Cuscapi Berhad - Fairly valued

News    The company has announced the proposed transfer of the listing of and quotation for the entire stock from the ACE market to the MAIN market of Bursa Malaysia.

It also proposed a 1-for-2 rights issue, a 1-for-2 bonus issue for every two rights shares subscribed and one free warrant for every one rights share subscribed by the entitled shareholders. 

Based on the current outstanding shares, the bonus and rights issues entail up to 184.0m additional new shares and another 122.7m warrants.  

The entitlement date will be determined later pending approvals from Bursa Malaysia Securities, Securities Commission, shareholders and others. The exercise is expected to be completed in 2Q2013.

    

Comments      We are positive on the proposal as we expect the exercise to enhance Cuscapi’s liquidity and reward shareholders, which may potentially re-rate the stock. They are not entirely surprising given its sizeable retained earnings reserve to the share capital at the ratio of 1.5:1.

Assuming full conversion of the warrants and the new issuance, the company’s share base will increase 125% to 552.0m. The total proceeds that would be raised from the rights and full warrants conversion is RM62.6m (RM29.3m from the rights and RM33.1m from the warrants based on the indicative issue price of RM0.24 per rights and the indicative warrants’ exercise price of RM0.27 per piece).

Based on the latest closing price of RM0.325, the theoretical exall price is estimated at RM0.255. As such, the warrants are slightly out-the-money. 

In our earnings model, we assume gradual conversion of 20% each year for the next five years. As a result, the share base will increase by 5.7% and 5.4% for FY13E and FY14E.

    

Outlook     We believe the company will continue to strengthen the contributions from its overseas units. In fact, its South East Asia and China regional operations have registered 2-year revenue CAGR(s) of 42.8% and 121.3%, respectively.

We are still looking forward to see the company concluding a project with one of the biggest fast-food restaurant chains in Philippines in the near future, which has been delayed since late last year. 

Besides, we are also looking forward to a new product of the company, which is currently in the trial run stage and could be one of the growth drivers from 2013 onwards.    

    

Forecast      Due to the higher cost spent for its regional expansion and not factored in by us earlier, coupled with the back-loaded earnings contribution from regional and product expansions, we are thus cutting Cuscapi’s FY12E-13E earnings by 27.0%-36.9% to RM6.5m-RM7.2m (from RM8.9m-RM11.4m), implying diluted FY12E-13E PERs of 16.9x-16.1x (vs. current FY12E-13E PERs of 12.4x-11.1x).

    

Rating     Maintain MARKET PERFORM.

    

Valuation  We  have  downgraded  our  TP  on  Cuscapi  to  RM0.36  (ex-all: RM0.27), from RM0.41 previously, implying diluted FY12E-13E PERs of 17.0x-16.1x (vs. FY12E-13E PERs of 12.4x-11.1x).

    

Risks      Delay in its projects implementation

Source: Kenanga