Golden Agri Resources’ proposed 17-for-100 rights issue is highly dilutive and we are downgrading the stock from BUY to Outperform It’s still unclear why the company needs the issue - at a 56% discount to TERP - given its low gearing and lack of imminent acquisitions. Factoring in the assumed debt reduction, net profits would be 3-4% after the issue. Our adjusted target price of S$0.41 implies 5% upside.

Rights issue is dilutive. Golden Agri Resources’ (GGR SP - S$0.43 - O-PF) proposed a 17-for-100 rights issue with a free warrants issue. The rights issue was priced at a 56% discount to yesterday’s theoretical ex-rights trading price (TERP). We see the rights issue as negative as it is highly dilutive while only raising US$215m. Moreover, the company has no imminent need for the cash as it can cover its working capital and capex needs for the next year. Only if the company were to announce a value-adding acquisition would the rights issue make sense.

Some upside remains. As a result of the proposed rights issue, we reduced the company’s expected debt by US$200m. A reduction in interest expense equates to a 3-4% higher net profit in 2009-10. After adjusting for the dilution, our target price declines from S$0.45 to S$0.41. Our new target price implies 5% upside to yesterday’s TERP price of S$0.39. With limited upside after recent outperformance, we downgrade our recommendation to Outperform.