Wednesday, June 20, 2007

Pacific Andes Holdings - Rights Issue Details and Comments

Today was the day that PAH went Ex-Rights (XR), and the price has adjusted according to the formula (Market Price + Rights Price)/2. In this case, the previous day's close was $1.41, thus theoretically, the XR price should be $0.965 based on the formula. PAH closed at $1.04 today, thus there was a 7.5 cent premium to the theoretical XR price. Computed backwards, the pre-rights price would have been about $1.55, which is an all-time high.

This phenomenon can be explained by the fact that PAH and CFG are rapidly growing their business, and from a business analyst perspective (as all value investors should be), this means that over time, the intrinsic value of the business and company can only increase. Without taking into account EPS growth, we are still likely to see positive results as ROE increases and net margin improves due to economies of scale in having more fishing vessels. Thus, the rights issue has achieved its objective of raising funds to grow the business, and Mr. Market has correctly factored in PAH's growth potential.

With the XR, it is perhaps prudent to explain the relevant important key dates and their interpretations for all PAH shareholders and other interested parties.

Ex-Rights Date (20 June, 2007) - This represents the date at which buying the shares in PAH no longer entitles you to the 1:1 rights to buy the share at $0.52. Dates before this date are considered the Cum-Rights (CR) period.

Record Date (22 June, 2007) - This is the books closure and record date for determining shareholders' entitlements to the rights issue. This will be T+3 from the last CR date.

Rights Trading Period (27 June, 2007 to 05 July, 2007) - This is the period whereby the rights are traded on SGX. Shareholders who were entitled to receive rights during CR period are able to sell their rights or buy more during this period. The rights are called nil-paid rights during this interim period as they have not been converted into shares yet. If rights are purchased, the buyer must still fork out $0.52 per right to convert it to one PAH share.

Rights Closing Date (11 July, 2007) - This is the final day for the rights, after which each right will be converted to one share in PAH at a price of $0.52 per right share.

As far as I know, there are no admin or brokerage charges which are applicable to the subscription for rights (could someone correct me on this if I am wrong ?). Thus, all it takes is x number of shares X $0.52 to get the amount to be paid. PAH is supposed to send an Offer Information Statement (OIS) to all shareholders to formally announce the rights issue and to inform about the indicative timetable of events.

The price of the rights in the market has to be such that a person buying the rights is no better off than buying the mother share (i.e. PAH). Thus, at the closing price of $1.04 today, and with a rights conversion price of $0.52 per right share, the theoretical market price for the rights should be at least $0.52. If it exceeds this, then it is more logical to buy the mother share directly rather than the rights. Thus, the rights' market price should keep pace with the market price of the mother share, to the tune of the formula Rights Market Price = PAH Market Price minus Rights Conversion Price.

If the fundamentals of the business remain strong, the temporary EPS dilution will not be an issue as the earnings will eventually catch up with the larger share float. If margins improve and economies of scale are achieved, EPS dilution may be minimal and intrinsic value can be maintained or even improved.

For the avoidance of doubt, PAH is only CR and not CD yet, even though the dividend of S$0.54 cents per share (post-rights) has been announced. This is because the dividend has not been approved at the AGM yet. Thus, shareholders who buy during the XR period will still be eligible to get the dividend as the CD period has not begun yet.

Boustead - Purchase of Remaining 10% of Boustead International Heaters

Boustead announced today that it was buying up the remaining 10% in Boustead International Heaters, which is the heater and waste recovery business unit in Boustead. The purchase will be done over 4 instalments (you can read more about it on SGXNet) and the total puchase consideration is about S$6.7 million.

Boustead is continuing to buy up minority stakes in their subsidiary companies in order to enhance shareholder value as the earnings from these units can then be fully recognized. This is in line with their strategy of selling off non-core units and focusing on their core competency, which includes Salcon (water and wastewater treatement) and Boustead Projects (Industrial real-estate solutions). More will be written on Boustead closer to the AGM.


littlecartnoodles said...

Hi ! Thanks for your post.

I've never experienced a rights issue before so I hope that you can help answer some questions ?

If I wish to subscribe to the shares, will I be required to attach a cheque to a signed response ? How much time is usually given for shareholders to respond ?

I'm currently working overseas so I'll have to make special arrangements with my family to make sure I get the OIS in time.

Many thanks.

musicwhiz said...

Hi littlecartnoodles,

I must be candid with you, this is my first rights issue as well ! I have been learning as I go along and asking more experienced colleagues and friends around me. Also, I am using Bonvests' rights issue indicative timetable as a guide for PAH rights issue (doc can be obtained through SGXNet). As for the OIS, I am also referring to the Bonvests OIS but the problem is that it is slightly different in that Bonvests makes use of dividend declared to offset amounts paid for rights shares. Thus, I think the PAH OIS should only include a coloumn for payment and to indicate if we wish to subscribe for more than what we were alloted.

The best thing to do is to get the OIS to take a look, which should be in the next few days. My blog will be updated as soon as this is received.

FYI, Bonvests' OIS can be accessed through MAS OPERA (do a search for Bonvests).

Cheers !

Anonymous said...

Hi musicwhiz, I'm .gh. Your Rights Market Price = PAH Market Price minus Rights Conversion Price is logical but i felt that it's theoretical. There will be people who can afford the lower rights price but not the PAH price which is doubled. Hence a premium for rights will be factored. Let's see what happens when the rights starts to trade come 27th. Regards.

musicwhiz said...

Yes, I agree it is a theoretical market price. The actual market price could possibly be quite different, but this is entirely dependent on market forces.

So yes, let's wait for the 27th to see how things go.

Anonymous said...

but pac andes already started drifting down to 90 cents.

musicwhiz said...

Hi Anonymous,

If Mr. Market offers you an even more attractive price for a good company, why are you refusing it ? Has the fundamentals of the company changed from 2 days ago till today ? If not, it's just a normal mood for Mr. Market and you should take advantage of his manic-depressive state instead of being influencd by it.

Good luck !

Anonymous said...

oh yeah. i'm willing to hold. but it's a short term glich in the price.

Anonymous said...

You are right that no brokerage will be charged when you convert the rights that you have to Pac Andes shares. You should be able to do so via local banks' ATM, but please refer to the OIS.

The bank will charge $1 fee for the rights application. Not sure if DBS has increased that to $2 in line with IPO fee.

Anonymous said...

Suggest you change this part "For the avoidance of doubt, PAH is only CR and not CD yet, even though the dividend of S$0.54 cents per share (post-rights) has been announced."

the proposed dividend is for the enlarged share base AFTER the rights issue, so new shares also benefit. it is $0.0054 per share, or 0.54 Singapore CENTS.

musicwhiz said...

Yes, sorry that was a typo on my part.

The dividend should be $0.0054 (0.54 cents per share) post-rights and not 54 cents/share.

Thanks for the correction !