Proposed Rights Issue To Fund Potential Acquisitions
CSE has announced a proposed rights issue of 1 right for every 5 shares at an issue price of S$0.33 (20.5% discount to the last traded price). If fully subscribed, the net proceeds of S$33.4m will be used to fund synergistic acquisitions in the communications business in the infrastructure industry in New Zealand and the US. This cash call amid poor market sentiment will likely create an overhang to share price. Our target price is reduced by 16% to S$0.37 after adjusting for dilution from the rights issue. Maintain HOLD.
• Proposed non-underwritten rights issue. On 10 Oct 22, CSE Global (CSE) announced a proposed non-underwritten rights issue of 1 right for every 5 shares held at an issue price of S$0.33 per share. The issue price is at a 20.5% discount to the last traded price of S$0.415 and 17.7% discount to the theoretical ex-rights price of S$0.401. CSE will issue up to 102.48m shares, which could raise net proceeds of up to S$33.4m.
• Majority of net proceeds intended to be used for acquisitions. 90% of the net proceeds will be used to fund potential acquisitions of synergistic communications businesses in New Zealand and the US. This forms part of CSE’s strategy to expand and grow its communications businesses in the infrastructure industry markets and participate in an expanding sector where demand for increased connectivity and security is expected to continue to grow. Both the potential acquisitions relate to radio and critical communications business which CSE views as a natural complementary fit to its business. The potential acquisitions are expected to strengthen CSE’s existing business partner and customer relationships as well as extend geographic coverage for its communications business, thereby enhancing its market position in these markets. However, there is no definitive agreement that has been entered into at this moment. On the other hand, 10% of the net proceeds will be used to partially repay some loans previously drawn down for acquisitions as part of CSE’s ongoing and prudent balance sheet management.
• Irrevocable undertakings from directors, and intention to subscribe from major shareholder. Three directors ? including the CEO, Chairman and independent director ? with a total stake of around 2.8%, have given their undertakings to subscribe their portion. On the other hand, Temasek, who owns 25% stake, has stated its intention to subscribe their portion of rights. Assuming that none of the other entitled shareholders other than the undertaking shares and Temask Entities subscribe for any rights shares of 28.88m, the rights issue could raise gross proceeds of S$9.5m. We think that this cash call amid poor market sentiment will likely create a near-term overhang to share price.