Perwaja: A Cautious White Knight Found!

Last week, we have the announcement of  the Regularisation Scheme of Perwaja and its subsidiaries  (here). The newspapers in reporting the scheme seems to put more emphasis on the entry of a white knight - Chinese conglomerate Tianjin Zhi Yuan Investment Group Co Ltd ("Zhi Yuan")-  to help revive the company (here and here). I hope to expand a bit on the scheme to enable shareholders to decide whether they want to go through with the exercise or exit the stock early.

The scheme in brief looks like this:


Diagram 1: Perwaja's Proposed Restructuring Scheme

The essential parts of the scheme are:

1) The Balance Sheet Restructuring, where 95% of its par value of the shares capital and the entire share premium, will be offset against accumulated losses.

2) Recapitalization, where a Special Issue of RM1.7 billion (in 4 tranches) to Zhi Yuan and a 4-for-5 Rights Issue of up to RM534.4 million, will be carried out. 

3) Debt Restructuring where total liabilities of RM2.238 billion will be first reduced by waivers to RM1.683 billion and then replaced by Term Loans, Installment scheme and shares. See Diagram 2.

Diagram 2: Perwaja's Proposed Debt Restructuring

The Special Issue of RM1.7 billion will be staggered over 30 months from the date of fulfillment of all conditions precedent to the restructuring scheme:


Diagram 3: Proposed Zhi Yuan's 4-tranche investment in Perwaja

There are two things that I found 'interesting' about the white knight and its investment in Perwaja. Based on the write-up given, we learned that Zhi Yuan is a small company by Chinese standard, It has a registered capital of RM303 million and 2000 employees. More importantly, it is not stated anywhere that it has experienced in the business of manufacturing steel products. This raised questions of the sponsors' financial capacity and managerial expertise.


Diagram 4: Brief Write-up on Zhi Yuan

Secondly, Zhi Yuan, which would have 2.5 billion shares out of 3.06 billion shares at the "entitlement" date of the Rights Issue (ignoring new shares to be issued for the unlikely conversion of Perwaja-WA), will be entitled for 2 billion Rights shares. It is only willing to subscribe for 500 million Rights shares.  The responsibility of finding takers for 1.5 billion Rights shares will fall on Perwaja. Who would want to sink in RM300 million if the sponsor seems rather reluctant to do so?

This level of caution - plus the staggered capital injection in 4 tranches by Zhi Yuan - doesn't inspire confidence.


Diagram 5: Zhi Yuan's Rights Issue Subscription

If you go to Perwaja's announcement of Changes in Shareholdings (here), you will see that its director, Pheng is slowly disposing his stake in the company (here and here). After all, the share price has risen from RM0.10 in early April to just under RM0.30 today.

I think you would do well to follow in Pheng's footsteps in reducing or disposing off your investment in Perwaja.

Note: 

In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Perwaja.