What is OR, OR is the right to convert to warrant.
Now MFCB OR trading at 29 cents,
Conversion 1.59
Every OR entitle for 3/7 free warrant. Theoretically warrant price is about 1/6 of the mother price since it is out of money. So it will be around 30 cents. So 30 X 3/7 will be about 13 to 15 cents.
So the cost of OR, 1.59+0.29-0.13=1.75 which is still 8 cents profit.
This is subjected that the mother share can maintain at 1.83 or above and the warrant is trading > 0.3
Warrant Conversion is 2.20 ( 4 YEARS)
Outperform
12-Month Target Price RM3.14
Mega First (MFCB) had recently proposed a rights issue with free warrants to partly fund its USD500m (RM2.1bn) Don Sahong Hydropower project in Laos. Post-rights, we do not anticipate significant dilutive impacts as there will be additional construction profits of RM35m-38m p.a. recognized in the Group’s bottom-line for FY16-19, an increase of 63-69% from our FY15 estimated earnings. Valuations will remain undemanding at 10x FY16 EPS. We maintain our Outperform call and TP of RM3.14 for now.
- Rights issue with warrants. Pursuant to the recent announcement, the exercise will involve issuance of 156m rights shares on the basis of 7 rights share for every 10 existing shares held. The issue price for the rights share is RM1.59, representing a 20.9% discount to the theoretical ex-rights price of RM2.01 (based on the 5-day VWAMP). Additionally, the rights will be issued together with 66.9m free detachable warrants on the basis of 3 warrants for every 7 rights share, with an indicative exercise price of RM2.22 and tenure of 4 years. The proposed exercise is expected to be completed by early-April 2016.
- Funding for mega project. The rights issue is expected to raise RM250m, out of which RM181m (72% of total proceeds) will be utilized to finance its Don Sahong Hydropower project while the remaining RM69m will be used to repay short-term borrowings (current total borrowings: RM147m) and related expenses of this rights issue proposal. Meanwhile, MFCB will also raise up to RM149m during the tenure of the warrant (assuming full exercise of the warrants) and the proceeds will also be used to fund its future growing working capital.
- Neutral impact to our EPS forecasts. Excluding the warrants (which should be out of money upon issuance), the rights issue will raise MFCB’s paid up capital by 70% to 379m shares (from 222.5m presently). As we expect additional profit of RM35m-38m p.a. (have not factored into our earnings forecast) to be recognized from the Laos hydropower construction project, it will fully offset the dilution impact from the proposed rights issue. The valuation will remain undemanding at 10x FY16 EPS. Meanwhile, our ex-rights SOP-based target price will be RM2.51 versus the theoretical ex-rights price of RM2.01.
- No earnings surprise in the upcoming results. MFCB’s 4QFY15 results will be announced on 25 Feb and we expect to see another steady set of results.
Source: PublicInvest Research - 18 Feb 2016