FOR a company to make a cash call when it is asset rich is indeed perplexing.
Such an exercise would result in dilution and uncertainties as it the exercise takes place in the current environment of an economic slowdown.
The latest proposal by Insas Bhd for a rights issue, which roughly mimics the same exercise it did in 2015, hence deserves a second look.
Insas is involved in a number of businesses, among which include stock-broking, credit facilities, food and beverage outlet operations as well as technology.
Recall that this is a company long said to have an intrinsic value not reflected in its share price.
The core of that lies in Insas’ stake in chip manufacturer, Inari Amerton Bhd.
That stake alone of 18.3% is worth about RM1.1bil. In comparison, Insas’ current market capitalisation only stands at RM500mil.
This is why in the past there had been speculation that Insas is a strong privatisation candidate by its major owners – the Thong brothers.
Datuk Seri Thong Kok Khee (pic) and his brother, Datuk Thong Kok Yoon, collectively own 36% in Insas, according to the 2019 annual report.
But it seems there are no signs of any privatisation plan for now.
Instead, the management is offering shareholders a renounceable rights issue of preference shares with warrants.
The exercise offers two redeemable preference shares (RPS) at RM1 each and five free warrants for every 10 existing ordinary shares. The tenure of the rights RPS is five years.
A back-of-the-envelope calculation shows that an existing shareholder participating in the rights issue will need to fork out an additional RM2,000 for every 10,000 shares held.
On July 10, the mother share closed at 75.5 sen.
Subscribers of the RPS would benefit from the dividend rate of 3.8% per annum, which is above the fixed deposit rates offered by local banks during this low interest rate environment.
In addition, the shareholder will get five free warrants that can be converted into ordinary shares or cashed out.
Insas has said that the exercise price of the warrants will be determined later based on the five day volume weighted average price (VWAP) of Insas shares.
“For illustration only, assuming an exercise price of 70 sen per warrant, the said exercise price represents a premium of RM0.0021 and RM0.0014 (0.30% and 0.20%) to the five day-VWAP and the theoretical ex-all price of Insas shares of RM0.6979 and RM0.6986, respectively, ” the company says.
“Barring any unforeseen circumstances and subject to all the required approvals being obtained, the corporate exercise is expected to be completed in the second half of this year.”
The proposed rights issue raises questions on why Insas sees a need in cash call, considering that it has slightly over RM392mil in cash and cash equivalents, based on its latest financial results.
It is uncertain how much of the cash is tied to the stock broking operations.
Insas is proposing a rights issue that seeks to raise between RM65mil to RM132.6mil, in order to repay its bridging loans of RM132.6mil.
For context, the bridging loans in the form of revolving credit facilities were taken to fully redeem the company’s redeemable preference shares (RPS) that expired this year. The RPS were issued as part of the previous rights issue in 2015.
Simply put, Insas’ latest rights issue s
One of the key concerns is on the take up rate of the cash call. As the major shareholders are not fully underwriting the shares, it remains to be seen if the objecive of raising the funds can be met.
Given that the rights issue also rewards subscribers with free warrants, it also raises concern that the conversion of warrants in the future would enlarge the share base and dilute shareholding.
This may put a pressure on the share price. It is worth noting that the stock has remained largely below RM1 since 2015. It currently trades below its year-to-date low of 91 sen.
By issuing RPS, the company has the burden of paying dividends of 3.8%. Insas, however, says the RPS is redeemable only at the option of the company, which it described as favourable.
The company feels that the proposed rights issue with warrants is in the best interest of shareholders.
“The proposed rights issue with warrants allows the company to raise capital at a competitive cost as compared to other means of financing such as through bank borrowings and other debt instruments and as and when any of the warrants are exercised, will enable the company to raise further proceeds from the equity market, ” it said in a filing earlier.
Some time ago, it appears that a proposal was presented to Insas’ board of directors for an in-specie distribution of Inari shares to Insas’ shareholders.
This was deemed necessary to unlock value and to excite shareholders after a long period of share price underperformance.
However, sources say the proposal has been rejected.
Being an important contributor to Insas’ bottoml ine, it is understandable that there might be hesitations for Insas to undertake an in-specie distribution as it will reduce the company’s stake in Inari, and hence future profit recognition.
In the nine month period ended March 31,2020, Inari delivered a pre-tax profit of RM22.8mil to Insas.
For comparison, in the same period a year earlier, Inari contributed RM29.1mil to Insas.
Did you find this article insightful?
75% readers found this article insightful