Benalec Holdings Bhd
(Sept 15, RM0.915)
Maintain “buy” rating with target price (TP) of RM1.98: The board of Benalec Holdings Bhd (BHB) announced a proposed issuance of up to RM200 million nominal value of seven-year redeemable convertible secured bonds (RCSB), at a fixed interest rate to be determined prior to issuance, on a direct or private placement or a bought deal basis or book running on a best effort basis without prospectus to investors who fall under Schedule 6 (or Section 229(1)(b)) or Schedule 7 (or Section 230(1)(b)), which are to be read together with Schedule 9 (or Section 257(3)) of the Capital Markets and Services Act, 2007.

The gross proceeds of up to RM200 million will be utilised for the group’s land reclamation projects (up to RM146.5 million), working capital and reserve requirement for a debt service reserve account (up to RM50 million) and defray estimated expenses (up to RM3.5 million). The sale and purchase agreement(s) or contracts or letter of award for the lands to be reclaimed will be identified and assigned as collateral for the proposed RCSB issue.

The RCSB will be convertible any time from the date of issue at a premium of 15% to 20% to the five-day value-weighted average market price (VWAMP) on a price fixing date to be determined later.On the fifth anniversary of the issue date, the bondholders will have the option to require BHB to redeem all outstanding RCSB at 100% of nominal value with accrued interests.

As of end-June, 2014, BHB had unaudited shareholders’ funds of RM543 million, cash equivalents of RM41 million and total borrowings of RM32 million. A maximum RCSB issue of RM200 million would only raise the group’s gross gearing to 0.4 times, which will decline when some or all of the RCSB are converted.

The potential earnings per share (EPS) dilution upon full conversion of the RCSB is of similar quantum, unless negated by sharply higher profit growth as a result of utilisation of the RCSB issue proceeds.

We are neutral on the proposed RCSB issue, which BHB’s board expects to complete by first half of financial year 2015, as potential earnings enhancement will have to be weighed against EPS dilution. We maintain our TP price of RM1.98, a 20% discount to revalued net asset valuation and trading “buy” rating, both of which are hinged on BHB being given the go-ahead to commence the massive land reclamation concessions in Tanjung Piai (3,485 acres or 1410ha) and Pengerang (1,760 acres) in Johor. — Affin Investment Bank, Sept 15

This article first appeared in The Edge Financial Daily, on September 17, 2014.