D&O has proposed a private placement of 3.2% of its total issued shares (1.198bn) to 3rd party investors at an indicative issue price of RM5.33 to raise RM205.2m in total proceeds to fund the construction cost of an 8-storey manufacturing plant in Melaka. The placement is expected to be completed by end-2021. We think the dilution impact on the Group’s EPS is muted after taking into the huge cost saving from bank borrowings. Meanwhile, 3QFY21 results are expected to be released on 24 Nov and we expect to see a lacklustre quarter as its operations were shut down for 21 days to curb the Covid-19 spread. Pending the completion of the private placement, we maintain our Outperform call with an unchanged TP of RM6.31.
- Salient details of the proposed private placement. D&O has proposed a private placement of new shares of 3.2% of its outstanding share base of 1.19bn at an indicative issue price of RM5.33/share. The proceeds from the private placement will help the company to fund the construction cost of the third manufacturing plant without dipping into borrowings in view of the hawkish interest rate outlook.
- Rationale of the cash call. The Group intends to raise about RM205.2m from the private placement. Bulk of the proceeds, (98.8%) will be used to fund the construction of an 8-storey manufacturing plant with an overall floor space of about 60,000 sq m, which is 3x larger than Plant 1 and 2x bigger than Plant 2. It will be located between the two existing manufacturing plants in Batu Berendam Free Trade Zone, Melaka. The construction of the third manufacturing plant, which will take about 3 years, is expected to kick start in 2H 2022, with commercial production for automotive LEDs gradually ramped up starting from 1Q 2025. Based on back-of the-envelope calculations, the third plant could potentially generate more than RM2bn in annual sales and RM400m profit for the Group.
- Muted dilution impact. We think the proposed private placement may have muted dilution impact on the Group’s EPS as the company could save at least RM7.1m in terms of borrowing cost p.a. (based on consensus lending rate of 3.5%). It may potentially reduce our FY22-23 earnings forecasts by about 2.6%-3.9% otherwise. Alternatively, the company can tap into cheaper USD-denominated borrowings (ranging from 0.4%-0.8% subject to loan terms) though it will be exposed to the potential multiple rate hikes in the long-term.
- A busy year-end. We gather that the company is currently running at full capacity for its Plant 1 in view of the robust demand, driven by i) higher penetration in the exterior LED segment, ii) increased adoption of automotive LED lighting, and iii) strong recovery in global auto sales, bolstered by the migration to electric vehicle.
Source: PublicInvest Research - 15 Nov 2021