More importantly, management will be requesting that, “…the Directors be and hereby authorized to apply any convertible loan, shareholder loan or any other loan facility due to any person, from the Company, as may be agreed by the person and the Company, towards payment for any shares subscribed for by such person under the Rights Issue”.
Taking a cue from this statement, we are of the opinion that the capital raise program (N 140 billion) is an attempt to pay down the outstanding value of WAPCO’s dollar denominated quasi-equity instrument of ?150 billion (using current exchange rate of NGN305/USD). By implication, existing shareholders with interest in the quasi instrument (previously shareholder loan) will have the option to subscribe for the offer using their outstanding stake in the quasi instrument.
EPS dilution on the brink albeit with some benefits
Whilst we expect earnings per share to be diluted following the Rights Issue and subsequent conversion of the quasi-equity instrument, we highlight some positives from the proposed structure. The 6% annual dividend accruing to holders of the quasi-equity will no longer exist, consequently freeing up extra earnings available for distribution to ordinary shareholders. Using current official exchange rate, dividend to the holders for FY’17 would amount to N 9.0 billion, and could in fact be higher in light of the lingering currency devaluation risk.
Valuation maintained pending further details on the issue
The details on timing and price of the Rights are yet to be communicated. However, assuming that the Rights is issued at WAPCO’s 30-day VWAP (N 48.31), we estimate that a full subscription to the offer would increase WAPCO’s outstanding shares by 55%. Meanwhile, with the potential liquidation of the quasi-instrument, we would no longer have to back out its value (N155 billion using our FY’17E NGN350/USD exchange rate) from WAPCO’s enterprise value in arriving at our equity valuation per share.
That said, analysts at Vetiva Capital Management ltd in Victoria Island expect the increased equity value to offset the impact of increased number of shares on our valuation per share (depending on the extent of the Rights price discount to market price).
Using our VWAP assumption as the Rights price, we estimate WAPCO’s post-conversion target price at N72.52, still at a decent potential upside to current price of N49.60. Pending further
details from the management however, we retain our target price at N77.32 (BUY).