MPS – Macquarie (BT)

MacarthurCook Property Securities Fund
Sept 14 close: A$1.07
Macquarie Research, Sept 13

RIGHTS issue to fund future growth: MPS has announced a one-for-three renounceable rights issue to existing unitholders. Full take-up from unitholders would result in the issue of a further 48.7 million units, equivalent to around A$51.1 million (S$65 million).

Impact: The rights issue applies to MPS units listed on both the ASX and SGX. The Australian issue price of A$1.05 represents a 4.2 per cent discount to 10-day VWAP prior to announcement, while the S$1.32 Singapore issue price represents a 1.5 per cent discount. New units will rank equally with existing units from the allotment date, expected Oct 19, and will be entitled to the December quarter distribution.

MacarthurCook in its own capacity will underwrite up to 4.8 million units of any shortfall at A$1.05 per unit. This represents just under 10 per cent of the full rights issue, or a A$5 million minimum raising.

Issue proceeds will initially be used to pay down existing debt. Repayment of a portion of MPS’ now fully drawn A$68 million cash advance facility with OCBC will enable the fund to invest in further opportunities as they arise.

We flagged the potential for MPS to raise further capital after its FY07 result, in light of management’s indication that it saw opportunities presenting themselves amidst current market volatility.

The impact on our forecasts is subject to numerous variables, including proportionate take-up by unitholders, the prevailing SGD/AUD exchange rate, timing of investment in new opportunities, as well as distribution yields and placement fees earned on new investments. If MPS is able to reinvest relatively quickly in investments generating yields of at least 9.5 per cent (around MPS’ distribution yield), this would have a neutral impact on EPS. But as a bear case scenario, if 50 per cent of the rights issue were taken up and only used to pay down debt, the impact would be a 4.1 per cent dilution in FY08 EPS.

Earnings revision: No change to earnings – subject to rights issue acceptance levels.

12-month price target: A$1.15 based on a DCF methodology.

Catalyst: Reinvestment into new funds at high yields and negotiated placement fees.

Action and recommendation: MPS’ high 9.5 per cent yield and high tax deferred combination remains an attractive combination for investors. Given the potential dilution of the rights issue, we have revised our recommendation to ‘neutral’ until evidence of successful reinvestment becomes apparent.

NEUTRAL

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