Wednesday, September 19, 2012

Oldtown: Dividends and placements should not mix

I am an investor who is trying to look at things rationally - sometimes perhaps overly rational.

What are the purposes of equity? Fund raising when you need them. Share them when you have excess cash. The sharing can be dividends, capital repayment (one of the popular one nowadays due to tax reasons) and even share buyback as by repurchasing, companies which have excess cash and deem their stocks to be undervalued will be reducing stock holders from the market - a positive.

Oldtown (a business which I like) just got listed a year ago. It promised 50% of dividends to be paid from its profits. Malaysian companies now tend to declare generous dividends which is a good thing - but sometimes has its limitations. It is no wonder that consultants advice for these directors and controlling shareholders to issue generous dividends if possible. Hence, 50% from profits is generous with Oldtown's decent profits.

Today, it announced of potentially issuing up to 10% private placement of shares. That will raise up to another RM60 million for the company and will increase the paid up share capital of the company. See below. The exercise will definitely dilute the EPS of the company further.

Now, what I boggles me is that it still has cash as seen below.

Debt is very minimal (about RM12 million) for the company especially after the fund raising from IPO done last year. It however puts the reason for this private placement as reducing interests costs?! My question is, isn't interests costs low nowadays, especially for companies that have good cashflows and balance sheet?

If it needs more funds, why not pay less dividends? It does not need to be gung ho and pays 50%. These kind of exercise is not right - of course sometimes you know the placements may not be as simple as it seems.


Malaysia Stock Talk said...

What about the cost of equity?

Raising fund from issuance of new share will cause the WACC to increase, resulting in higher required rate of return from the stock and thus, lower stock price due to higher discount

felicity said...

Precisely, that is finance what we studied in school on, but most of the times, these are not applied in the stock market.

This is a very valid point btw

Anonymous said...

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felicity said...


Anonymous said...

Hey Felicity, what do you think could possibly happen to Oldtown next week? I'm all technical, from what i can see there is some form of accumulation of Oldtown shares late last week. Do you think there is a possibility for Oldtown share to rally further considering the closing price of next five days could be the price they use an an indicative price of the private placement? Thanks.

felicity said...

Hi Yong

Please don't quote me as I am not into this kinda of technical but I suspect that Oldtown may allow the price to sip low before the pricing for the private placement is fixed. This will only then attract the private placement to be completed assuming that it is still looking for investors to pick up the shares.
If the investors are already identified prior to the placements, it is all the more possible that the price will be kept low.

Anonymous said...

Thanks for answering my question. Now, although they risk sacrificing some interest, isn't there also a possibility where they would push the price further in order to gain more capital from the private placement considering every cent they push means another 330k gain? just curious. Thanks again, I hope it's not too much troubles to answer my questions. cheers

felicity said...

I think they will choose to let the price simmer down. It is quite a trading stock. In most cases, they would already have identified who to raise the funds from except for some smaller portions. I think they would want to make the price attractive so that it would be picked up. At RM1.80 or so, the price is already much better than the 1 year ago IPO price of RM1.25.