Successful Completion of Rights Offering Expected to Increase Annual Sales by 100 Billion KRW
Annual Interest Expense 10 Billion KRW... "No Debt Repayment Cost from Rights Offering"
Subsidiary's Business Suspension Likely to Have Low Impact on Financial Stability
[Asia Economy Reporter Yoo Hyun-seok] Isu Petasys is raising funds for facility investment through a large-scale paid-in capital increase. Due to the impact of COVID-19, demand for its main product, network equipment, has increased, creating a greater need for expansion. There are also voices calling for measures to improve the financial structure as annual interest expenses exceed 10 billion KRW. The company plans to repay debts, including borrowings, by selling assets of its subsidiary Isu Exaboard, which has decided to suspend operations.
◆ Expanding production capacity with a 60 billion KRW paid-in capital increase = Isu Petasys announced on the 17th through a public disclosure that it has decided on a paid-in capital increase of 60 billion KRW through a rights offering followed by a general public offering of unsubscribed shares. The planned issue price per share is 2,730 KRW, and 21,978,021 new shares will be issued. The record date for new share allocation is next month on the 17th, and the expected listing date is November 18th.
The large-scale paid-in capital increase inevitably dilutes shareholder value. The number of newly issued shares corresponds to about 53.2% of the total shares. The largest shareholder, Isu Corporation, holds a 22.78% stake. The company explained in the securities registration statement that the largest shareholder is expected to participate 100% in this paid-in capital increase subscription.
Of the 60 billion KRW raised, Isu Petasys will allocate 42 billion KRW to facility funds and the remainder to operating funds. Specifically, 27 billion KRW will be used for new facility investments such as wired networks, and 15 billion KRW will be used for constructing new buildings for new facility lines. The period is from 2022 to 2024. Additionally, 18 billion KRW will be spent on operating funds for purchasing raw materials and supplies.
With the shift to an untact society due to COVID-19, including remote work and online learning, the 5G and data center markets have rapidly grown. Demand for server products has increased, necessitating facility investment.
After the facility investment is completed, cumulative sales are expected to increase by 420 billion KRW over the next five years. The final production capacity (CAPA) expansion due to the facility investment is projected to reach about 4,000 square meters per month. An annual sales increase effect of 100 billion KRW is anticipated.
Isu Petasys is a printed circuit board (PCB) manufacturer. It electrically connects various electronic components and mechanically fixes them. Its performance has been stagnant in recent years. In 2018, it recorded sales of 560 billion KRW and operating profit of 7.5 billion KRW. In 2019, sales were 514.2 billion KRW with an operating loss of 24 billion KRW, showing poor performance. Last year, sales remained similar at 514.2 billion KRW, but operating profit turned positive, achieving a profit of 2 billion KRW.
In the first half of this year, it achieved sales of 216.7 billion KRW and operating profit of 13.3 billion KRW, increases of 16% and 167% respectively compared to the same period last year. The improvement in performance was attributed to increased orders and strong performance of overseas subsidiaries. The average monthly order amount in the first half of this year was 31 billion KRW, a 19% increase compared to the average monthly order amount in the second half of last year. Additionally, the Chinese subsidiary turned profitable in the second quarter due to expanded sales of network equipment in the first half.
◆ Debt ratio at 570% and annual interest expenses of 10 billion KRW = Isu Petasys bears a heavy burden of borrowings. The borrowing dependency ratio was 60.48% on a consolidated basis and 39.50% on a separate basis in the first half of this year. Last year, these were 62.58% and 46.03%, respectively. Also, short-term borrowings in the first half of this year were 220 billion KRW consolidated and 98.7 billion KRW separate. Long-term borrowings were 10.1 billion KRW and 3 billion KRW, respectively. As a result, annual interest expenses reach 10 billion KRW. Isu Petasys’ annual interest expenses were 9.1 billion KRW in 2018, increased to 10.8 billion KRW in 2019, and slightly decreased to 10 billion KRW last year.
The debt ratio is also high. The consolidated debt ratio in the first half of this year was 570.61%, nearly 70 percentage points higher than last year's 498.05%. It is expected that the debt ratio will decrease once capital is expanded through the paid-in capital increase. Shinhan Financial Investment recently predicted in a corporate visit report that Isu Petasys’ debt ratio will fall to the 200% range after the paid-in capital increase.
The company expects additional financial burdens to decrease. In June, Isu Petasys decided to suspend operations of its subsidiary Isu Exaboard. This company manufactures high-density interconnect (HDI) and flexible printed circuit boards (FPCB) used as components in mobile phones. It recorded sales of 167 billion KRW and a net loss of 10 billion KRW in 2018. In 2019, sales were 142.7 billion KRW with a net loss of 40.8 billion KRW, and last year sales were 121 billion KRW with a net loss of 11.2 billion KRW, continuing its deficit.
The company explained in the securities registration statement, "We have decided to suspend operations of Isu Exaboard, a major subsidiary that has continued to experience poor business performance," and "We plan to sell assets held by Isu Exaboard and repay debts including borrowings." It anticipated that the possibility of deterioration in financial indicators would be limited.
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