KUALA LUMPUR: OSK Investment Research has raised its target price for KENCANA PETROLEUM BHD [] to RM2.69 based on a price-to-earnings ratio (PER) of 14 times FY2011 earnings per share (EPS) after it announced a corporate exercise involving a rights and bonus issue .
The corporate exercise involves a rights and bonus issue on the basis of two rights for every five existing shares at 50 sen and three bonus shares for every existing 10 shares, including the rights shares.
The company also proposed a provision for financial assistance in the form of securities for the facilities taken by Mermaid Kencana Rig 1 (MKR1).
"Although there is a potential earnings dilution of about 40%, we believe this exercise would help to increase liquidity in the shares by about 86%, from 905 million shares to 1.68 billion shares. We like Kencana's strong order and tender books, of over RM2 billion each as at Oct 2009, which should keep it busy over the next 12 months," said the research house.
The issue price for the rights issue, at 50 sen, is a 62% discount from the theoretical ex-all price for Kencana of RM1.32 based on its five-day volume weighted average market price up to Wednesday.
The rights issue is expected to raise RM185 million and the proceeds would be used for capex spending, investment opportunities, business expansion, working capital and repayment of bank borrowings.
The bonus issue would add 388 million shares to Kencana's existing 905 million shares, assuming the 17 million share options under the company's Employees' Share Option Scheme are fully exercised.