United Engineers

Maybank Kim Eng Research, June 13

UNITED Engineers (UE) has proposed a one-for-one renounceable rights issue to raise $490 million to reduce its borrowings for its recent acquisition of WBL, and increase UE's financial flexibility.

The rights issue has been priced at $1.50 per share, which indicates a 47.6 per cent discount to the last transacted price of $2.86 per share on June 10.

There are three options for current UE shareholders - to sell their renounceable nil-paid rights on the market, take up the rights issue to avoid dilution, and to sell all shares.

We think that the rights issue is clearly an aggressive action by the major shareholders to force the minority shareholders' hand. We downgrade to "sell" with a target price of $1.86, adjusted for rights issue shares.

A total of 326.6 million new shares will be issued, with gross proceeds of $490 million to be gained. Major shareholders such as OCBC and the Lee family have agreed to irrevocably undertake and subscribe for the rights issue.

This will account for 36.1 per cent of the total underwritten rights issue, inclusive of 12.6 million convertible stock units owned. In essence, the major shareholders will fork out $176.9 million, while the minority shareholders will have to provide the remainder $313.1 million.

What is the future value ex-rights issue? Assuming it is based on current share price of $2.66 per share, ex-rights price will be at $2.08 per share.

We expect there will be selling pressure as not everyone will take up the rights issue. There will be shareholders who may not be able to afford or willing to put in additional capital.

Discount to book narrows from this exercise. One of the key reasons on why we liked UE in the first place was its large discount to book.

Essentially, this exercise will be dilutive to current shareholders. Simply put, the price-to-book ratio will increase from 0.70 times to 0.79 times at current price levels, indicating a 12.9 per cent dilution at this level. We expect UE's current net gearing to fall from 116 per cent to 55 per cent.

We downgrade to "sell" and lower our target price to $1.86, inclusive of WBL acquisition costs, and apply a larger discount on the UE's property earnings.

SELL