News

In an announcement to Bursa Malaysia, Boustead has proposed: (1) a renounceable 2 for 5 rights issue of 413.7m new shares at an issue price of RM2.55/rights share; and (2) a subsequent bonus issue of 2 for 5 (after proposed rights issue).

Comments

In other words, an investor holding 5,000 shares initially will end up with 9,800 shares with an additional cost of RM5,100. At a closing price of RM4.19, the ex-rights price of the share is RM3.72. The rights issue price is at a 31% discount to Boustead Holdings’ ex-rights price of RM3.72.

The Proposed Rights Issue is expected to raise gross proceeds of up to approximately RM1.05b. The proceeds are proposed to be utilized for: (i) repayment of bank borrowings (RM486m), (ii) property development activities (RM507m), (iii) working capital for BHB and subsidiaries (RM55.9m), and (iv) estimated expenses arising from the proposals (RM6m).

We are neutral-to-negative on this corporate exercise. The reasons are: (1) the exercise will be EPS dilutive, and (2) Boustead Holdings’ net gearing will still exceed 1x despite utilising part of the proceeds to pare down debt. The RM486m will only reduce net debt and net gearing of RM6,993m and 1.2x as at 31 September 2015 to a net debt and net gearing of RM6,507m and 1.1x.

Outlook

We expect the trading & manufacturing, and pharmaceutical divisions to show growth and deliver sustainable recurring incomes. The trading & manufacturing division’s growth will be underpinned by its captive market from Boustead Petroleum Marketing Sdn Bhd, which conducts marketing and distribution of petroleum products under the BHPetrol retailing brand. Its pharmaceutical division is supported by Pharmaniaga Logistics’ government concession agreement.

Plantation earnings, meanwhile, will hinge largely on CPO price movements since 91% of its plantation estates are already matured of which outlook over the medium-term looks mildly positive.

The heavy industries division is expected to remain stable but risk lies in potential future cost overruns from its legacy commercial projects.

Change to Forecasts

No changes to our FY15E and FY16E forecasts

Rating & Valuation

Maintain UNDERPERFORM. Target price is RM3.50 based on Sum-of-Parts (25% discount to its SoP valuation).

Risks

Further weakness in CPO prices and delays in the delivery of LCSs and cost escalations.

Source: Kenanga Research - 19 Jan 2016