Renaissance Services -Equity Report -22-07-2012

Equity Injection through Mandatory Convertible Bonds…

Financing through Quasi Equity Route: As part of its capital injection plan announced during end 2011, Renaissance Services (RNSS) has finalized to raise about RO 42 million through issuance of Mandatory Convertible Bonds (MCB) on a rights basis. We believe that the company has adopted this quasi equity structure to ensure lower coupon payment and also giving higher returns to the participating shareholders through issuing the convertible securities at higher discount. The presence of mandatory equity convertibility nature of this instrument in turn provides Internal Rate of Return (IRR) of about 16.9% assuming the investor holding the bond over the next five years.

Overall, we recommend a Subscribe rating for the long term investors who can hold the bond till full convertibility. While the caveat remains on the lower coupon payment over the first two years and also the price risk associated with the bonds during each conversion. This may in turn limit the MCB subscription of the short to medium term investors, who would perceive the risk factors and avoid the issuance. On the other hand, despite discounted valuations we recommend a Neutral rating on the stock with the revised fair value of RO 0.512 owing to the prevailing earnings instability and the financing uncertainties.