Tuesday, May 26, 2009

Pacific Andes - Buy By DBS (25 May 09)

Taking a longer term view
• 4Q09/FY09 results above expectations on tax benefits
• Proposed 1-for-1 rights issue at S$0.15 (50.8% discount to last price) to raise at least S$204m
• Upgrade to Buy on removal of high gearing concerns post-rights, TP: S$0.57 (Pro-forma post-rights TP: S$0.30)

Results above expectations. Net profit surged 38% to HK$664.3m on the back of a 12% growth in revenue to HK$7.8bn. The better than expected bottomline was due to its tax benefit of HK$70.2m. Else, operating profit would have been in line with our expectations.

Proposed Rights issue. The Group announced a 1-for-1 underwritten rights issue at S$0.15 for each Rights share (50.8% discount to last traded price of $0.305). The Rights issue is estimated to raise net proceeds of about S$204.4m, up to a maximum of S$223.6m (if principal amount of CBs fully converted to shares). The rationale of the Rights issue is to enlarge the Group’s working capital and capital base. One warrant will also be given for 5 Rights shares subscribed. Exercise price of Warrant is S$0.23. We estimate that the Group’s net gearing will retreat to c.0.43x, from the current 0.9x, post-rights.

Taking long term view, upgrade to Buy. While the huge discount and dilution could create overhang and result in price weakness in the near term, we believe the rights issue will be positive for the share price over the long term as it removes concerns of its high gearing. We raised our valuation peg to 6x on FY10F earnings (from 2.5x PER, 0.3x book based on its historical low) on the basis of a normalization of equity risk premium. This is based on a 20% discount to our target PE for China Fishery Group. Hence, our TP is raised to S$0.57. Our pro-forma postrights TP is S$0.30.

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