Oando Rights Issue – To Take or Sell


Tuesday, November 25, 2014 1.43 PM / Sriram Sekhar / Smartadvisors


Oando Plc has announced its rights issue recently and looking to  raise N 48.8 Bn and is offering new shares to shareholders in its book as at July 25, 2014 on the basis of one new share for every four shares held as at the qualification date. In a show of confidence, the rights issue is being offered at N22 per share, which is higher than the current price of 21.4%. The price of the stock has been going up since the rights issue opened, and is 5% up today. The application list for the offer will close on December 19.

In similar issuance, Oando had in 2013 raised about N55.2 billion from a rights issue, slightly above the initial target of N54.6 billion. The company had issued 4.548 billion ordinary shares of 50 kobo each to existing shareholders at N12 per share between December 2012 and February 2013 with the intention of raising N54.6 billion.

As we can see, the company has been having rights issue almost every year for the past several years. The reason for most of the rights issues have been to go in for large acquisitions, which are likely to bear fruit in the long term. However, this brings to question on how much dilution the company will incur, and what the impact will be on the individual shareholder. Let us look at a scenario were one investor has invested in all the rights issues, and another one hasn’t, and look at how the stock has given returns for both of them.

As we can see, someone who invested in the rights issues over the years has lowered the cost of acquisition, so that the current loss is almost 10% less than someone who has not subscribed to the rights issues over the years. The stock price has been declining since 2011 on the back of the global recession, and has only recently started moving upwards - albeit with a lot of volatility.

We had initiated coverage of Oando Plc with a Buy on 8th Sep 2014, and indicated that the stock is trading below its intrinsic value, and based on a DCF valuation, we estimate that the stock will touch N 36 in the medium to long term. Oando is a Pan - African multinational energy cooperation, and is the largest integrated energy solution provider in Africa and Nigeria's leading oil retailer. The company holds 16 licenses for exploration, development and production of oil and gas. With these robust assets, Oando reports net production of Oil & Gas at 42,500 boepd. The company is continuously acquiring the assets, as the strategic focus of the company is to become the market leader in African oil & gas exploration and production sector.

The company also recently completed its $1.65 Bn acquisition of ConocoPhillips' Nigerian assets, effectively transforming the company into one of the largest local oil producers. As a result of this acquisition, Oando's capacity will increase by approximately 10x to 50,000 barrels a day.

One of the biggest advantages for the company is that their gas pricing is fixed through long term contracts, so the current drop in crude oil do not significantly impact them at the moment. They have hedged in the upstream on their future crude production at $100/barrel for 3 years.

Oando recently distributed a total of N2.4 billion as cash dividends to shareholders, consisting of a final dividend of 30 kobo per share for the 2013 business year financial year and an interim dividend of 70 Kobo per share for the six-month period ended June 30, 2014, bringing total dividend per share to N1.

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