Golden Agri-Resources

Price/Fair: S$0.70/S$0.90 Mkt Cap: US$ 7,150m 

3-mo daily turnover: US$33m 1-Yr Hi/Lo: S$0.80/0.55

Issuance of Convertible Bond of US$400m due to 2017

What’s New

Issue convertible bond of US$400m. Golden Agri-Resources (GGR) has announced to issue convertible bond (CB) worth of US$400m (S$499.2m) which will be due on 4 Oct 2017. The CB will bear coupon rate of 2.5% on a semi-annual basis and with initial conversion price of S$0.8896/share. Based on the latest closing price, the conversion premium is 28%. The CB attached with investor put option (3-years) at 100% of principal amount, plus interest accrued up to date of redemption.

Use of proceeds. The issuance of convertible bond will raise about US$394.5m or about S$492.2m (after deducting estimate cost and expenses). The company plans to use the net proceeds from the issuance of CB for general corporate purposes.

Stock Impact

Fully conversion of CB represent 4.37% of existing shares. With the initial conversion price of S$0.8896, assuming all of bondholder converted into shares, this will issue another 561m of new shares by due date on 2017. The expected additional new shares represent approximate 4.37% of the current number of shares.

Issuance of CB to increase gearing level to 0.21x. The issuance of convertible bond (before any conversion into shares) of US$400m is expected to increase company’s gearing level to about 0.21x from 0.17x as of 1H12.

No detail on the usage of the convertible bonds other than for general corporate purposes. There is no detail on the usage of convertible bonds other than for general corporate purposes. But, we believe that the company may use to proceeds for further acquisitions as the company is also required funding following its plan to expand its business besides China and Indonesia.

Plans to expand into Liberia and India. The management plans to expand its operations into new markets, such as Liberia and India. Through Verdant Fund, the company plans to develop a long-term project in Liberia. The project is at an early stage as the establishment of nursery for seedling and planting is targeted to commence by this year. Meanwhile, the company plans to expand its downstream activities in India through a local partner with the intention to secure sales of its CPO production to be exported to India. Currently, management is in early discussion with several parties in that country.

Valuation Recommendation

We think the announcement of CB may create overhang on the share price of GGR in the short term. As the conversion of the CB may only take place until 2017, we, therefore maintain BUY recommendation at the moment with target price to S$0.90, based on 14x 2013F PE, a mid-cycle valuation for an integrated player.

Information by KE