• Proposed rights and bonus issues
   
• Bulk of proceeds to finance construction of manufacturing plant in Philippines

• Potential 10%-20% dilutions to FY21/22 EPS, not accounting for potential contribution from its new plant

• Maintain HOLD with RM4.25 TP

What’s New

Rights and bonus issues. Perstima (PER) announced yesterday that the group is going to undertake the following rights and bonus issues exercises: 1. A rights issue of 19,860,944 units of shares (20% of its existing share base) on the basis of one new share for every five shares held at an issue price and entitlement date to be determined later; 2. A bonus issue of 9,930,472 units of shares where the entitled shareholders and/or their renouncee(s) who subscribe to the rights shares shall be entitled to the proposed bonus issue on the basis of one bonus share for every two rights shares subscribed. Its parent company Versalite Sdn Bhd has provided its irrevocable and unconditional undertaking to subscribe in full its entitlement under the proposed rights issue based on its shareholding and vote in favour of the proposals in respect of its direct shareholdings in the group. Bulk of proceeds to finance new manufacturing plant in Philippines. Assuming an indicative issue price of RM3.00, the group is expected to raise approximately RM59.6m. ~92% of the proceeds raised (estimated RM54.8m) will be used to partially finance the electrolytic tinning and tin-free steel production line for the manufacturing plant in Philippines. The remaining proceeds will be used for purchase of raw materials and expenses for the proposals. The new plant has a manufacturing capacity of 200,000 MT per annum and is expected to be installed and fully commissioned by June 2021.

Outlook

Challenging environment. We expect the operating environment to remain challenging and competitive. The increased competition from overseas imports and volatility of the Ringgit against the US Dollar (USD) are expected to continue impacting the group’s growth and profitability. Potential dilution to EPS. Given that the dates of PER’s corporate exercises are yet to be determined, we are maintaining our earnings estimates for now. Nonetheless, we wish to highlight that assuming the exercise is completed in September 2020, the potential dilutions to PER’s FY21-22 earnings per share (EPS) will be 10% and 20% respectively, not taking into account the earnings contribution from its new plant.

Valuation and Recommendation

Maintain HOLD with RM4.25 TP. We maintain our HOLD recommendation for the group with target price (TP) of RM4.25. Our price-to-earnings (PE) target is pegged to 12x – close to its historical mean

Source: Alliance Research - 2 Mar 2020