Published March 2, 2009

CapitaLand, CMT need attractive buys to justify rights issues

By UMA SHANKARI

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CASH is king these days, but does any company really need to hold on to $6 billion of it?

Good response: The take-up for CapitaLand's rights issue has been good so far which means that shareholders are willing to be supportive

CapitaLand, Singapore's largest property company by market capitalisation, last month announced a fully underwritten one-for-two rights issue to raise $1.84 billion. The developer is in no way hard-up for money - CapitaLand has some $4.2 billion of cash and cash equivalents on hand. After the rights issue, it will have a whopping $6 billion in the kitty.

So was the rights issue really necessary? CapitaLand said that the exercise was 'pre-emptive' and that it will provide the company with greater financial capacity to pursue merger and acquisition opportunities that might arise, as well as other investment opportunities. Chief executive Liew Mun Leong also told analysts and media at a briefing on the day the rights issue was announced that there were 'a number of proposals on the table' that the developer was studying.

Analysts have been mostly positive on the rights issue, issuing a slew of fresh 'buy' calls that sent CapitaLand's stock soaring 11.4 per cent after the announcement of the issue. And sources have since told BT that the take-up for the sharply discounted rights issue has been good so far, which means that shareholders, at least, are willing to be supportive.

But there is no denying that the rights issue is dilutive. A day after the rights announcement, Goldman Sachs lowered its 2009 and 2010 earnings per share (EPS) estimates by 37 per cent and 33 per cent, respectively, to reflect the dilutive impact.

To justify the dilution, CapitaLand has to show that it raised the money for a good reason by making some attractive buys in the not-too-distant future. The rights issue does make the company more financially secure, of course. Other than increasing its war chest to $6 billion, the issue will also reduce CapitaLand's net gearing to 0.28 times from 0.47 times. But these factors alone are not enough to justify asking shareholders for $1.84 billion, especially at a time when investors themselves are looking to conserve capital.

The same principle applies for CapitaLand's 29.7 per cent-owned retail trust CapitaMall Trust (CMT), which on the same day as the announcement of its parent's rights issue said it will raise $1.23 billion in a 9-for-10 rights offer. The market, and analysts, didn't take this - and the much larger dilution - as well as they did with CapitaLand's issue, sending CMT's shares down 6.2 per cent even as CapitaLand's shares shot up.

'While widely expected, we believe the rights issue (50 per cent of market cap) was larger and more dilutive than expected,' said UBS Investment Research. The firm downgraded CMT's earnings per unit and dividend per unit forecasts by 30-50 per cent post-rights, also taking into account lower net property income, higher interest costs and the repayment of convertible bonds in 2011.

CMT intends to use the bulk of the proceeds to pay off $956.2 million of debt due this year, and reduce its gearing from 43.2 per cent to 29.1 per cent. However, the repayment could have been achieved by refinancing loans, rather than asking investors to fork out another $1.23 billion.

One reason for the fund raising is that by lowering its gearing, the trust will be in a better position to raise funds in future when it needs to make an acquisition. Lim Beng Chee, chief executive of CMT's manager, said that the trust chose to go with a rights issue rather than look for refinancing for its loans as it was looking at the 'longer-term'.

But for both CapitaLand and CMT, those vague hints of acquisitions need to be translated into real deals to justify asking shareholders for so much money.