WCT proposed a 3-for-20 bonus shares issue and 1-for-5 free warrants. The ex-date will be on 6 Dec 2012 and the new Warrants D will be priced at RM2.25. The rationale for the corporate exercise is to (i) reward shareholders, and (ii) create liquidity for WCT. As the dilution effect will come in gradually,we reiterate our BUY call on WCT with SOP-based target price of RM3.20.
3-for-20 bonus shares and 1-for-5 free warrants
- Previously, WCT proposed a 3-for-20 bonus shares issue and 1-for-5 free warrants. In an announcement to Bursa Malaysia last Friday, WCT has determined the ex-date for the corporate exercise to be on 6 Dec 2012 and the entitlement date to be on 10 Dec 2012. Both bonus shares and warrants will be listed concurrently. The exercise price of the new Warrants D has been fixed at RM2.25.
- The rationale for the corporate exercise is to (i) reward shareholders, and (ii) create liquidity for WCT.
Existing Warrants B and C
- Currently, WCT has 139.3 million Warrants B and 157.2 million Warrants C in circulation, with exercise price of RM2.50 and RM2.75, respectively.
- Warrants B, expiring in April 2013, is currently trading at RM0.25 while Warrants C, expiring in March 2016, is currently trading at RM0.44.
- Upon issuance, Warrants D is already in-the-money for existing shareholders as its exercise price of RM2.25 is about 5% below the theoretical ex-price of RM2.37 post-bonus shares issue.
Impact on earnings estimates
- Assuming all existing warrants get converted before the bonus issue and all new Warrants D get converted subsequently, the enlarged share base will increase to 1,509 million post-bonus shares issue (refer to Figure 1). The dilution impact on our FY13-14F EPS from the full conversion of Warrants B, C and D is 24-27%, after accounting for interest savings (refer to Figure 2). However, we are keeping our EPS estimates unchanged as the dilution effect will be gradual.
- Theoretically, upon full conversion of all warrants, total cash proceeds will amount to RM1.28bn. Under this scenario, the company’s balance sheet will improve from current net gearing of 0.45x to a net cash positio nof 0.36x.
Valuation and recommendation
- Post-corporate exercise and assuming full dilution,the fair value of the share will be reduced to RM2.72, which still provides a 15.1% upside (refer to Figure 3) to the theoretical ex-date price of RM2.37 (based on current share price of RM2.72).
- However, we are not making any changes to our current target price of RM3.20 at the moment as the dilution effect will be gradual. Note that we have already accounted for the full conversion of Warrants B & C in deriving our current SOP-based target price of RM3.20. Maintain BUY.