- We maintain our HOLD rating on UEM Sunrise (UEMS) with an unchanged fair value of RM0.94/share on a 60% discount to its NAV. UEMS announced that it has proposed to issue up to 793 million Redeemable Convertible Preferences Shares (RCPS) to the UEM Group (UEMG) in cash.

- The five-year RCPS has an issue price of RM1.00 each for a total sum of RM793mil. RCPS holders will be in a position to receive annual dividends at the discretion of UEMS, subject to a cap of 4.75 sen/RCPS. UEMS has the option to redeem the RCPS issue after the fourth year within a period of six months.

- Alternatively, the RCPS can be converted into new UEMS shares after the 54th month from its issuance date at a conversion price of RM1.60. This could translate into an additional 633mil new UEMS shares or a c.14% expansion in its share capital to around 5.2bil shares.

- The RCPS essentially replaces an earlier share sale agreement (SSA) on 3 April 2015 between UEMS and UEMG.

- The SSA was for UEMG to subscribe to 524mil new UEMS at an issue price of RM1.47/share. The proposal would have helped UEMS raise RM771mil.

- The new RCPS proposal will help UEMS to raise gross proceeds of up to RM793mil. This, in turn, will be utilised to partly redeem the RCPS of its wholly-owned subsidiary, Bandar Nusajaya Development (BND).

- The 450 million BND RCPS was issued to UEMG on 28 November as part settlement for an outstanding RM800mil loan by Khazanah Nasional Bhd, which was subsequently transferred to UEMG. The BND RCPS is supposed to mature on 27 November 2015 at a total redemption amount of RM923mil.

- Apart from the RM793mil proceeds from the new RCPS issue to UEMG, the balance of the BND RCPS will be redeemed via another agreement on 30 June that will see UEMS disposing an office block together with a commercial area at Puteri Harbour to UEMG for RM138mil.

- Had the BND RCPS not been redeemed, it would have been automatically converted into BND shares thus resulting in UEMG having a direct 22% stake in it.

- Via this new settlement structure, we believe UEMS would be able to maintain its 100% stake in BND. On a similar vein, we make no changes our earnings forecast. We maintain our view that UEMS would redeem the RCPS when it is due.

Source: AmeSecurities Research - 18 Sep 2015