gearing is estimated to fall to 0.4 times.
“We are negative on this as we estimate that the proposal will be dilutive to our FY18F EPS forecasts by c.15% (assuming full warrant conversion) due to the expansion of share base and the exercise price of the warrants is 32% below 7-Eleven’s theoretical ex-rights price of RM1.48, based on the announcement.
“Our earnings forecasts are unchanged for now. Upon the completion of the rights issue and full conversion of the new warrants, 7-Eleven’s share price ex-warrants will be adjusted to RM1.48 (based on its five-day VWAP of RM1.66).
“We continue to advocate investors to switch to Bison (Add, TP: RM2.07) for its stronger earnings growth and comparatively attractive valuation,” said CIMB Research.
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