Elsoft Research proposed to undertake a 1-for-5 bonus issue and 2-for-1 share split. In summary, the proposals will have a neutral impact on the group’s earnings, but we are positive on them as the enlargement of the group’s share base by 136.4%/144.1% under a minimum/maximum scenario will bode well for the stock’s liquidity and marketability. We maintain our Buy recommendation with an unchanged TP of RM3.75/share (RM1.56/share ex-bonus and ex-split) based on a PE multiple of 25.0x.

Proposed 1-for-5 Bonus Issue and 2-for 1 Share Split

• Elsoft Research proposed to undertake the following exercises:

(1) 1-for-5 bonus issue; and

(2) 2-for-1 share split.

• The proposed 1-for-5 bonus issue will be first undertaken on an entitlement date to be determined and this will then be followed by the 2-for-1 share split.

• Altogether, in a minimum/maximum scenario the exercise is expected to enlarge the group’s share base by 136.4%/144.1% (see Table 1) and correspondingly dilute earnings per share by 57.7%/59.0%.

• The maximum scenario assumes the exercise of all outstanding ESOS comprising 4,732,500 options which are in the money and will enlarge the group’s share base by 1.7%.

• In summary, the proposals will have a neutral impact on the group’s earnings. However, we are positive on them as an enlarged share base will bode well for the stock’s liquidity and marketability.

Valuation and Recommendation

• We maintain our Buy recommendation on Elsoft with an unchanged TP of RM3.75/share (RM1.56/share ex-bonus and ex-split) based on a PE multiple of 25.0x.

• We continue to like Elsoft for its research and development capabilities, relevant product offerings, rich margins and robust balance sheet.

• Besides, the group could potentially benefit from the heightening in trade tensions between the USA and China as manufacturers reveal interest in setting up operations in countries like Malaysia.

Source: TA Research - 29 Aug 2018