Investors fail to cheer biggest ever fund raising move by HNB

Investors on Friday failed to cheer the biggest-ever fundraising exercise by HNB with its share price remaining subdued whilst overall the market failed to get a boost either.

HNB on Thursday announced a planned exercise to raise Rs. 15 billion via a rights issue as well as a private placement in a bid to woo investors from outside.

Tapping shareholders for the first time since 2004, HNB announced a one for six Rights Issue for both voting and non-voting shareholders. Rights for voting is priced at Rs. 219.50 per share and non-voting at Rs. 119.50 per share.

In total 59,589,892 shares will be issued with voting amounting to 47.9 million worth Rs. 10.5 billion and non-voting amounting to 11.689 million worth Rs. 1.4 billion, raising a combined Rs. 11.9 billion.

HNB also announced a private placement of 13.5 million shares at a price not less than Rs. 235 each, aimed at raising to Rs. 3.17 billion. The private placement will be offered to foreign and local institutional investors who will offer the highest price. Such investors will be identified by the managers to the issue. Those who participate in private placement will not be entitled to any rights shares.

The total fund raiser will be Rs. 15.06 billion.

The moves are to strengthen the capital/balance sheet of the bank and to support the overall business. The current stated capital of HNB is Rs. 5.36 billion.

Judging by how HNB share fared, the market overall and investors in particular appear to be less excited by the move. HNB closed Friday at Rs. 226.20, down by 80 cents though it peaked to an intra-day high of Rs. 229.50 from Thursday’s close of Rs. 227. The non voting share dipped more sharply by Rs. 6.10 to close at Rs. 130 whilst its intra-day peak was Rs. 135.50.

Though the market on Friday was mixed, with the ASPI growing by only two points whilst the MPI dipped by over 10 points, analysts were surprised by the performance of HNB share after the mega announcement.

The banking, finance and insurance index outperformed the market with its sector price index up 10 points.  Some of the peers of HNB sans announcements did gain. For example Sampath Bank rose by Rs. 1.20 though the industry’s private sector giant Commercial Bank’s voting share too dipped by 70 cents.

On Thursday when the bourse saw an overall rebound, HNB voting was disappointing too, dipping by 90 cents though non-voting gained by one rupee.

Whilst technically a Rights Issue could be nothing to cheer since existing shareholders’ stakes get diluted unless subscribed, usually in Sri Lanka investors react positively to any fresh fund raising that will reflect positively on future earnings.

Both voting and non-voting Rights are at a discount to the current market. The HNB Board decided on the new moves at its meeting on Wednesday, on which day HNB voting share closed at Rs. 227.90 and non-voting at Rs. 135.10. As per Wednesday’s closing, the discount on voting is Rs. 8.40 and Rs. 15.60 on non-voting.  By Friday this discount had narrowed to Rs. 6.70 on voting share and Rs. 10.50 on non-voting.

Some analysts said it wasn’t an attractive discount, hence the lukewarm reaction to the latest fund raiser by HNB. The bank’s book value per share was Rs. 80.80 at end 2010.

However, most analysts expect the market to show better respect this week, with some expecting a truer and a positive reflection of investor confidence on HNB share.

HNB in 2010 saw its net profit grow by 6.8% to Rs. 4.78 billion. It is yet to release 2011 FY first quarter earnings. TKS Securities forecast HNB’s FY2011 net profit grow by 21% to Rs. 5.79 billion and FY2012 figure to grow by 20% to Rs. 6.9 billion. The price earnings ratio of voting share in 2010 was 18.7 times and on non-voting it was 10.6 times. Forecast for 2011 is 15.4 times for voting and 8.8 times for non-voting.

TKS Securities in a recent banking sector report has recommended HNB as buy. It said the voting share offers good value on 15.4x 2011E earnings, 12.9x 2012E profit and 2.7x PBV. The non voting share which is trading near 43% discount to the voting share is attractive on 8.8x 2011E earnings, 7.3x 2012E earnings and 1.5x PBV.

“However, we believe such a disparity between the voting share and the non voting share is fundamentally unjustifiable because the difference between the voting share and the non voting share is only voting rights where all other benefits remain the same. We also believe that this gap would narrow down in the future. Therefore, given the expected loan growth of HNB coupled with its improving asset quality, lower cost/income ratio, healthy capitalisation levels, sustainable interest margins, islandwide reach and attractive valuations, we rate HNB BUY,” TKS Securities added.

Both rights issues and the private placements are subject to regulatory and shareholder approval.

In 2010 shareholders’ funds (Capital and Reserves) grew by 14% to Rs. 27.2 billion.

As at end 2010, HNB’s Tier 1 capital was 10.99, down from 11.10 in 2009 whilst the minimum requirement is 5%.Tier 1 and 2 was 12.64%, down from 13.16% in 2009 whilst the requirement is 10%.

Its advances to customers rose by 18.5% to Rs. 210 billion.

HNB last had a rights issue for voting and non-voting  shareholders in 2004 on the basis of 2 for 5 priced at Rs. 55 for voting and Rs. 33 for non voting. In 2005, it had an issue of underlying shares for GDR. The upcoming issue will also be HNB’s fifth rights issue since it got listed in 1971.