Awaiting further clarity
- CSE today proposed a 1-for-5 rights issue at an issue price of S$0.33, c.20% discount to its last transacted price and c.18% discount to TERP of S$0.40.
- Rationale for the rights issue: 1) to fund the acquisitions of communications businesses in New Zealand and US, and 2) repayment of existing loans.
- We expect near-term share price weakness due to uncertainty over earnings accretion and poor macroeconomic conditions. Reiterate Hold at S$0.45 TP.
Non-underwritten 1-for-5 rights issue proposed to raise S$33.4m
? CSE today proposed a renounceable non-underwritten rights issue on the basis of one rights share for every five shares held.
? The issue price is S$0.33, representing c.20% discount to the last transacted price of S$0.415 on 10 Oct, and c.18% discount to the theoretical ex-rights price (TERP) of S$0.401. Based on the issue price, the rights issue is expected to raise gross proceeds of S$33.8m and net proceeds of S$33.4m.
? Rationale for the rights issue: 1) to fund the acquisition of communications businesses in New Zealand and the US, and 2) partially repay existing loans. Approximately 90% of the net proceeds will be used for M&As and the balance 10% for loan repayments.
? The acquisition targets are engaged in radio and critical communications businesses, which CSE views as a complementary fit to its business. Revenue from the group’s communications business in Australia formed c.21% of 1H22 total revenue.
? Substantial shareholder Temasek (via Orchid 2 and Orchid 3 Investment entities) intends to subscribe its pro rata entitlement of c.26m shares (c.S$8.4m). Temasek already owns a 25% stake in CSE as at 10 Oct.
? In addition to Temasek, key members of CSE’s management and board (Lim Ming Seong: Board Chairman, Lim Boon Kheng: CEO, and Tan Chian Khong: Director) intend to subscribe for their pro rata entitlement of c.3m shares (c.S$1.1m) combined.
Why choose to conduct equity financing now?
? We believe management is choosing to conduct equity financing as it wants to maintain a healthy balance sheet. As at end-Aug 22, CSE’s net gearing stood at 0.39x (vs. 0.25x as at end-Dec 21).
? If CSE had opted for debt financing, its net gearing would have risen to 0.57x. Considering the rising rate environment and CSE’s huge order book of S$389m as at end-1H22, we believe it did not turn to debt financing in order to remain financially prudent and maintain sufficient working capital.
Reiterate Hold, expect near-term share price weakness
? We expect near-term share price weakness due to 1) uncertainty over earnings accretion from its M&As, and 2) deteriorating macroeconomic conditions.
? Reiterate Hold with an unchanged TP of S$0.45 (12x FY23F P/E, its 10-year historical average), as we await further clarity on its M&A targets. Re-rating catalysts: quicker energy sector recovery, more greenfield project wins. Downside risks: prolonged cost pressures resulting in deteriorating margins.