Sunday, January 20, 2013

Terms we should be clear of investing in Bursa

While we thought we know some of the terms or exercise, do we actually know them that well?

Bonus issue

Bonus issue - Is it a bonus really? From below, assuming Company A announced a bonus 1 for 1, the paid up capital of the company changed from RM5 million to RM10 million. However, the Shareholders Funds does not change at all - remained at RM11 million. A bonus issue does not do anything to the fundamentals of the company.

An example of account for bonus issue
The individual shareholder will get an extra 1 share for every 1 share that he holds, but the price will be divided into 2 from its original price. For example, if the price is being traded at RM1.00 after the ex-date, it will be readjusted to RM0.50. Investors that chase after bonus is actually chasing after something that does not have any impact to fundamentals - just accounting adjustment.

Rights issue

Rights issue happens when the company is in need of additional funds and they are asking the shareholders to contribute based on the holdings that they have at the point of time during the ex-date of the exercise. Very often the rights is being issued at a discount to the traded price - otherwise no one will exercise. No major shareholder will issue a right if they do not have the funds to pick up the rights. It will reduce their holdings unless it is an exercise to force them to do so as the float of the company does not meet the requirements of Bursa.

A right will cause dilution to share price if it is issued at discount - and if the person does not pick up, he / she will face dilution in the value of the stocks price.

Warrants

Does not really seem to be so but a fund raising exercise as well. And it will dilute the value of the shares as well. Hence, as much as a warrant is welcome due to the sweetener nature of the stock as it is usually issued for free, over time it will dilute the share price. Usually, the warrant's exercise price is determined at ex-traded price of the company.

Private placements

Issued at a discount as well most of the time. Hence, it is value depreciat-ive to the stocks. Sometimes, the private placements of shares are issued to parties known to the major shareholders or even nominees holders. Since it is issued at a discount, and if issued to related friendly parties, it may not turn out to be a good thing for minority shareholders.

Share buybacks

Depends on the exercise and how much unused additional funds companies have. If the perceived value of the stock is low, this exercise will be positive for the company. However, be aware of major shareholders that used them for their own personal advantage. Do especially watch out companies that do buybacks but yet the major shareholders continue to sell their own stocks.

Share dividends

These are issued from the buybacks that the company did. Does not mean anything as if they are doing the buybacks might as well cancel off the shares as providing share dividends is not a reward to shareholders as sometimes mentioned.

To me, it is a misleading exercise.

MoU

Memorandum of Understanding - does not mean anything as it is just an agreement that says both parties understand that they will or may in fact not pursue in future - tie-ups, projects etc. A useless piece of announcement usually which is meant to mislead investors.

7 comments:

Art Featherpitch said...

I love that last sentence for MOU. How true.

David said...

good one, esp. on the share buyback analysis. just a few pointers to add:

the illustration on the bonus issue is referred to as transfer of wealth within the company's networth. yes, it's nothing but accounting tricks but this kind of tricks may be beneficial for shareholder in some good companies, take DIALOG for example. also, (special) dividends can be paid out from retained earnings/accumulated profits.

these days, free warrants are issued to sweeten deals involving rights issues. otherwise, shareholders unwilling to fork out the extra money will dump the shares. be wary of companies esp. REITS that often do rights issues.

Gark said...

The only beneficial item to investors is by doing share buyback and then cancel the treasury shares. However these is hardly done, usually all the buyback result in bonus issue which does not serve any purpose at all...

Otherwise all those bonus issue, share split, share consolidation, free warrant, rights issue etc all waste shareholder's money and/or asking for more money.

ahjunmy said...

TQ Feli to share out. Investors should know what they do.

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