News

• 1 for 2 bonus issue. Mitrajaya has proposed a bonus issue on a basis of 1 bonus share for every 2 existing shares held.

• Free warrants. It also proposed the issuance of 89m new free warrants on the basis of 1 free Warrant D for every 5 existing shares held. The bonus shares will not be entitled for the free warrants (i.e. the free warrants on a 1 for 5 basis are based on the current share base pre bonus issue).

• ESOS up to 15%. Lastly, it also proposed the establishment of an ESOS scheme involving up to 15% of its issued and paid up share capital.

Comments

• Neutral on bonus issue. We are neutral on the proposed bonus issue as from a shareholder value perspective, “three 1/3rd slices of a cake is the same as 2 halves”. Enhanced liquidity in Mitrajaya shares should eventuate post bonus issue.

• New warrants to replace the old. Mitrajaya’s current warrant (Warrant C) expires in July 2016 with an exercise price of RM0.90. The issuance of Warrant D will serve as a replacement for Warrant C.

• Impact to share base. Under the minimum case scenario where no dilutive securities are exercised, Mitrajaya’s share base will increase from the current 398.2m to 597.3m. For the maximum case scenario, where all warrants (both C and D) and ESOS are exercised, the share base will increase to 857.1m.

• Adjustment to target price. Post bonus issue, our TP would be adjusted from RM1.97 to RM1.31.

Risks

• Execution risk on its construction jobs and slow sales for its property developments.

Forecasts

• The bonus issue has no impact to our earnings forecast. The proposed Warrants D and ESOS may result to some interest savings when exercised. Our forecast is unchanged.

Rating

BUY, TP: RM1.97

• As with the past trends of companies embarking on bonus issues, expect some short term share price uptrend.
• Mitrajaya is our top small cap construction pick given its superior earnings growth prospects which is anchored by its sizable orderbook of RM1.9bn, implying 5.1x FY14 construction revenue cover.

Valuation

• Our TP is based on 10x FY15 earnings, inline with our target valuation parameter used for small cap contractors.
• Investors with a higher risk appetite can consider its warrants (exercise: RM0.90, expiry: July 2016) which is now trading at a 2.1% discount.

Source: Hong Leong Investment Bank Research - 16 Mar 2015