Background: GMG Global is an integrated natural rubber company with its corporate headquarters in Singapore. It owns upstream plantations in Africa and has midstream processing operations globally.
In 2008, China-listed Sinochem International acquired a 51% stake in GMG, giving the company a crucial link to China, which is currently the world’s biggest natural rubber consumer.
Recent development: GMG proposed a 1-for-1 rights issue in October which would raise $344.5m. The new shares will be listed on 23 December 2011, having been approved at an EGM. Its share price has corrected by about 25% (from theoretical ex-rights price) since the announcement in October.
Our view
Calling for money from the broke. While a rights issue is theoretically a fair way for all shareholders to participate in future growth, most investors will not appreciate having to put in more money in the current market conditions, which we believe is the reason for the share price correction.
Pros and cons of a strong parentage. On the other hand, Sinochem’s deep pockets mean it is able to provide strong backing, and the proceeds may come in handy to pick up cheap acquisitions (80% of net proceeds earmarked for investments). We expect the investments may come in the form of additional plantation acreages to increase upstream exposure.
Valuations appeal. After the share price decline, valuations have become more attractive. However, investors would have to be patient, given that upstream investments are typically capital-intensive and will pay off only on a longer-term basis. Near-term headwinds include expected tempering of rubber demand and a 30% price decline since August. The stock is trading at 12x PER based on 9M11 run-rate.
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