Perusahaan Sadur Timah Malaysia (Perstima) Bhd
(March 4, RM4.02)
Downgrade to neutral with a lower target price (TP) of RM4.49: Perusahaan Sadur Timah Malaysia (Perstima) Bhd proposed a one-for-five rights issue to raise additional capital for its tinplate and tin-free steel manufacturing plant expansion in the Philippines. To attract subscription to its rights issue, for every two rights shares subscribed, investors are entitled to one free bonus share.

Total capital expenditure (capex) spent on the new plant is estimated at RM278.8 million. Perstima intends to raise capital from this rights issue to partly finance its capex with the remaining balance to be funded by internally generated funds and bank borrowings.

We previously noted that the plant expansion was to be funded by 40% internally generated funds and 60% bank borrowings, with plant capex earmarked at RM100 million, as guided by the management.

We are “neutral” on the exercise for its slight dilutive effect on the company’s share price. However, we view the boost to the stock’s liquidity positively as the total number of floating shares increases from the exercise. Historically, Perstima has seen volume trading at very thin levels.

Revenue growth may continue to be depressed by cheaper imports of tinplate, as seen by the dip in sales in the third quarter ended Dec 31, 2019 (3QFY20). Perstima lacks any growth catalyst in the near term and will only start to see notable earnings growth in FY21 from contributions of its Philippine plant operations that will commence around June 2021.

We maintain our sales forecast and tweak our capex estimates. Additionally, we also introduce our estimates assuming the proposal passes and is fully subscribed to, switching our TP derivation at a diluted earnings per share price-earnings ratio pegged at 12 times to get RM3.46. — Inter-Pacific Research, March 4