Saturday, December 29, 2012

SP Setia and its betrayal to its warrants

Warrants is a fantastic derivative which is often very useful to its master holders. Whenever there are rights issuance, the issuer will usually be provided with a so-called sweetener to sweeten the exercise. The calling of rights happens when companies are in need of funds injection and it is often the fear of the issuer that minorities may not take up the offer - hence a sweetener called warrants are usually provided for free. It is like free baby shares (if you are picking up the shares rights) which has some value when it is opened for trading.

As for investors who would like to buy or sell warrants, its volatility is much higher following its mother share especially those that are close to being in-the-money. It is often good for shares that have good potential, undervalued and the warrants are still having some time to expire. The same cannot be said for shares that have near termed expiring warrants though.

SP Setia is a wonderful share despite me not so interested in property stocks. It is probably the best developer in the country for now. The properties that it built probably has gained much premium to its original costs due to the brand and quality that are associated with the company - hence, it is one of those few developers that can actually be traded substantially above its NAV. Hence, with the brand over time, the share is good but in the short term, its shares can be traded at any price as there is less fundamental involved in short term trades.

The weird thing is that shareholders were offered at RM3.95 for each ordinary and warrants at RM0.96 by PNB and Tan Sri Liew together, (CEO of the company) sometime around February 2012. At that point of time, there was much brouhaha calling that the offer was way undervalued etc. etc. There were calls for much higher price. In fact, the independent advisor, call for shareholders not to take up the offer as the so-called RNAV (revised NAV) is actually RM5.00 - so why sell?

At the end, many sold anyway and PNB (the main offeror) and partners were holding more than 79% at that point of time. See below.

On the other hand, the independent advisor asked shareholders to sell the warrants as it was almost 10 months to its expiry. Hence, the offerors ended up holding up to 88% of the warrants which has an exercise price of RM2.99. From there we know that there are less than 25 million warrants shares in holdings of the minorities - important to know the number of shares left for trading (but of course PNB can still sell). I do not know where these group represents - probably they are the believer of SP Setia really worth much more than RM3.95.

Boy, could they be regretting? As SP Setia's shares did not perform to its expectations in terms of price. Financial results on the other hand, was actually good. And if you look at the price below, its share price had a surprising huge drop within say 15 days from around RM3.60 to RM3.00. Why a sudden lost of confidence in the stock? Why and who is behind the selling? It is not one of those who owns more than 5% as no major announcements were made. Tan Sri Liew leaving SP Setia - again the same old news regurgitated?

Trading of SP Setia - ordinary share

It is ok to hold on to a stock which is trading at RM3.10 now as there is no expiry for SP Setia. As long as its performance holds and the company sells more houses, it will be back to RM3.95 in no time, I believe. The one that is running out of time is the warrant which is due to expire in 21 January 2013 and left with few more days to be traded (3 Jan 2013). It suffered a similar huge drop (but much much higher percentage drop obviously) following the mother share. Time is running out, but the mother share is still trading at above the exercise price of RM2.99. Whatever it is, the holders still need to come out with cash and pick up.

Trading of SP Setia warrants

I know that the warrants have been largely traded and as at yesterday, it is still out of the money. In fact, the same warrant share was traded several times on the same day (look at the volume) during the last few weeks as traders like shares that are trading at low price. One thing I know, PNB has exercised some 79 million warrants shares (or even more). There is also a need to increase the public shareholdings to 25%. But you will never know, the share price could be left (if it drops to RM3.00) with the warrant shareholders holding a worthless paper at the end of the day.

Remember, at the same time with the drop in price, SP Setia is proposing for several things - private placements of up to 15%, ESOS of up to 15%. All these are based on last 5 days traded price prior to the exercise and with discounts. If I am an employee or someone who is taking up the private placements, obviously the lower the share price the better. Or could it be someone is buying the warrants...

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