Already priced in. MAS released a circular to shareholders to call for an EGM on 5 Mar 2013. The proposals to be tabled at the EGM are: i) a par value reduction of MYR0.90/share to MYR0.10/share; ii) a share premium reduction with the objective of resetting accumulated losses to zero; and iii) a rights issue to raise a maximum of MYR3,100m. The market has already priced in this scenario and the clarity over the timeline will spark more interest in the stock, in our view. Our BUY (Target price: MYR1.02) call is unaffected; our estimates already reflected this scenario.

A more detailed proposal. Khazanah Nasional has unconditionally committed to taking up its full entitlement commensurate with its 69.37% shareholding and contribute up to MYR2,150m. The proposed rights issue is renounceable and may be offered to the other entitled shareholders. Should the take-up rate for the offer by the minority shareholders be low, Khazanah may end up holding more of MAS than the maximum of 75% to keep MAS’ listing status; in which case, the circular states that the Company will endeavor to rectify the situation within the timeframe allowed by the authorities.

What do we think? The proposed rights issue is extremely EPS dilutive, by 56%-64%. Our forecast net asset value (NA) in 1Q13 is MYR0.69/share, implying the stock is now trading at book value. Based on the scenarios for the rights issue in the circular, we estimate that the share price needs to be ≥MYR0.69 in order for the rights issue to be non-dilutive on its NA value and be attractive for the investor.

How much capital does MAS need? MAS needs a minimum cash infusion of MYR1.0b to pay for pre-delivery deposits (PDP) relating to its aircraft acquisitions. This amount could be easily funded by drawing down its existing sukuk facility. Therefore, we think MAS could survive without the rights issue, despite with a low cash balance.

Should you participate? Only if the share price is ≥MYR0.69, otherwise it is too dilutive and below its post-rights NA. There is also the option to enter the stock post completion of the rights issue (estimated end May 2013). With the capital injection from current shareholders, MAS will be adequately capitalized and have a sturdier balance sheet.

Source: Maybank Research - 08 Feb 2013