News

• Rights Issue and warrants. Adventa has proposed to undertake a (i) renounceable rights issue on a 3 for 5 and (ii) 1 free rights warrant for every 2 rights shares subscribed for on an entitlement date to be determined later.

Comments

• Impact to share base. The abovementioned corporate exercise would increase Adventa’s share base from 152.8m by 91.7m shares to 244.5m shares.
• Amount raised. The indicative price has been set at RM0.55 sen/ share, representing a discount of c.11% to yesterday’s closing of RM0.62 sen. The rights issue will raise RM50.4m whilst the warrant (assuming all rights warrants exercised) will raise a further RM29.8m bringing total potential gross proceeds from the corporate activity to RM80.2m. However for purpose of analysis we will exclude the proceeds from warrant as it is out of the money (exercise price RM0.65).
• Utilization of proceeds. The funds raised will largely be utilized for (i) business expansion purposes (RM30m) (ii) working capital (RM19.4m) and (iii) defrayment of expenses in relation to the corporate exercise (RM1m). Details on business expansion are vague and the company will make the appropriate announcements once a fitting plan has come to fruition.
• Impact to net gearing. We estimate that net gearing would reduce from 0.3x (FY17) to 0.04x on a proforma basis.

Risks

• EPS dilution resulting from the rights issue

Forecasts

• As an indication, assuming a half year dilution impact in FY18 and a full year impact in FY19. EPS would be diluted by 23% in FY18 and 37.5% in FY19. Tentatively the exercise is expected to be completed by 2Q18.

Rating

• We like Adventa for its first-mover advantage in the home renal dialysis treatment and near monopolistic position in the commercial sterilisation and warehousing activities within the region. Nonetheless, earnings growth remains contingent upon an expedited take up rate of their Luxcensia Intellis domestically and abroad, posts regulatory clearance and market adoption; which remain cloudy in the near term, despite its stellar prospects in the long term. Furthermore we can expect earnings dilutions on the back of this corporate exercise. On that note, we are ceasing coverage on Adventa.

Valuation

• After factoring in the EPS dilution from the rights issue, our previous TP would be reduced from RM0.64 to RM0.60 on a theoretical ex rights basis, which is based on 1.2x P/B.

Source: Hong Leong Investment Bank Research - 18 Jan 2018