VS  has  proposed  a  private  placement  of  up  to  20.7m  new  shares,  or 10%  of  its  207m  outstanding  share  base.  Maintain  NEUTRAL  with  an unchanged MYR4.50  TP  (11%  upside),  or  MYR4.10  post  completion  of the  exercise.  There  are  also  proposals  to  terminate  the  company’sexisting ESOS.  Post exercise, a  new ESOS scheme of up to 15% of the enlarged share base has been proposed to take its place.Proposed private placement  details.  The price of the new  VS Industry (VS)  shares, while not yet determined, will be at not more than a 10% discount to its volume-weighted average price for the five market daysprior to the price-fixing date. We estimate that the exercise, which could raise  net  proceeds  of  MYR70m-80m,  will  be  completed  by  2Q15.

According to VS’  announcement  to  Bursa Malaysia, the proceeds will be used to finance its working capital needsfor the next six months. Details on the ESOS  proposals.  The proposed new ESOS will only be implemented  after  the  termination  of  VS’  existing  ESOS,  which  ispending  the  approval  of  its  shareholders  at  an  EGM  slated  at  a  later date.  There  are  up  to  34.2m  new  ESOS  (15%  of  the  enlarged  sharebase post completion of the private placement) to be issued.

Dilution  impact.  Assuming  a  maximum  scenario  that  excludes  new shares  from  the  potential  exercise  of  the  new  ESOS  (at  an  enlarged share  base of 227.7m),  the  placement is expected to dilute our  FY15F-17F (Jul) EPS by 9.1% and reduce VS’ net gearing to  0.6x from 0.8x (as at  end-Jul  2014).  Meanwhile,  if  we  assume  a  maximum  scenario  that includes  new  shares  from  potential  exercise  of  the  new  ESOS  (at  an enlarged share base of 261.9m),  the dilution impact to our  FY15F-17F earnings could be 21%. Maintain NEUTRAL  and TP of MYR4.50.  We maintain our NEUTRAL recommendation and TP of MYR4.50, based on an unchanged FY16F P/E of 10x, in line with its closest competitor, SKP Resources’ (SKP MK, NEUTRAL, TP: 0.85) P/E valuation of 11x. Upon the completion of the placement,  our  TP  will  be  diluted  to  MYR4.10  (excluding  potential exercise  of  proposed  new  ESOS).  Management  believes  that  the exercise  will  strengthen  VSI’s  financial  and  capital  position,  as  well  as potentially improve the liquidity of the stock in the market. 

Source: RHB