Mansek ELTY:A water-shed value?

Following Avenue Capital Group's non-participation in ELTY’s latest Rp3.2tn rights issue, when it was offered at a price lower than its previous acquisitions, it inevitably leads us to the following questions: (1) is the non-participation an exit plan or just a re-alignment of Avenue’s portfolio? (2) whether there is any deal behind the dilution that would compensate the theoretical loss the fund has to bear. With such ownership uncertainty, we put our recommendation to Neutral, at TP of Rp124/share.

Water-shed value? Avenue’s non-participation in the Right Issue price offer of Rp160/share raises the question of why Avenue would take a pass on the rights offering while the rights shares were offered cheaper than Rp200/share it paid when the fund first came in. ELTY claimed that Avenue is now more interested in the company’s infrastructure project which is evidenced in the latest discussion on new loan of US$55mn which likely will be given in the near term, following the earlier US$45mn loan related to the project. Thus, we wondered whether how the fund now sees ELTY’s value or the move is more of! a re-ali gnment of its portfolio.

Earnings visibility remains a challenge at toll road business. We see the possibility for Avenue to join back to the company at Bakrie Toll Road (BTR) level, when the IPO is up, however is unlikely to happen at least over the next year, as operation progress is considerably still slow, and at the same time the company is also still burdened by high interest expense which will come into realization in 2H this year. So, what would be the compensation of the theoretical losses Avenue will incur following its non-subscription, while awaiting for BTR IPO. The soonest compensation will likely be higher interest of the new loan disbursed by Avenue to ELTY as it plans to be in mezzanine loan category, which usually carries relatively high interest rate.

Downgrade to Neutral. Considering Avenue’s past experience in infrastructure project financing, we are convinced that the share dilution is more towards the re-alignment purposes, despite also the fact that Limitless Dubai still maintains its presence at the BSU level, which fade-out our concerns with regards to valuation. However, the reduced ownership on ELTY leads us to provide ELTY higher discount on its valuation. Therefore, we turn our recommendation to Neutral, with rolling TP 2011: Rp124/share, a higher 65% discretionary discount to its NAV11F.