In a week where knife-dodging was the name of the game, it wasn’t too hard to find the biggest “falling knife” in the market – United Engineers (SGX: U04). Shares in the diversified engineering company were some of the worst performing amongst the mid-caps. They are down around 20% to $2.30 at the time of writing. Meanwhile, the Straits Times Index (SGX: ^STI) is down around 1% for the week.
United Engineers, which recently joined the ranks of the midcaps from the small-caps index, has its fingers in a number of pies. It develops properties, it is involved in environmental engineering and it also manages buildings. More recently, though, it bought a 44% stake in WBL Corp (SGX: W01) that it didn’t control from Straits Trading Company (SGX: S20). The acquisition added car dealership in China to the group’s portfolio of interests.
However, the purchase of the S$1.25b car dealer also bloated the company’s balance sheet. This week’s announcement to launch a rights issue will help pay down debt.
A rights issue entitles existing shareholders to buy additional shares in proportion to the number of shares they already own in the company. In the case of United Engineers, the rights issue, which is still subject to shareholders approval, will allow existing shareholders to buy one new share for every share that they already own.
The new shares are expected to cost $1.50 a pop, which works out at around a 50% discount to last Friday’s close of $2.86. The rights issue could raise about S$460m, which is roughly the price that United Engineers paid for the purchase of WBL.
Existing shareholders are not required to take up their rights. However, buying the new shares will enable them to maintain the proportion of the company they currently own.
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