Pacific Andes Holdings - Dilution from rights issue

PAH's 4Q09 core net profit of HK$341.4m (+55% yoy) beat our estimate of HK$198.4m and consensus of HK$207.5m. The main reasons for divergence were higher sales, wider gross margins from the volatile SCM business, lower-than-expected operating expenses, and a tax rebate from fishmeal operations. Management has proposed a renounceable one-for-one rights issue with warrants. Our FY10-11 core EPS estimates have been raised by 5-17% on higher SCM sales and margins assumptions. Our cum-rights-and-warrants sum-of-the-parts target price has been lifted to S$0.53 (from S$0.36). Post-rights dilution, our target price will fall to S$0.26. Downgrade to Neutral from Outperform due to limited upside to our target price ex-rights.

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