PETALING JAYA: Mitrajaya Holding Bhd’s plan to sell new rights shares worth up to RM107mil has spooked the market, as there is no clear expansion initiative to offset the dilutive impact on its earnings.
Kenanga Research, in a report yesterday, said that it was “negatively surprised” with the company’s proposed fund-raising exercise.
“We were negatively surprised by the rights issuance given that it would be dilutive for the company’s 2018 earnings per share and return on equity and the rationale of using the rights proceeds to pare down debts despite manageable current net gearing levels, while there are no clear expansion plans.”
The research house said the construction and property development company’s gearing stood at 0.34 times as at the second quarter of 2017.
Kenanga Research pointed out that the last time Mitrajaya did a cash call (via a rights issuance) was in the year 2000, where the proceeds were used for working capital purposes.
“We note that net gearing for small to mid-cap contractors under our universe can go as high as 0.8 times but the typical comfortable level is below 0.5 times.
“Post-rights issuance, we expect the net gearing position to decrease to 0.18 times.
“We believe their lighter balance sheet would serve the working capital needs for their current outstanding order book of RM1.8bil and we do not expect any major land banking activities in the near future,” it said.
Hong Leong Investment Bank (HLIB) said it is not changing its earnings forecast for Mitrajaya following the announcement of the proposed rights issue – pending more specifics on the exact completion date.
“Tentatively, the rights issue is expected to be completed in the first quarter of 2018.
“As an indication, assuming a full year dilution impact, our 2018 to 2019 earnings per share would be diluted by 16.6%.
“After factoring in the earnings per share dilution from the rights issue, our theoretical ex-rights target price is reduced from RM1.15 to 96 sen, which is based on an unchanged 10 times target price to earnings ratio on 2018 earnings.”
Kenanga Research also said it is not making changes to the company’s 2017 earnings, but has however raised its 2018 earnings by 6% to RM85mil after accounting for the interest savings of RM4.9mil post rights issuance.
“That said, 2018 earnings per share will be diluted by 6% to 9.5 sen from the rights.”
Last week, Mitrajaya announced that it was proposing a rights issue to repay bank borrowings.
It proposed a one-for-five renounceable rights issue of up to 157.48 million shares together with warrants E and bonus issue on the basis of a warrant and a bonus share for every two rights shares subscribed.
The entitlement date will be determined later.
Mitrajaya said it would seek an undertaking from its major shareholder and group managing director Tan Eng Piow, who owns a 40.91% stake, to subscribe in full for his entitlement under the proposed rights issue.
Based on the indicative issue price of 68 sen per rights share, the company aims to raise between RM93.69mil and RM107.09mil, all of which, except the related expenses, will be used to pare down the unsecured revolving credit of about RM145.34mil given by financial institutions to Mitrajaya’s unit Pembinaan Mitrajaya Sdn Bhd.
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