Land & General Berhad - subscribe or be diluted - the ICULS dilemma.

SUMMARY: L&G have a cash horde of RM159M yet proposed a ICULS issue to raise RM77.8M to fund the purchase of a 14 storey office space in Putrajaya @RM575psf. This rights issue may potentially dilute current shareholder's holding by up to 50%.


L&G recently proposed a RM 77,779,589 renounceable rights issue of five years, 1%, ICULS at RM0.13 each for every ordinary share of L&G.

Translation: 
- Each shareholder will be entitled to subscribe for a convertible loan stock paying 1% interest, convertible at anytime within 5 years of issuance.
- The proceed of the rights issue will be used primarily for the purchase of a 13 storey strata office building being constructed in Putrajaya. (edit: apparently the vendor of the office block is a related party according to Focus news article 2 weeks back.)
- The ICULS may be converted in 2 manner; 1) by surrendering 2 ICULS for 1 L&G share, or 2)by surrending 1 ICULS and RM 0.13  for 1 L&G shares. Basically the ICULS can be converted to shares at RM0.26, regardless whether ICULS or cash is used to top up the conversion at a later date.

Impact:
Due to the 2 different methods for conversion (cash and ICULS), the impact on potential dilution cannot be determined beforehand. A illustration was provided in the announcement to illustrate the potential dilutive impact of this exercise.

Based on this illustration, we can foresee a potential dilution of between 25% to 50% for existing shares.

From a share base of 598,304,530, the number of issued shares can potentially double to 1,196,609,060!!!




Does L&G need the ICULS?
Based on the latest available result, L&G holds approximately RM159M, and is generating a steady operational cashflow of RM35M in the 9 months to December 2012. This cashflow is expected to remain (if not strengthen) due to the strong sale at its Elements and Foresta project in Kuala Lumpur.

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Analysis
I personally like the profitability outlook on the company for its current stable of project. The strong sales achieved in its current projects namely Foresta and Elements provided me with this confidence to invest in the company. Its current market cap is approximately RM 245M and based on previous announcement, the company can expect a profit of approximately RM120M for its 50% state in the Elements project alone.

It is also rather odd to me for L&G with its strong development expertise to be purchasing a strata office. The purchase price is RM 575psf, why can't L&G's management purchase a plot of land and built the structure themselves? 

Not being particularly familiar with the value for Putrajaya, I consulted some listing for offices in Putrajaya and found space to be listed for around RM 300 psf only. Note I am not a valuer. But I am not terribly excited with the proposed use of fund.

Conclusion
- Earning dilution is a reality for this proposed rights issue.
- The company may not really need the cash given its healthy cash horde of RM 150M.
- Even if the cash is needed elsewhere, does it really make alot of sense to suffer a dilution of up to 50% in return for a 13 storey office space in Putrajaya? I reckon no.
- However, if the proposal is adopted - I would subscribe, simply because I don't want to be further diluted.


Edit: If you are a minority shareholder keen on voting against this, do get in touch with me. Perhaps we can pool our vote/voice.