This article first appeared in The Edge Financial Daily on August 8, 2018
Only World Group Holdings Bhd
(Aug 7, RM1.01)
Maintain hold with an unchanged target price (TP) of RM1.09: Only World Group Holdings Bhd (OWG) yesterday announced a proposal to issue one free warrant for every two existing shares. In total, it will issue 133.6 million warrants and its share base will increase to 400.7 million from 267.1 million currently (assuming full exercise of all warrants over a period of five years).
The entitlement date has yet to be determined and will be fixed at a later date. This exercise is slated for completion by the fourth quarter of calendar year 2018 (second quarter of financial year 2019 [2QFY19]).
OWG highlighted that the issuance of free warrants is mainly to reward shareholders. It will also provide investors the opportunity to increase their equity participation in the company without incurring any additional cost.
The price of the new warrants will be determined at a later date, and will be based on the five-day volume weighted average market price of OWG shares with a discount/premium to be determined later on market-based principles.
Assuming the full exercise of all free warrants, the group will raise a total of RM106.8 million (based on an illustrative price of 80 sen per warrant). Cash raised from the exercise of the free warrants will mainly be utilised to finance its working capital requirements.
This could reduce its borrowings, resulting in lower interest cost. Currently, it has a net debt of RM101.4 million (as at end-2QFY18). We are also not discounting the possibility that the group may utilise the proceeds from the exercise of warrants for potential merger and acquisition activities if the opportunity arises.
Based on our back-of-the-envelope calculation, the issuance of free warrants will lower our FY19 to FY20 forecast earnings per share by 23.7% to 24.5%. This is based on the assumption that all warrants are exercised fully in 2QFY19 (at the illustrative price of 80 sen per warrant).
However, our early indicative TP will be largely unchanged at RM1.09 post the warrant exercise, adding back the net cash per share assuming full exercise of all outstanding free warrants.
We expect shareholders and investors to view the free warrant issue positively as a form of reward, and this could spur short-term interest in the counter. In our view, current valuations have largely priced in its potential strong earnings growth from its exposure to the Genting Integrated Tourism Plan.
Downside risks include fewer-than-expected visitors for its Komtar operations and Genting facilities. Upside risks include higher-than-expect spending per Komtar visitor. — CGSCIMB Research, Aug 7