THE BUZZ - Puncak Niaga has proposed to issue of up to 40.9m free warrants on the basis of one warrant for every 10 existing ordinary shares. It also proposed to issue a 5-year Redeemable Convertible Secured Sukuk of up to RM165m in nominal value. The proposed free warrants and Convertible Sukuk are inter-conditional upon the relevant approvals being obtained for each other.

Rewarding existing shareholders. The Warrants are issued at no cost to the entitled shareholders on a pro rata basis ' ie a reward to existing shareholders. The exercise price of the warrants has been fixed at RM1.00 each, representing the par value of Puncak Niaga shares and at a discount of approximately 22.48% to the 5-day volume weighted average market price (VWAMP) of RM1.29. While the warrants are American Style and thus can be exercised at any time during the period commencing until the expiry date, we are not overly concern on the dilution implication, especially as they only represent 10% of its original ordinary share issue. Apart from that, we also do not expect any immediate dilution as the warrant is likely to immediately trade at a premium upon its listing.

Fund raising via Convertible Sukuk. The RM165m Convertible Sukuk will be privately placed without a prospectus and comes with a fixed profit rate, which will be determined prior to its issuance. We expect the rate to range from 5% to 6%. The Convertible Sukuk is convertible into new Puncak Niaga shares at a conversion price that will be at a premium to the 5-day VWAMP of the company shares on a date to be determined later by the board.

M&A in the pipeline? According to the company's announcement, the proceeds of up to RM165m from the proposed Convertible Sukuk will be utilised in priority to fund future acquisitions of Shariah compliant companies to be identified later and mutually agreed upon between Puncak Niaga and the Convertible Sukuk holders within 12 months from the receipt of the proceeds. Among the targeted assets are mainly in the treated water, wastewater and environment sectors as well as in the oil and gas (O&G) industry. In the event that no acquisition or investment is made within 12 months from the date of issuance, the proceeds shall be advanced to its wholly-owned subsidiary, KGL Ltd, to refinance its USD36m syndicated term loan. Any surplus of funds will be utilised as the group's working capital.

Expending footprint in the Oil & Gas industry. Meanwhile, we understand that the newly acquired Global Offshore (M) SB (GOM) has secured a lucrative O&G pipe maintenance project worth more than RM500m YTD, which is impressive considering that it is a newly acquired business. We also witnessed a substantial profit surge from its O&G unit in 2QFY12 and expect sustainable income from GOM moving into 3Q before the monsoon season comes again at year-end. Meanwhile, margins for its O&G projects are estimated to be in the mid-teens, which we deem attractive. We suspect that management may focus its acquisition target to players within this industry in a bid to further diversify its income flow from water to O&G.

Reiterate Trading BUY. The free warrant is indeed a sentiment booster. Furthermore, the proposed Convertible Sukuk issuance also suggests that the group may move to expand its footprint into the lucrative O&G field which we think is sufficient reason for investors to cheer. Therefore, we are keeping our Trading BUY recommendation, with our fair value maintain at RM2.08 based on a 3x forward FY12 EPS.

Source: OSK