United Engineers

United Engineers: Maybank KE cuts rating to SELL with TP of $1.86, after the proposed a 1-for-1 renounceable rights issue to raise SGD490m to reduce its borrowings for its recent acquisition of WBL, and increase UE’s financial flexibility. There are three options for current UE shareholders – (1) To sell their renounceable nil-paid rights on the market, (2) take up the rights issue to avoid dilution, and (3) to sell all shares. MBKE think the rights issue is clearly an aggressive action by the major shareholders to force the minority shareholders’ hand. A total of 326.6m new shares will be issued, with gross proceeds of SGD490m to be gained. Major shareholders such as OCBC and the Lee Family have agreed to irrevocably undertake and subscribe for the rights issue. This will account for 36.1% of the total underwritten rights issue, inclusive of 12.6m convertible stock units owned. In essence, the major shareholders will fork out 176.9m, while the minority shareholders will have to provide the remainder SGD313.1m. Assuming it is based on current share price of SGD2.66/share, ex-rights price will be at SGD2.08/share. MBKE expect there will be selling pressure as not everyone will take up the rights issue. There will be shareholders who may not be able to afford or willing to put in additional capital. One of the key reasons on why MBKE liked UE in the first place was on its large discount to book. Essentially, this exercise will be dilutive to current shareholders.