Friday 29 Mar 2024
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ACE Market-listed PUC Founder (MSC) Bhd has big plans to raise up to RM127.6 million from shareholders to go into a renewable energy venture, which includes planting up 50mw of solar power.

This is quite an ambitious endeavour for two reasons. The first is that the company’s market capitalisation is only RM90.6 million. Given the current market conditions, it may prove challenging to raise the funds via the irredeemable convertible unsecured loan stock (ICULS) rights issuance that the company is proposing.

Against this backdrop, PUC Founder’s share price has already fallen 35% in the past few weeks. The stock closed at 8.5 sen last Friday.

However, if the company can convince its shareholders to subscribe for the ICULS, it would give it relatively cheap funds to pursue the venture.

“The weak market is especially ideal for ICULS. We are offering shareholders 4% returns [per annum], with upside potential down the line. This is much better than fixed deposits,” says Cheong Chia Chieh, the managing director and largest shareholder of PUC Founder.

Recall that PUC Founder (fundamental: 1.85; valuation: 2.10) is proposing to issue two five-sen rights ICULS for every one share held as well as one-for-eight free warrants with an exercise price of 10 sen. The ICULS will have a life of three years.

Even if the company were to secure funding, the next challenge would be securing a reasonable amount of solar energy quota, considering the Sustainable Energy Development Authority (Seda) has only very limited solar capacity up for grabs. Last year, Seda only released 10mw of capacity for the 425kW to 1mw range, the scale that PUC Founder would be interested in. On top of that, any one bidder can only win 1mw of capacity at most.

“When we first announced that we were going into renewable energy, everyone doubted us. But with the 1mw we have secured, we have shown that we are capable,” says Cheong, who is confident that the company can continue to secure more solar capacity.

In March, PUC Founder announced that it had been awarded 1mw of solar capacity by Seda via the feed-in-tariff (FiT) programme, for a site in Sungai Petani, Kedah.

With a tariff of 1.0355 sen per kWh, this project is lucrative but still small compared with PUC Founder’s ambitions.

The FiT programme is not designed for companies to hoard large capacity. It is ultimately subsidised by consumers, through the 1.6% renewable energy levy on electricity bills, which goes to the renewable energy fund.

Furthermore, Seda revises the tariff downwards every year to put pressure on the internal rate of return of solar projects.

It is worth noting that there are plans to open up the industry by introducing utility-scale solar (USS), but that is at least a few years away. Furthermore, USS would be allocated through bidding, which would drive tariffs down even more and minimise returns for developers.

That said, Cheong is tight-lipped about his plans to achieve the 50mw capacity so as not to breach Bursa Malaysia’s rules. However, if PUC Founder has money, it may open up an avenue for it to undertake solar projects awarded to other parties.

Note that Seda imposes a moratorium on solar projects so that they cannot be flipped for a quick buck. However, there are financing structures that can easily bypass the restriction, which only looks at the equity holders of a solar project — for example, taking de facto control of the project in exchange for financing its development.

In the meantime, there has been steady newsflow from PUC Founder over the past two weeks. On Aug 19, it signed a memorandum of understanding (MoU) with Bioalpha Holdings Bhd for land sharing rights. This will allow Bioalpha to grow crops under PUC Founder’s solar panels on 2.5 acres in Sungai Petani. This is similar to how Cypark Resources Bhd maximises the use of its solar project land.

Later, PUC Founder signed another MoU with PW Consolidated Bhd to build and operate an “ecotype biogas electricity plant”. Both parties still need to carry out a feasibility study on the proposed project.

Despite the newsflow, PUC Founder’s share price remains depressed. If it is a reflection of shareholder confidence in the company, then perhaps the take-up of the ICULS will be challenging.

PUC Founder plans to raise at least 

RM40 million from the exercise, backed by its largest shareholder — London-listed Resource Holdings Management Ltd (RHM), with a 41.58% stake.

Cheong controls 23% of RHM and is a director of the company.

RHM has already committed to fully subscribe for the ICULS. This should provide enough money — RM28 million for solar project and 

RM11 million for working capital — to plant up 4mw of solar capacity.

Interestingly, the bulk of the money that RHM will be pumping into PUC Founder will come from the disposal of shares in the latter on the market.

Recall that RHM came to control a 62.48% stake in PUC Founder through a reverse takeover in 2013. RHM injected Red Hot Media Asia Ltd into PUC Founder in exchange for shares, making up 62.48% of the company.

Since then, RHM has pared down its stake to 41.58%. This includes a seven-for-one bonus issue with free detachable warrants that was undertaken late last year.

In total, RHM has sold about RM26 million worth of PUC Founder shares and warrants on the market.

In a nutshell, RHM injected Red Hot Media Asia into PUC Founder in exchange for shares, then sold a substantial amount of the shares at an average price of 27 sen apiece. Now, it is planning to pump this money, plus a little more, back into PUC Founder in exchange for the ICULS.

Pending the exercise, trading of RHM’s shares has been suspended on the London Stock Exchange. The stock last traded at 7.75 pence on Aug 4, giving RHM a market capitalisation of £3.7 million (RM23.98 million). Since PUC Founder makes up the bulk of RHM’s holdings, it is technically cheaper to buy into RHM than PUC Founder.

RHM values PUC Founder at only RM57.45 million or 5.4 sen a share, a 36% discount to its share price on Bursa.

However, at present, its share price of RM1.20 is already below the NTA value and could be an attractive value proposition for investors, says the firm.

 

This article first appeared in digitaledge Weekly, on August 31 - September 6, 2015.

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