STOCK FOCUS OF THE DAY
MRCB : Proposed rights issue to raise up to RM2.86bil BUY
We maintain our BUY call on MRCB with an unchanged fair value of RM1.89, based on a 10% discount to its RNAV. We make no changes to our earnings forecasts. MRCB has proposed to undertake a renounceable rights issue of up to 2.86bil new ordinary shares in MRCB together with up to 571.3mil free detachable warrants on the basis of one rights share for every one (1 for 1) existing MRCB share held and one free rights warrant for every five rights shares subscribed for (1 for 5), on an entitlement date to be determined later.
The issue price for the rights issue and the exercise price for the warrants will be determined at a later date based on a discount of not less than 20% and a premium of not less than 20% to the theoretical ex-rights price respectively. Under the minimum scenario, the enlarged total issued share capital of MRCB will increase to 4.35bil shares, while under the maximum scenario, the enlarged share capital will increase to 5.71bil shares, after the full exercise of ESOS and warrants. Using an indicative rights issue price of RM1.00 and exercise price of RM1.60 for the warrants, this exercise will raise RM2.17bil (minimum scenario) or up to RM2.86bil (maximum scenario). We are surprised by the proposal. On the positive side, the proposal will have an immediate impact in reducing the gearing of MRCB, which will translate into lower interest costs for the group, and better earnings trajectory. However, we believe the substantially enlarged share base of MRCB may have a dilutive impact on the earnings per share of the group moving forward, which will be negative for the shareholders.
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