WCEHB-PR: Is It Worth Investing? [Updated]

WCE Holdings Bhd ("WCEHB") is carrying out its rights issue of Redeemable Convertible Preference Shares ('RCPS') on the basis of 2 RCPS @RM0.24 each for every 1 ordinary share held, plus 1 free warrant for every 4 RCPS subscribed for.

WCEHB-PR is the rights to subscribe for the RCPS. It has been traded since October 25 and will cease trading on November 4. This means today is the last day of trading of WCEHB-PR. 

Note: WCEHB-PR is not for speculation. After today, there will be no more trading of this rights, WCEHB-PR. You have no option but to apply for the RCPS at RM0.24 each. The deadline to submit your application is 11 November 2019. You can download the prospectus here and the application form here.

There are 2 options for the RCPS to be converted into ordinary shares. They are:
Option 1:
To convert 1 RCPS plus RM0.04 each to 1 ordinary share

Option 2:
To convert 4 RCPS to 3 ordinary shares

The exercise price for the warrant depends on the time of conversion:
First Exercise Period 
1-5 years: RM0.39

Second Exercise Period 
5-10 years: RM0.45

Why WCEHB rights issue is worth considering?

1. WCEHB owns 80% of the highway concession known as the West Coast Expressway (see the map below). This RM6 billion highway is still under construction but 3 sections (Section 8, 9 and 10) are now open (here). 

Map of West Coast Expressway

2. WCEHB is a marginally profitable company, not a loss-making concern.

3. WCEHB share price has dropped sharply since the announcement of this rights issue. From the chart below, we can trace the decline from around RM0.95 to RM0.40 since the announcement was made on 26 March 2018 (here) to the sending out of the circular to shareholders on 25 July 2019 and finally to the fixing of the ex-date on 10 Oct 2019. These 3 dates are denoted on the chart as A, B and C. 

Chart: WCEHB's daily chart as at Nov 1, 2019_12.15pm (Source: Malaysiastock.biz)

4. After the share has gone ex the entitlement, the theoretical ex-rights price was computed to be about RM0.36. And, the share price continued to drop until it reached RM0.305 yesterday. At the time of writing, WCEHB has recovered somewhat to about RM0.33 while WCEHB-PR was trading at RM0.025.

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It is fair to assume that the share price will slowly recover after the rights issue. Let's imagine WCEHB were to go back up to RM0.60 after 1 year. What would be the value of the RCPS & the warrant?

Once If the share price touched RM0.60, the preferred option to use for conversion would be Option 2. Why?

Under Option 2 (1 RCPS + 4 sen = 1 ordinary share), WCEHB RCPS will be worth RM (0.60-0.04) = RM0.56.

Under Option 1 (4 RCPS = 3 ordinary shares), the RCPS would be worth RM0.45.

The market will automatically value the RCPS using Option 2. To do otherwise would lead to value destruction. Markets everywhere abhors value destruction.

Next, what would be the value of the warrant with exercise price of RM0.39?

We are using the exercise price for the First Exercise period and we shall assume that the warrant will be trading with no premium nor at a discount.

The warrant would be worth RM (0.60-0.39) = RM0.21.

Potential profit for investing in 4 RCPS (in RM)

= [Total value of 4 RCPS and 1 warrant] 

                                less 

   [Total cost of buying the rights and subscription cost]

= [(0.56 x 4) + (0.21 x 1)] – [(0.025 x 4) + (0.24 x 4)]

= 2.45 – 1.06

= 1.39

This means you will get a return of 131% for a 1-year investment period.

Based on the above, I think you can consider applying for WCEHB's rights issue of RCPS or to buy the WCEHB shares in the market now. However the return for investing in WCEHB RCPS (of 131%) would exceed that of investing in WCEHB shares (of about 81%).