News   Proposed 3-for-10 bonus issue and 2-for-10 rights issue, which will take place concurrently. Also proposed exemption for CBG Holdings (CBG), its major shareholder from the obligation of extending a mandatory take-over offer for the remaining shares not already held by them.

The entitlement date will be determined later, pending approvals, including shareholders, Bursa Malaysia and Security Commission (“SC”). The exercise is expected to be completed by 4Q14.

Comments   We were not entirely surprised by the proposal, but our take is tilted towards neutral-to-positive as (i) QL implements bonus issuance every 1 to 2 years historically and (ii) the cash call will bring down QL’s relatively high net gearing ratio of 0.7x to 0.4x.

Assuming the maximum scenario assuming full acceptance, the bonus and rights issue entail up to249.6m and 166.4m additional new shares. The rights issue will raise RM299.5m in cash and bulk of the proceeds will be utilised for repayment of borrowings and bring down the current net gearing to a more comfortable level of 0.4x.

In the minimum scenario whereby only CBG and Farsathy subscribe for the rights issue, CBG may potentially increase their shareholdings from 44.9% to 47.6%. In this case, any 2% increase in shareholding within 6 months will trigger a mandatory general offer (MGO) to acquire all the remaining shares. As CBG has no intention to undertake a MGO, CBG will seek for an exemption from the SC as mentioned above.

In our view, we think investors should subscribe the rights as the issue price of RM1.80 is at a substantial discount to the market price of RM3.69. However, the exercise will result per share earning dilution with FY14E-FY15E EPS being adjusted down by 33% each to 13.0-15.4 sen from 19.5-23.0 sen, implying FY14E-FY15E diluted PER at 20.8x-17.6x.

Outlook   Despite the expansion plans and greater margin from MPM, we remain neutral on QL as the ILF and POA divisions are still in the recovery stage, especially POA.

Forecast   Due to cost-saving of c.RM8m p.a., NPs for FY14E and FY15E have been adjusted upward to RM162m and RM192m from RM157m and RM184m, respectively.

Rating MAINTAIN MARKET PERFORM

Valuation   We are revising our TP upwards from RM3.40 (exbonus/rights: RM2.51) to RM3.74 (ex-bonus/rights: RM2.73) based on an unchanged FD CY14E PER of 18.5x vs FD FY14E previously.

Risks to Our Call   Vagaries of the global economic and weather uncertainties.

Source: Kenanga