KUALA LUMPUR: Malaysia Building Society Bhd’s (MBSB) proposed rights issue could dilute its 2016-17 estimates earnings per share by up to 40%, according to Affin Hwang Capital.

“We estimate a potential 39-40% dilutive impact on 2016-17 estimates EPS, barring any potential corporate enhancement exercises. The capital-raising is needed to recapitalise the group further,” it said.

MBSB is planning to raise up to RM2bil via a renounceable two-call rights issue of new shares to meet its capital requirement.

Under the proposed exercise, the issue price of the rights issue would be payable in two calls – the first call of which would be payable in cash on application by the entitled shareholders and/or their renouncees who wish to subscribe for the rights shares, while the second call shall be capitalised from the company’s share premium and/or retained earnings account.

The financial services provider said it would allocate about RM1bil in proceeds from the proposed rights issue to purchase liquefiable assets, while RM900mil would be used to expand its financing business, RM86mil as working capital and RM14mil for estimated expenses of the rights issue.

Affin said based on an illustrative Rights price of RM1, representing a 26.8% discount to the theoretical ex-rights price of RM1.12, there would be both a minimum and maximum scenarios.

The minimum scenario (8.5 Rights-for-10 shares) involving the issuance of 2,412.8 million rights shares, with the first call priced at 82 sen while the second call at 18 sen while a maximum scenario (8-for-10) with the full exercise of outstanding ESOS and warrants and the proposed dividend-reinvestment-shares, raising altogether 2,355.5 million rights shares, with the first call priced at 84 sen and second call at 16 sen.

“Assuming that MBSB’s earnings remain the same as our 2016-18E forecasts, EPS will likely be diluted by circa 39% to 40%. Return on equity (ROE) may decline by 0.7-1.7 percentage points,” Affin said.

Affin has maintained its “hold” rating on MBSB and an unchanged target price unchanged at RM1.38, based on a 0.75 times P/BV target premised on a 9.1% calender year 2016 estimates ROE.

“Ex-Rights, we estimate MBSB’s fair value to be 90 sen (at a 0.66x P/BV target), based on unchanged 2016-17 estimates profit forecasts. At this juncture, the deep discount of circa 41.7%-43% in the first call subscription price (82 sen-84 sen) to its current share price appears to be fairly attractive, but could potentially spark a selldown of the shares given this dilutive capital raising exercise,” it said.

Affin said the upside risks for MBSB was corporate exercises to enhance earnings while the downside risks was increased delinquency and more impairments on financing books and no implementation of turnaround plans.