Published March 12, 2009

More TLCs seen making cash calls

UOB-Kay Hian cites KepLand, NOL, CitySpring and Mapletree Logistics

By OH BOON PING

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MORE Temasek-linked companies (TLCs) could make cash calls, following Chartered Semiconductor Manufacturing's US$300 million rights issue, say UOB-Kay Hian analysts.

Likely candidate?: NOL's forecast net gearing of 55 per cent by 2010 makes it a likely candidate for a rights issue and 'NOL will likely see a sharp deterioration in its balance sheet because of losses in 2009 and 2010 in a poor shipping market', say UOB-Kay Hian analysts

Likely candidates include Keppel Land, Neptune Orient Lines (NOL), CitySpring Infrastructure Trust and Mapletree Logistics, the analysts say.

They note in a report that there has been a slew of cash calls by government-linked companies. These include DBS Group, CapitaLand, CapitaMall Trust and Chartered Semiconductor in the TLC stable.

'Separately, Ascendas Reit, an associated company of JTC, has undertaken a share placement as well as a rights issue. The purpose of these cash calls is to strengthen the balance sheet, repay debt and/or fund capex,' the report says.

TLCs have the advantage of a parent with deep pockets should they require new capital to strengthen their balance sheets and meet financial obligations, it notes.

The analysts say that cyclical companies with a high net debt-to-equity ratio and a deteriorating earnings outlook are more likely to make cash calls than others.

Therefore, Keppel Land's net gearing of 61 per cent and NOL's forecast net gearing of 55 per cent by 2010 make them likely candidates for rights issues.

'While Keppel Land's management recently denied a planned rights issue, the risk of a cash call still exists,' according to the analysts. And 'NOL will likely see a sharp deterioration in its balance sheet because of losses in 2009 and 2010 in a poor shipping market'.

In addition, highly-geared business trusts and real estate investment trusts (Reits) that have net debt-to-asset ratios of more than 35 per cent could make cash calls.

'While this is below the 60 per cent statutory limit, these entities will likely want to shore up their balance sheets ahead of asset impairment,' the analysts say.

They cite CitySpring Infrastructure Trust, owing to its high net gearing of more than 100 per cent, and Mapletree Logistics Trust, which has a net debt-to-asset ratio of 35 per cent, as likely candidates.

However, they feel Mapletree may not undertake a rights issue any time soon as it completed a three-for-four rights issue at 73 cents per share to raise $606.7 million only a few months ago in August last year.

TLCs seen to be able weather the current financial storm well include Singapore Airlines (SIA), SIA Engineering, Singapore Technologies Engineering, Keppel Corp, Sembcorp Industries, Sembcorp Marine and SMRT.

The analysts warn that share prices are likely to respond negatively to cash calls, given the dilution impact.

For example, on Monday, Chartered Semiconductor revealed a 27-for-10 rights issue at a 65.9 per cent discount to its last-traded share price of 20.5 cents.

When trading resumed on Tuesday, the price plunged 39 per cent to close at 12.5 cents - its steepest fall in a decade.

Meanwhile, Merrill Lynch issued a contrarian 'buy' on Chartered citing factors such as its utilisation which has bottomed out and improving customer loading.

'We anticipate a sharp order snap-back in 2H09 due to huge under-ordering by customers. The early rights issue comes as a negative surprise which could have waited. Conversely, the issue also provides Chartered with a healthier balance sheet at the start of a sector recovery.'

It has a price target of 39 cents on the stock.