Friday, 6 November 2015

Earning Dilution - ICULS

Reminder: All information provided in this post might not be accurate

Irredeemable Convertible Unsecured Loan Stock (ICULS) is another way for a listed company to raise money besides rights issue and warrants.

As the name implies, ICULS is a loan which can be converted into common stocks/shares.

Basically investors who take up the ICULS will "lend" their money to the company and in return, the company will pay interest to them, usually twice a year.

Holders can convert their ICULS into the company's shares at any time within the conversion period. 

From what I learned so far, it seems like all ICULS are compulsory to be converted to common shares. So, it will certainly cause earning dilution to the company in the future unlike warrant which may not be converted if they are not "in the money".

Unlike warrants also, ICULS holders do not need to pay extra cash when the ICULS are converted to common shares.

They only need to surrender their ICULS at a conversion price.

How much earning dilution can ICULS bring to a company?

Well, most of the time the maximum numbers of new shares from ICULS conversion will be given in the circular to shareholders while issuing the ICULS.

So, it's easy, just refer to the circulars to know the extent of potential earning dilution.

Lets take SAM Engineering as an example.

In order to acquire engine case manufacturing business in early 2012, SAM "borrowed" RM135mil cash through issuance of ICULS.

Below are part of the salient terms of the ICULS found in the circular.


Issue size : RM135mil
Issue price : 100% of the nominal amount
Form & Denomination : RM1.00 each
Conversion price : RM2.10 nominal amount of the ICULS per SAM share
Conversion mode : by surrendering ICULS with an aggregate nominal value of at least equivalent to the conversion price
Maximum new shares from ICULS conversion : 64,285,714

With conversion price of RM2.10, this means that potential ICULS buyers know that they can buy SAM's shares later at RM2.10 each. 

As the total loan is RM135mil, it can be converted to 64,285,714 new SAM shares. (135mil divided by 2.10)

I only knew about this recently. Previously, I looked at the information on my trading platform which looks like this:

The "Share Issued" shown above is RM117.524mil as at 5th Nov 2015. 

I thought the number of new SAM shares after all ICULS converted will be 117.5mil, and this is the main reason why I didn't invest in SAM in mid 2015.

Apparently I was wrong.

This RM117.524mil should be the total amount of loan remaining out of RM135mil issued, which means RM17.5mil has been converted into 8.32mil new SAM shares.

The maximum new shares is only 64.3mil, and from 5th Nov there are potentially 56mil more new shares when all ICULS are converted.

From its circular as well, it is mentioned that SAM's total shares will go up to 135.167mil once all ICULS are converted.

If I expect SAM's FY16 net profit to be RM60mil, my projected fully-diluted EPS for SAM will be 44.4sen.

Here is another example,


Issue size : RM77,779,589 (equivalent to 598,304,530 units)
Issue price : 100% of nominal value of RM0.13 each
Form & Denomination : RM0.13 each
Conversion price : RM0.26 for every one new L&G share
Conversion mode : by surrendering nominal value of ICULS equal to conversion price, OR by surrendering RM0.13 nominal value of ICULS together with cash such that in aggregate it equivalent to conversion price
Maximum new shares from ICULS conversion : 598,304,530

At conversion price of RM0.26, one would expect that the maximum numbers of new L&G shares from ICULS conversion is 77,779,589 divided by 0.26 = 299,152,265 shares.

However, it is stated that maximum new shares is 598,304,530.

This is because of its conversion mode, in which ICULS holders can either choose to surrender RM0.26 ICULS for a new share, OR surrender RM0.13 worth of ICULS and top up RM0.13 cash to get a new L&G share.

The latter works like a warrant with an "exercise price".

The maximum scenario assumes all holders will pay RM0.13 to get a new L&G share, which is unlikely I think.

So we will not know the exact numbers of new shares until the ICULS reach maturity. We only know that there will be minimum 299mil new shares and maximum 598.3mil new shares.


Issue size : RM52,602,650
Issue price : 100% of the nominal value
Form & Denomination : RM1.00 each
Conversion price : RM1.00 for every one new TGUAN share
Conversion mode : by surrendering the ICULS with the aggregate nominal value equivalent to the conversion price
Maximum new shares from ICULS conversion : Not mentioned

In Thong Guan's case, the maximum new shares from ICULS conversion is not mentioned in the circular.

We can know that from conversion price of RM1.00 and straight forward conversion mode, the maximum new TGUAN shares will be 52.6mil once all ICULS are converted.

Nevertheless, this is not the end of the calculation of EPS dilution from ICULS conversion.

Just look at the simple formula of EPS below,

Net profit attributable to shareholders

Weighted average numbers of ordinary shares

After the conversion of ICULS into ordinary shares, the denominator will increase thus EPS will drop.

Nevertheless, net profit attributable to shareholders will also increase at the same time as the company will save on the loan interest payable to ICULS holders if ICULS are converted.

If the company issue RM100mil worth of ICULS with interest rate of 4%, then it will "save" RM4mil a year if all the ICULS are converted into ordinary shares.

This RM4mil "saved" is subjected to normal tax like other profits in the company, so we need to deduct the tax rate to get the actual figure.

So, for EPS dilution from ICULS, the formula will be:

Net profit attributable to shareholders + convertible loan interest (1-tax rate)

Weighted average numbers of ordinary shares + new shares from ICULS conversion

For convenience, personally I think I will not include the interest saved in my calculation of EPS dilution from ICULS conversion. It's always better to overestimate the dilution effect rather than underestimate.

As I only learn all these stuff by myself from online search, I can't be sure that all the information here are correct as I might interpret them wrongly.

So please correct me if I'm wrong.

For EPS dilution from warrants conversion, please refer here.


  1. Hi BD, again, thanks for the selfless sharing.
    For TGuan case, they also set the conversion period to be after 2 years. I suppose the management needs time to use the money borrowed from ICULS to grow the business in stages that take years, so the EPS will take times to grow, and in order to avoid diluting the EPS too much at early stage, they set that 2-years rule. I wonder if this is a possible reason ? and not sure if this is a common practice for company issuing ICULS ?
    I think ICULS holder will be triggered to do conversion when they want to sell. Otherwise, they can continue to hold the ICULS as it's price will grow together with the stock price.
    Besides, I think it is not a bad idea to hold ICULS until due date especially for a company that give dividend lower than the ICULS' interest. In this way, ICULS holder can enjoy both capital appreciation (same as stock) and higher interest return (compare to dividend return in stock) at the same time.

    1. For me, company gives ICULS to raise cash is just like a private placement but the company get the cash first, and give the new shares later to avoid instant earning dilution. To compensate for the dividends, the company pay interest to ICULS holders instead. With less circulating shares, the company will look more attractive in term of EPS & DPS.

  2. my way of looking these corp exe is easy, if the current sp is lower than the subscribed price, than buy it.

    This theory apply to private placement, right issue, as well as ESOS, or acquisition via issuing shares

    For example, if the share price 25cents, if the co proposes right issue at an issue price of 50cents, bcoz the par value is 50cents, then hentam.

    Recently im studying this kind of kangtao investment style, n found many successful cases

    like Voir, EAH, ifcamsc, Sanichi, AWC, Geshen, BHS......

    There seems like a invinsible hand behind.......hehehe

    1. Hey, I have informed you earlier right? Pls alert me if you find this type of good kangtao. I'm not kidding man :)

  3. Hi BM: I saw this comment for you from i3investor. I did not read your write up nor the comment in detail. I am not sure if it is right or wrong but it sounds kind of friendly feedback. Just cut and paste here in case you are interested but does not see it at i3investor. Please forgive my busybody.
    Posted by vaentec > Nov 8, 2015 03:32 PM | Report Abuse

    Hi bursadummy, your article has some major flaws in it.
    Please recheck your facts & understanding of ICULS and then re-edit this.
    It might mislead amateur readers.
    Conversion price means you need to pay that amount per share if you want to convert your ICULS into a real share. Example: Conversion price for L&G-LA is 0.13, meaning you have to pay 0.13 per share to convert it to the L&G share. And it is highly unlikely that they WILL NOT do this. In fact, it's common sense to do this. One L&G-LA is worth 0.31 now. One L&G is 0.44. Will you use 2 L&G-LA (2*0.31 = 0.62) to exchange for one L&G (0.44)?
    Of course not. You will use one L&G-LA(0.31) + 0.13 to convert to a L&G.
    I hope you can benefit from reading this comment.
    (Moreover, the dilution effect has already been factored in the day this announcement is official. Please refer to the stock chart of all the companies above during the time when this ICULS take effect. The market is very efficient even though not perfect)

    Don't be discouraged.
    It's good of you to share your ideas here.

    1. Thanks bsngpg, you're definitely not busybody. Thanks to vaentec also for the feedback. I'm not discouraged by this comment as it's the fact I still need to understand this further but I just can't get what I want from the internet. That's why I wrote "disclaimer" in the beginning and end of this post. I'm not sure how LA is priced and traded in the market.

      "Conversion price means you need to pay that amount per share if you want to convert your ICULS into a real share". Does vaentec mean that investors have to pay more cash when converting their ICULS into shares?

      As for L&G case, I assume that original LG-LA holders have their cost price for one L&G share at 26sen. At mother share price of 44sen, they have already gained from capital appreciation so are unlikely to use 13sen ICULS and pay 13sen cash to convert to one L&G share. However, for those who purchased LG-LA from open market at 31sen now, it is more worth to pay 13sen to get one LG share. Am I right?

      I don't know how to edit this post at the moment as I'm still not sure... The purpose is actually just to talk about EPS dilution and not about ICULS.

  4. lol, i feel like a monkey playing tricks in front of Budhha, ur Geshen, hhgroup, Johotin all run like mad men, but I all early let go liao.

    If u dun feel hesitate to play with me this little monkey, u may whatapp me at 016-6071100

    1. I won't use whatsapp, hope u can share here, hehe

  5. BD, i still holding Geshen. Can advise if this stock can hold for long term or should profit taking?

    1. Hi alex, I can only say that I will hold for longer term.

  6. Hi BD, another sound piece of analytical work again! thanks and I truly benefit so much from your sharing...

    1. I'm glad that someone benefit from my sharing, thanks :)

  7. Can u comment on ASB after they convert iculs?