(Sept 17, 21.5 sen)
Downgrade to hold with a lower target price (TP) of 22 sen: Destini Bhd has proposed a new private placement of up to 20% of its issued share capital, expecting this corporate exercise to be completed by the fourth quarter of 2019. The company will need approvals from Bursa Malaysia and its shareholders at an extraordinary general meeting.
Assuming a placement price of 21.5 sen per share, the company said the placement could raise RM49.7 million, which should be used mainly to repay bank borrowings and fund working capital. This news is a negative surprise for us due to the potential earnings per share (EPS) dilution.
Destini’s net debt was at RM91 million or 0.18 times net gearing as at end-June 2019. We believe a weak operational cash flow is the key reason behind this private placement. Its net operational cash outflow was RM9.4 million in the first half ended June 30, 2019 (1HFY19), which we believe was mainly due to slow government job payments and weak oil and gas (O&G) earnings.
It is unclear whether the company will do a full placement of 20% of its issued share capital or a smaller portion. However, based on our estimates, the dilution of financial year ending Dec 31, 2020 (FY20) and FY21 EPS could be 13% to 14%, assuming the placement is fully completed by end-FY19.
We maintain our EPS forecasts pending the proposal’s completion but cut our TP from 26 sen to 22 sen, as we change our TP basis to 10.5 times calendar year 2020 price-earnings (PE) from 13.2 times, now based on a 50% discount to our implied target basis of 21 times for Singapore’s ST Engineering (with an “add” call) from a 40% discount on 22 times PE previously.
The larger discount is to reflect a potential EPS dilution from the private placement, weak financials and concerns over continued slow payments for government jobs done. We downgrade the stock from an “add” to a “hold” rating due to weak financials and poor visibility of earnings.
Potential rerating catalysts are more O&G job wins, while downside risks to our call are weak financials, concerns over continued slow government job payments and a potential EPS dilution. — CGS-CIMB Research, Sept 13