Theoretical solution 1 – Based on our analysis, a sustainable solution could be to raise US$300m in 2Q10 at S$0.60/share and implementing a US¢1/qtr dividend policy. This would provide an attractive dividend yield of 9-10% for unit holders, meet RM’s financing needs, and still set aside sufficient reserves to repay debt. Clear communication of RM’s dividend policy may be necessary to restore investor confidence before the capital raising exercise in 2Q10.
Theoretical solution 2 – An alternative solution could be the issuance of a debt-equity hybrid instrument such as non-participating preference shares in 2H09, with conversion into ordinary shares when the assets are delivered in July 2010. This solution would have the added immediate advantage of removing the overhang surrounding the unfunded capex commitments.
Caveat emptor applies – We caution that the above are hypothetically possible scenarios to meet RM’s funding needs on a sustainable basis. The challenges facing RM are not impossible to surmount; however, there exists tremendous uncertainty on the exact terms of any capital raising exercise, as well as on RM’s operating environment. As a result, we maintain our Sell/Speculative Risk rating; the “safety floor” share price is equal to our target price of S$0.23, based on NTA/share with 25% discount to vessel book values.
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