Event:
CitySpring has proposed a renounceable 11-for-20 rights issue at $0.39 per rights unit to raise $205m in net proceeds. The proceeds will be used for partial buyback of the A$486m floating rate bonds ahead of their maturity in August 2015. Taking into account interest cost savings from debt reduction and the enlarged unit base of 1,519m units, we adjust our target price from $0.540 to $0.460. Maintain HOLD.
Our View:
The proposed capital injection exercise serves as a pre-emptive move to remove the negative outlook on Basslink bonds’ rating and to ensure that Basslink’s distributions to CitySpring will not be disrupted due to any rating downgrade.
Even though the use of the rights proceeds for partial buyback of the A$ bonds will result in net interest cost savings of about $8.5m, the fact that the capital-raising is not used for funding any yield-accretive acquisition is still seen as a negative.
Temasek Holdings, the sponsor, has committed to subscribe for up to 85% of the rights units and if allotted the entire undertaking, will hold 48% of all units following the rights issue. However, the rights units are not subject to any lock-up agreement precluding the subsequent disposal of units by Temasek.
Action & Recommendation
Assuming that the distribution amount to unitholders is maintained at around the same level as in FY Mar11, we estimate a DPU of 3.3 cents for FY Mar12 based on the enlarged unit base. Though the dividend yield remains attractive, we see no major drivers for a re-rating. Management is seeking organic growth in distributions to unitholders through the gas network conversion project for City Gas. However, the timeline of the project is yet to be ascertained. Maintain HOLD with a target price of $0.460.
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