KUALA LUMPUR: Kenanga Research is negative on Mitrajaya Holdings Bhd 's rights issue priced at 68 sen per piece as it is earnings dilutive and the proceeds of RM94mil would be used to pare down debt.

Mitrajaya has proposed a one-for-five renounceable rights issue of up to 157.5 million share rights with one free warrant and one bonus for every two shares subscribed.

"We were negatively surprised by the rights issuance given that it would be dilutive for FY18E EPS and ROE (by 6% and 7%, respectively) and the rationale of using the rights proceeds to pare down debts despite manageable current net gearing levels of 0.34x (as of 2Q17), while there are no clear expansion plans," said the research firm.

"Post-rights issuance, we expect net gearing position to decrease to 0.18x (from 0.34x as of 2Q17). We believe their lighter balance sheet would serve the working capital needs for their current outstanding order-book of RM1.8b and we do not expect any major land banking activities in the near future."

On outlook, Kenanga Research noted that steel prices are at a five-year high of RM2,655 per tonne, and it has factored in higher cost assumptions into its FY17-18E earnings.

Unbilled sales of RM233mil in the property arm would provide about two years of visibility to the group.

The South African arm will see unbilled sales of Rand45mil (RM14.8mil) recognised progressively upon completion of the transfer of ownershipp in FY17 and early FY18.

The Wangsa 9 Phase 3 will be launched by November 2017 with a GDV of RM300 mil.

"Post rights, we maintain MP with lower SoP-derived cum/ex TP of RM1.10/RM0.95 (previously cum/ex TP RM1.20/RM1.03).

"Our TP implies FY18E PER of 10x, which we find fair given that it is within our applied targeted PER for small-mid cap contractors of 9-13x."