Morningstar has recommended that investors do not subscribe to Bank of Queensland’s recently announced share purchase plan.
On Tuesday, Bank of Queensland (BOQ) announced the successful completion of its $250 million institutional share placement. The raise will result in the issue of 32.1 million new fully paid ordinary shares in BOQ at a price of $7.78 per new share.
The regional bank has also announced a non-underwritten share purchase plan (SPP) as it looks to raise an additional $25 million to strengthen its balance sheet and lift its capital levels to exceed APRA’s “unquestionably strong” Common Equity Tier 1 (CET1) capital ratio benchmark.
Morningstar analyst Nathan Zaia said the capital raise was a surprise to the market but noted that BOQ’s management wants additional capacity to accelerate its strategic transformation.
“The transformation strategy covers several areas, but management has not disclosed exactly how these additional funds will be allocated,” Mr Zaia said.
“Improving the lending process, investment in Virgin Money, improving customer experience, a productivity review, and strengthening risk and compliance standards are just some of the focus areas.
“While experienced CEO George Frazis says work to gauge the required investment is complete, shareholders should be given more detail before being asked for additional funds.”
Morningstar has downgraded its fair value estimate for BOQ by 9 per cent to $8.20. With shares on issue increasing 9 per cent and earnings in decline, Morningstar has assumed that dividends fall by 23 per cent to 50 cents a share.
“We recommend investors do not subscribe to the share purchase plan,” Mr Zaia said. “Despite the bottom end of the offer price range being a 6 per cent discount to our fair value estimate, it is within three-star rating territory and we prefer a greater margin of safety.”
Morningstar does not expect BOQ’s strategic priorities to drive a meaningful uplift in profitability for the bank.
BOQ’s share purchase plan will be priced at a 2 per cent discount to the average share price for the five days leading up to the offer closing date, expected to be on 20 December 2019.
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