SINGAPORE (June 30): DBS Group Research is upgrading Jardine Cycle & Carriage from “fully valued” to “hold” given its greatest challenge is the continued weak outlook for Astra International.

Jardine C&C recently announced a 1-for-9 rights issue for a total of 39.5 million shares at an issue price of $26 per share, which is estimated to raise net proceeds of US$768 million ($1 billion).

Majority shareholder Jardine Strategic with a 74.43% stake has undertaken to subscribe for its share of the rights.

The rationale given for the rights issue is to repay loans of US$626 million previously drawn down to fund its 24.9% stake in Siam City Cement in April this year, and for general corporate purposes including making strategic investments and/or acquisitions.

In a report out today, analyst Paul Yong estimates that the rights issue will improve the group’s net gearing from 0.85x at end-FY14 to 0.5x by end-2015F.

This could enable the group to make more acquisitions.

However, given that Astra still accounts for about 90% of Jardine C&C’s earnings and Astra’s tepid outlook, DBS remains cautious on Jardine C&C’s near-term prospects.

Yet, it is still interesting to keep an eye out for Jardine C&C’s next acquisitions and their potential impact on the group.

“Given the continued weak outlook for Astra International and the increasing diversification of JC&Jardine C&C’s investment portfolio, we are widening our sum-of-parts discount for Jardine C&C to 15%, which is its historical mean since 2007,” says Yong.

“As Jardine C&C’s share price has weakened below our TP, we upgrade the stock to a ‘hold’,” he adds.

Jardine C&C is up 31 cents to $33.46 on 134.7 million shares traded.