Monday, August 1, 2011

Pewaja ... Aug11

Debt-laden Perwaja Holdings Bhd is making a cash call to its major shareholder Kinsteel Bhd to raise RM280 million under a planned restricted issue of redeemable convertible unsecured loan stocks (RCULs).

The steel manufacturer is also proposing an issue of free warrants on the basis of one free warrant for every two existing shares held.

The seven-year RCULs, with a coupon rate of 7%, will be issued to Kinsteel. Both parties have signed a conditional subscription agreement to formalise the exercise. 

The gross proceeds will be used to finance the working capital needs of Perwaja, in which Kinsteel owns a 37.34% stake.

Under the restricted issue, Perwaja will issue the RCULs to Kinsteel at 100% of the securities’ nominal value.

The proposed restricted issue of RCULs is expected to be completed by year-end (2011). Upon completion, Kinsteel will undertake a renounceable restricted offer for sale (ROS) of the RCULs it owns to the entitled shareholders of Perwaja. This will be done on the basis of RM1 nominal value of RCULs for every two existing Perwaja shares held.

Kinsteel is the largest shareholder of Perwaja, followed by Equal Concept Sdn Bhd with 27.84% equity interest and Maju Holdings Sdn Bhd with 3.87%.

The proposed restricted issue will enable Perwaja to raise proceeds for Perwaja group’s working capital requirements and to defray the expenses incidental to the proposals and the proposed ROS.

Further, the proposed restricted issue is in line with Perwaja’s financing plan which is intended to address the overall financing needs of Perwaja group, taking into consideration the expected increase in turnover of Perwaja group upon the implementation of the Economic Transformation Programme and Perwaja’s plan for cost reduction which is envisaged via a concentration and pelletising plant.

Kinsteel’s decision to subscribe for the RCULs is an indication of the parent company’s confidence in the earnings outlook of Perwaja.

The restricted issue of RCULs is not expected to have a material effect on the company’s earnings in the current year ending Dec 31.

Kinsteel bought into Perwaja in 2006 and floated the company on Bursa in August 2008. As at March 31, Perwaja’s long-term borrowings amounted to RM336.1 million and short-term debts (including bank overdraft) was RM598.2 million.

Industry observers say Perwaja Holdings Bhd's move to raise RM280 million via restricted issues is a good avenue to address working capital needs, especially now that its financing needs are expected to escalate. As Perwaja has put into motion plans to reduce costs via a concentration and pelletising plant costing RM200 million, the company’s financing needs are expected to escalate.

The implementation of various mega projects under the government’s Economic Transformation Programme soon is also expected to spur demand for steel products, which will in turn increase the group’s working capital requirement.

Perwaja’s move to raise funds via RCULS will minimise the immediate dilution effect given that the instrument can only be converted after five years from the date of issue and the fixed coupon rate would enable the company to secure its cost of funds during the tenure of the RCULS, especially with interest rates looking to inch higher.

Meanwhile, Perwaja’s gearing is expected to stay below 1x upon full exercise of the RCULS.

For Kinsteel, it is deemed an earnings accretive move, but caution that the cash call will strain Kinsteel’s balance sheet.

A full subscription of Perwaja’s RCULS would raise its gearing from 2.2 times to 2.6 times. Kinsteel has said it would finance the subscription RCULS with its internal funds and bank borrowings. KinSteel will undertake a ROS of the RCULS it owns to the entitled shareholders of Perwaja.

Perwaja’s decision to undertake a ROS of RCULS to Kinsteel could also be due to concerns that the securities might not appeal to other shareholders in Perwaja.

Assuming Perwaja shareholders fully subscribe their entitlements under the ROS. Kinsteel would need to fork out about rm105 million for the RCULS.

Should Kinsteel decide to finance half of the securities by borrowings, its net gearing would increase to 1.12 times from 1.09 times as at March 31, 2011.

As at end March 31, 2011, Kinsteel had debt obligation of rm1.85 billion compared to a cash pile of rm81 million, translating into a net debt of rm1.76 billion. Perwaja had rm935 million worth of debts against cash of rm20.51 million, hence net borrowings of rm914 million.

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