On 9th September 2020, Hibiscus suspended its trading to make announcement of proposed private placement of new Convertible Redeemable Preference Shares (CRPS).
What is CRPS?
Preference shares are shares of a company issued with a fixed dividend payout. They are not like common shares which can dilute a company's earning and assets per share.
Preference shares holders have the priority to be paid first in case the company is liquidated but they do not have voting rights compared to common shareholders.
Redeemable means that the company can redeem or buy back the preference shares in the future.
Convertible means that the preference shares can be converted into company's common shares before a specific date.
Private placement means that the shares are sold directly to private investors, not to the company existing shareholders.
It's not uncommon for a company to issue CRPS to raise fund. What has caught the eyes of investors for this Hibiscus's CRPS is the size of the fund.
Before the announcement, Hibiscus's share price was hovering around 60sen, which gave it a market cap of RM953 million base on 1.588 billion shares.
Hibiscus wants to raise up to RM2 billion from the CRPS, which is 2x larger than its market cap.
The purpose of this fund-raising is to acquire "quality producing assets" which have the following qualifying parameters:
- payback period (cash flow break even) =< 5 years
- internal rate of return (IRR) >= 12%
- Located at South East Asia
- Maximum numbers of acquisition = 3
Below are the important figures for this CRPS
- Issue size: Up to 2 billion units of CRPS with RM1 each to raise up to RM2.0 billion
- Maturity date: 2 years from first tranche
- Preferential dividend: 4% per annum
- Conversion price: 66 sen (first tranche)
- Conversion period: anytime up to 6 days before maturity date
- Mandatory conversion: upon completion of acquisition up to 30 days before maturity date
- Redemption option: From 18 months after first tranche issue date
- Mandatory redemption: On maturity date
I'm not accountant and what I share here is just base on my personal understanding and opinion. It might be wrong.
If I interpret it correctly, it means that Hibiscus will raise RM2 billion from this CRPS, keep the cash and look for opportunities to acquire quality oil producing assets.
CRPS holders will be paid dividend at 4% per annum for 2 years, and can choose to convert their CRPS into common shares at conversion price of 66sen at anytime within this 2 years.
If Hibiscus successfully acquire assets, then the CRPS are compulsory to be converted into common shares.
If the first tranche is fully subscribed at conversion price of 66sen, and all the RM2 billion is fully utilized to acquire assets, then there will be 3.03 billion new common shares of Hibiscus from the conversion. (2 bil divided by 0.66).
If the first tranche of CRPS is undersubscribed (less than 2 billion), there may be further tranches of CRPS later at different conversion price.
If Hibiscus fails to utilize the fund either fully or partially within 2 years, it will redeem the CRPS and give the money back to CRPS holders with the dividends fully paid.
If 2 billion CRPS are fully subscribed at conversion price of 66sen, and Hibiscus only utilizes RM1 billion to acquire assets, in the end only 1 billion CRPS will be converted to 1.515 billion new Hibiscus shares and the other 1 billion CRPS will be redeemed by the company.
When investors see that there will be potential 3.03 billion new shares to dilute the earnings, inevitably they will feel uneasy.
That means almost 200% increase in its outstanding shares from 1.58 billion to 4.61 billion!
Most investors are not happy with a 10% private placement. Now it's a potential 200% of private placement.
However, if the number of shares increases by 200% and the net profit also increases by 200%, then it should not be a worry.
The problem is, how much profit can the potential new assets contribute to Hibiscus? So far there is no clue about it.
I think the management of Hibiscus must have a few potential targets in mind before calling for cash via CRPS. If not, why do they raise so much fund at RM2bil? They have too much cash and want to donate out as dividends?
Hibiscus is formerly a SPAC (Special Purpose Acquisition Company) and has successfully acquired two oil-producing assets in the past.
In Mac 2016, Hibiscus acquired 50% interest in oil-producing Anasuria Cluster at the North Sea of UK for USD52.5mil (RM199.1mil , USD1:RM3.79).
In Mac 2018, it has completed the acquisition of 50% interest of producing asset in North Sabah for USD25mil (RM104.6mil, USD1:RM4.18).
In FY2019 ended in Jun 2019, Anasuria and North Sabah contributed RM132mil & RM128mil of net profit respectively to Hibiscus. These profits were achieved from average realized oil price of USD72.8 & USD66.6 respectively.
Its operating profit stood at RM549mil before working capital changes and the net operating cash flow was at RM496mil.
A RM300mil worth of acquisition contributed RM260mil of net profit in a year. This is not bad at all despite being achieved at higher oil price of around USD70/bbl.
How much net profit can another extra RM2 billion producing assets bring to Hibiscus?
RM300mil of acquisition can give you RM260mil net profit, so in proportion RM2bil can bring you RM1.7bil net profit? Of course it's NOT as simple as that.
IF Hibiscus successfully raises RM2bil in one tranche, and utilizes all the money to acquire producing assets, and reports an annual net profit of RM500mil (inclusive of new assets, Anasuria & North Sabah), its EPS will be 500 / 4610 = 10.8sen.
These figures are just rough estimation as we do not know the future oil price and how good are the assets Hibiscus are going to acquire.
When we invest in a company, we hope that the company can grow. The faster it grows, the better it is.
Growth can be achieved via organic growth, acquisition and diversification.
Personally I like acquisition as it is the fastest way a company can grow, as long as the acquisition is strategic and makes sense.
Hibiscus currently has a few non-producing oil fields. It needs rather long time to explore and drill to get the oil.
I'll be very happy if it can acquire quality oil-producing assets to contribute immediately to its top and bottom lines.
In the past, Hibiscus's revenue & profit jumped after the acquisition of Anasuria Cluster, and then jumped again after the acquisition of North Sabah.
Its share price also follows until being hit by recent plunge in oil price.
With the experience in acquisition of good quality producing assets in the past, I am confident that Hibiscus is capable of striking another good deal.
I think it's a good move to buy oil & gas assets in this difficult time, just like savvy stock market investors take chances when the share price of a good stock drops to lower level amid poor market sentiment.
Recent 17% drop in share price of Hibiscus from 60sen to 50sen shows that investors do not take this CRPS positively, which I think must be due to its huge potential dilution.
Your company plans to grow by acquiring good assets, by right shareholders should be happy, isn't it?
Anyway, if no assets acquisition is done, there will be no dilution effect but the company will have to pay up to RM160mil dividend to CRPS holders.
As a shareholder of Hibiscus, I hope that:
- it is able to raise enough money in only one tranche (no more lower conversion price)
- the money is fully utilized quickly to acquire 3 quality assets within 2021 (save dividend payout)
- the Brent oil price can recover to USD60-70 level in 2021
- the new assets are as good as, if not better than its Anasuria & North Sabah
Normally for CrPS to be convincing, easy way is to "work-up" the price above 0.66... maybe 0.7-0.75 range
ReplyDeleteI really hope so, lets see how it pans out :)
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