In a Bursa announcement last night, Perak Transit has proposed a bonus issue of up to 114.29m new ordinary shares (1 bonus share for every 10 existing Perak Transit shares) and 571.47m free warrants (on the basis of 1 warrant for every 2 Perak Transit shares). The warrants will be issued at no cost to the entitled shareholders of Perak Transit. The exercise price of the warrants will be determined by the Board at a later date.

A Pleasant Surprise

The 1-10 bonus issue comes as a positive surprise and should further improve trading liquidity of the stock. The accompanying free warrants while also a sweetener should also help address the issue of funding for its upcoming Kampar terminal, which is expected to be constructed at an estimated cost of RM128m. Cost of the new terminal is relatively large, in relation to the stock's current market cap of RM320m. Hence, for illustrative purposes and based on an example RM0.235 strike price, the warrants should be able to raise RM134m.

*Note that RM0.235 is discount of approximately 6.0% to the theoretical ex-bonus price of PT shares of RM0.25.

Any Short Term Dilutive Impact Should be Fully Negated by 2019E

While the 572m bonus free warrants may seem large and possibly EPS dilutive (shares outstanding is expected to increase from 1.142m to 1.829m post the bonus issue and full conversion of warrants), we think that any negative impact should be fully negated upon commencement of the terminal at 4Q18. For the moment we are forecasting net profit to increase by 51% yoy to RM41.8m in 2019E, while PERs should fall from current level of 11.0x to 7.7x. While we have modelled in some contribution from the Kampar terminal, we think that our forecast may still be conservative at this point, considering that the built-up area of the terminal at 480k sf is nearly 8x the size of its existing Amanjaya terminal in Ipoh.

Maintain BUY and TP of RM0.34

Maintain Buy at an unchanged TP of RM0.34 (based on 14.0x 2018E EPS). We continue to like Perak Transit for its (i) attractiveness as a monopoly business; (ii) strong earnings growth from its core existing businesses; and (iii) long-term potential from the upcoming terminal in Kampar.

Source: Affin Hwang Research - 6 Jun 2017