Sumatec ...Nov09

On Oct 21, 2009 the company announced a capital reduction exercise that will reduce the par value of its shares to 60 sen from Rm1, followed by a one for five rights issue. The deal comes with free warrants.

The price of the rights issue, which will be pegged at a later date, will not be below than 60 sen per rights share given the par value is 60 sen.

Should minority shareholders subscribe for the rights issue?

One option is that shareholders could leverage on the current low market price by buying up some shares on the open market to offset the dilution caused by the rights issue, instead of subscribing for the rights at 60 sen per share. By doing that, shareholders will not get free warrants, whose exercise price will not be lower than 60 sen as well as shares cannot be issued below par value).

But the money saved from purchasing the shares on the open market would probably be enough to acquire the warrants when they are floated on Bursa Malaysia. The warrant price may not be too high, assuming the underlying share price remained depressed.

Its major shareholder, Tekad Mulia Sdn Bhd is taking up a total of 17 million rights issue, which is equivalent to 46% of the 36.9 million shares that will be issued in the exercise. The min funds raised will be RM10.2 million.

Based on its entitlements, Tekad Mulia’s shareholding in Sumatec could possibly increase by up to 52.78%.

The question is that with the par value of 60 sen, its rights issue would also likely be at the price, which is way above its current share price of lees than 40 sen.

However, the undertaking of Tekad Mulia to subscribe to the rights issue could b seen as the majority shareholder’s confidence n the prospects of Sumatec.

The company itself appears to be repositioning itself. In Sept 2009, the company announced proposal of several subsidiaries to a newco – SISB – for RM77 million. Sumatec is proposing to be a shareholder of SISB. The other shareholders in the newco are Ethos Capital One Sdn Bhd, the EPF and a management buyout team comprising three individuals.

Following the exercise, SISB is expected to apply for a listing on Bursa by June 30, 2010. A point to note is that apart from its partnership with the EPF, Sumatec has also teamed up with Ethos capital One, a local private equity fund which is said to be politically linked.

Following the announcement of its proposed disposal, Sumatec then bought the entire stake in SISB, which is intended to be the investment holding company of the Semua Group, for RM2.00. Subsequently, SISB has to become a wholly onwed unit of Sumatec.

Another plus point for Sumatec is that it has reported improved earnings since it returned to the black in 4QFY2008 ended Dec 31.

It has an existing order book of Rm700 million, while project margins are expected to improve due to lower material prices.

The company’s proposed capital reduction and rights issue is expected to be completed by 1Q2010. But before that, it has to get shareholders approval. Until then, shareholders will have to decide whether they want to buy into SUmatec’s growth story.