Jaks Resources (Jaks) has announced that it will be issuing a renounceable rights issue of up to 278m warrants, with an indicative price of RM0.25 per warrant, on the basis of 1 warrant for every 2 existing shares. Given that the indicative pricing for the right is in the money, there should be no dilution to current shareholders; hence, we are maintaining our BUY call and TP at RM1.90 unchanged.

Issuance in the Money, No Immediate Dilution

Based on the current price indication, the total cost of the new share is at RM1.25 (RM0.25 for the subscription and RM1.00 for the conversion of the warrants), which is at 15% discount to the current share price. Given the sharp discount, there is a high likelihood that most of the rights will be subscribed, in our view. The warrants will expire in 5 years from the date of issuance, and can be converted from the 2nd anniversary date of the issuance. The total immediate fund raised from the subscription is RM68.2m-RM69.5m, with an additional RM278m from the conversion of warrants at a later date.

More Money for Vietnam

Bulk of the money raised from the subscription will be utilised for the Vietnam power plant project, as the additional funding (RM45-46m) is needed to expedite the current progress of its EPCC contract. We believe that the allocation of RM10m to renewable energy projects is a good indicator that management is making progress in identifying new projects that will help to replenish the earnings shortfall from the completion of the Vietnam EPCC contract in 2020. The funds from the warrants conversion could be used as equity if those new projects does materialise or take up the option to acquire additional stake in the current Vietnam power plant project.

Maintain BUY Call With Unchanged TP at RM1.90

We are maintaining our RNAV based TP at RM1.90 and BUY call as the company’s fundamentals remains unchanged, and there is no dilution impact to the current shareholders. The re-rating catalyst for the stock will be the progress of its Vietnam power plant project. Downside risks to our call are 1) widening losses from its property segment, and 2) slower recognition from its Vietnam EPC contract.

Source: Affin Hwang Research - 7 Jun 2018