Why United Engineers' latest rights issuance may be a bad move

It's dilutive for shareholders.

According to CIMB, UE will be issuing renounceable underwritten 1-for-1 rights of up to 326.6m new shares to raise up to S$489.9m. The rights will be priced at S$1.50 each, or a 47.6% discount to its last closing price. 

CIMB noted that major shareholders in OCBC, Great Eastern and the Lee Group, which collectively own 34.1%, have irrevocably undertaken to subscribe to the rights. UE says the net proceeds will be used to reduce borrowings and enhance itsfinancial flexibility after its WBL acquisition.

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We do not like this move as it raises more questions on the group’s financial discipline after its WBL acquisition. The rights are extremely dilutive for shareholders, in our estimation, priced at 0.4x P/BV.

We estimate that its RNAV could collapse by 36% after this exercise. The issue will be fully underwritten by the underwriters, which include OCBC Bank. UE’s balance sheet will strengthen with its FY13 net gearing expected to drop from 117% to 61%.

But development sales recognition (e.g. Austville and Orchard Gateway) in the next 2-3 years could have reduced its leverage, in any case. In our view, this move benefits UE’s creditors potentially at the expense of minority shareholders.

We are also unsure why the group has priced the rights at such a hefty discount. The last time rights were priced at such discounts by major property developers in Singapore was during the 2008-09 financial crisis.