1-for-1 rights issue; downgrade to SELL. UE has proposed a 1-for-1 renounceable rights issue to raise SGD490m to reduce its borrowings for its recent acquisition of WBL, and increase UE’s financial flexibility. The rights issue has been priced at SGD1.50/share, which indicates a 47.6% discount to the last transacted price of SGD2.86 per share on June 10th . There are three options for current UE shareholders – (1) To sell their renounceable nil-paid rights on the market, (2) take up the rights issue to avoid dilution, and (3) to sell all shares. We think the rights issue is clearly an aggressive action by the major shareholders to force the minority shareholders’ hand. Downgrade to SELL with a TP of SGD1.86, adjusted for rights issue shares.

Details on the rights issue. A total of 326.6m new shares will be issued, with gross proceeds of SGD490m 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% of the total underwritten rights issue, inclusive of 12.6m convertible stock units owned. In essence, the major shareholders will fork out 176.9m, while the minority shareholders will have to provide the remainder SGD313.1m.

What is the future value ex-rights issue? Assuming it is based on current share price of SGD2.66/share, ex-rights price will be at SGD2.08/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 on its large discount to book. Essentially, this exercise will be dilutive to current shareholders. Simply put, the price to book ratio will increase from 0.70x to 0.79x at current price levels, indicating a 12.9% dilution at this level. We expect UE’s current net gearing to fall from 116% to 55%.

Downgrade to SELL with revised TP of SGD1.86. We downgrade to sell and lower our TP to SGD1.86, inclusive of WBL acquisition costs and apply a larger discount on the UE’s property earnings.

Source: Maybank Kim Eng Research - 13 Jun 2013