KS Energy Services Ltd: Rights issue of warrants

Rights issue of warrants. KS Energy Services Ltd (KS Energy) has proposed to undertake a renounceable non-underwritten rights issue of up to 92.747m warrants at an issue price of S$0.20 for each warrant. Each warrant carries the right to subscribe for one new ordinary share at an exercise price of S$1.40 on the basis of one warrant for every four existing ordinary shares held by entitled shareholders, fractional entitlements disregarded. Several key shareholders have given their irrevocable undertakings to subscribe for the entitlements.

Previous agreements. The group has previously entered into a subscription agreement (dated 6 Jun 07) with Sovereign Assets S.A pursuant to which warrants were issued; the full exercise will amount to an issuance of 9m shares (subscription shares). There are also three bond purchase agreements (dated 23 Jul 07) with Centar Investments (Asia) Ltd, Stark Asia Master Fund Ltd and Stark Master Fund Ltd pursuant to which convertible bonds were issued; the full conversion will result in an issuance of about 25.3m new shares (conversion shares).

Proceeds for general working capital. Including the subscription shares and conversion shares, 92.747m warrants will be issued, assuming full subscription and exercise of the current warrants issue (maximum subscription scenario). This will raise about S$18.2m in net proceeds from the warrants issue. A minimum subscription scenario outlined by the group delineates that about 84.2m warrants will be issued, and the estimated net proceeds will be about S$16.48m. KS Energy intends to use the net proceeds for general working capital.

Maintain HOLD. Although the upfront estimated net proceeds does not seem very substantial compared to the group's cash level (about S$70.6m as at 31 Mar 09), proceeds from the exercise of warrants are considerable (about S$118m assuming full exercise and minimum subscription scenario). This will provide additional financial flexibility to the group (as of 31 Mar 09, ST debt: S$145.9m, LT debt: S$200m, net debt-to-equity ratio: 0.69x). Together with Dubai-based Dutco, the group may also look into acquiring assets during this downturn. We are raising our fair value estimate to S$1.36 (prev S$1.10) based on 9x FY09F PER for the distribution business and 10x peg for drilling and related businesses due to the current re-rating of the sector, but maintaining our rating at HOLD.

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