OCK is proposing a 1:10 rights issue with 1 free warrant for every rights share subscribed. An ESOS of up to 15% of the group’s share base is also proposed. Proceeds from the exercise will fund the group’s debt servicing and working capital needs. This would aid in easing the group’s gearing but at the expense of earnings dilution. Based on our computation for the maximum rights subscription, we estimate an ex-TP of RM0.580 with an unchanged cum-DCF TP of RM0.630. Maintain MP for now.

(Refer to the overleaf for the computation of our ex-prices)

Rights issue with warrants. The group has proposed to undertake a renounceable rights issue on the basis of 1 rights share for every 10 existing OCK shares held. This also comes with 1 free detachable warrant (OCK-WB) for every rights share subscribed. Though the entitlement date has yet to be determined, the group has set for a minimum issue price of RM0.20 per rights share to raise a minimum required fund of RM6.5m from a minimum subscription level. Assuming all outstanding OCK-WA are fully converted and rights fully subscribed, the group could net a total proceeds of RM24.5m. However, we believe this to be unlikely given OCK-WA’s hefty 29% premium (as of the time of writing) and exercise price of RM0.710. The funds raised from the rights shares are to be allocated for the repayment of bank borrowings and to fund working capital needs. RM800k would be allocated to be utilised to finance the exercise. Overall, the group aims to achieve interest savings of between RM0.2m-RM0.7m/year. Though the exercise price for OCK-WB is yet to be determined, the group hopes to utilise its eventual proceeds for further working capital requirements.

ESOS also in the bag to reward employees. In addition to the above, the group is also proposing an employee share option scheme of up to 15% of the group’s share base (up to 220.1m new shares, assuming all rights issue and warrants are converted). Its exercise price is also yet to be determined.

Lightening the load. All in, this cash call appears apt as the group’s gearing continues to be stretched as it works towards expanding its tower portfolio, with the growing interest costs putting pressure on earnings. However, certain investors might take caution on the dilutive effect of the exercise. That said, this exercise could be taken as neutral to some as the group has been refraining from paying dividends in favour of business growth and with a potential spin off across the horizon looking to unlock some value.

Maintain MARKET PERFORM and DCF-driven TP of RM0.630. Our DCF assumptions are based on a WACC of 9.3% and TG of 1.5%. No model changes have been made post-update as the exercise is only earmarked for completion in 4QFY20. That said, in line with the dilutive effect of the rights issue, we estimate an ex-TP of RM0.580 and a current ex-price of RM0.535

(current cum-price: RM0.570). Our maintained MARKET PERFORM call is also corresponding to the lesser capital upside given our ex-rights calculation. That said, any aggressive downtrading of the stock could open up buying opportunity on the back of the group’s longer term prospects in a sustainable business environment (68% revenue is recurring) coupled by its asset spin-off aspirations.

Risks to our call include: (i) faster/slower-than-expected expansion of tower portfolios, and (ii) higher/lower-than-expected operating margins.

Source: Kenanga Research - 6 Jul 2020