How To Subscribe To Rights Issues Online

I used to subscribe to Inari rights issues before in 2015. At that time I used a nominee account. So my broker helped me to do everything and I just needed to ensure that I had enough money in my account to pay for the rights shares.

Now I mostly use direct trading account. That means there is no one to help me and I have to do it all by myself.

As it's my first time subscribing for rights shares on my own (current Jaks rights issue), I contacted the investment bank and they were kind enough to give me the instruction on what I should do.

First, I have to wait for the rights shares subscription form which will be sent to my house's mail box. I have to fill up the form and then go to bank to get a banker cheque as payment. 

After that I have to go to post office to buy a RM10 setem hasil and paste it on the form. Finally I have to mail the form and banker cheque back via pos laju or other courier service. 

Travelling to 2 places (bank & post office) and queuing up during this very moment is both time-wasting and risky.

Important Dates of Corporate Exercises

When investing in stock market, inevitably we will come across dividends, bonus issue, rights issue etc.

Companies will announce such exercises through Bursa announcement and it usually contains a few dates. These dates can be confusing especially for beginners.

Lets study these dates with real examples.

JAKS Wants More Cash

When I saw Jaks's Bursa announcement on rights issue on 13/7/20, I thought that it has finally fixed the price and date for its rights issue.

To my surprise, Jaks revised its original proposed rights issue in order to raise more money, from min/max RM130mil/RM160.9mil to RM200mil/RM289.6mil.

Most shareholders expect Jaks to be cash rich in a couple of years time, so they might be "shocked" by this increase in cash call.

For me, I actually don't feel particularly disappointed. I just think that Jaks needs the extra money to do something, be it to expand its business, pay the debts or compensation whatever.

Compared to private placement and huge bank borrowings, rights issue with "free" warrants might be a better way. However, I'm not too comfortable with the large amount of warrants.

I believe that the money raised will be put into good use. It will be superb if it is to subscribe to the remaining 10% of the power plant sooner to make it 40%.

I don't know the directors and I'm not sure whether they are credible, cunning or selfish. Perhaps I'm too naive. 

The original plan is 4 existing shares entitled to 2 rights shares (est 40sen) with 1 warrant.

The revised plan is 5 existing shares entitled to 8 rights shares (est 22.5sen) with 4 warrants (ex 50sen).

If you have 1,000 Jaks shares now, you are entitled to 1000 x 8/5 = 1600 rights shares and 800 warrants. You need to pay 1600 x 0.225 = RM360 to subscribe in full.

The new TERP is RM0.50 based on 5-day VWAMP of RM0.9443. So the illustrative rights share price of 22.5sen represents 55% discount to TERP which is almost similar to the original plan (53%).

A total of 888.8mil issued rights shares stated in the table above is based on minimum RM200mil. If all rights shares are fully subscribed from existing 651mil ordinary shares, the number of rights shares will be 1,041mil in which RM234mil can be raised. So the total shares will reach 1,692mil before conversion of warrants. 

The table below shows Jaks original rights issue proposal for comparison purpose.

As mentioned in previous post "Jaks Worth Only 40sen?", even though the number of shares increase substantially and EPS will be adjusted lower, there will be no dilution to existing shareholders who subscribe to the rights issue fully.

If Jaks is able to generate the anticipated RM200mil annual net profit (from 30% shares), its projected EPS will be 11.8sen base on total shares of 1,692mil. Refer "Jaks: Cash Cow In The Making?" for estimated profit and cash flow from its Hai Duong power plant.

Following the rights issue, Jaks share price will be adjusted lower accordingly. If its share price stands at 88sen on the ex-date, it should be adjusted to around 48sen if I'm not wrong.

This calculation is based on "before = after", p = adjusted share price.

(0.88 x 5) + (8 x 0.225) = (5+8)p + 4(p - 0.50)

p = 0.48

Base on projected EPS of 11.8sen, if fair PE ratio is 10x, target price will be RM1.18. This represents a potential 150% upside from 48sen.

When Jaks achieve 40% shares in the power plant, then potential annual net profit could be RM260mil with a projected EPS of 15.4sen. This is a potential 220% upside from 48sen if PE of 10x is given.

At 30% shares, a potential cash inflow of approximately RM300mil per year into Jaks is expected from the power plant operation. If the management is to give out one third or RM100mil to Jaks shareholders as dividend, it will be 5.9sen per share. This is a 50% payout from its net profit of RM200mil and a 12% dividend yield from share price of 48sen!

If Jaks choose to distribute only 20% cash from its power plant as dividend which is RM60mil, it will be a dividend payout of 30% from its net profit. Dividend per share will be 3.5sen per and dividend yield is 7.4% from 48sen.

If the dividend yield is consistently high, then the market might give Jaks a PE higher than 10x.

How much will Jaks distribute if its shares in the power plant rise to 40%? At this level, potential free cash flow attributable to Jaks might reach RM400mil annually.

Nevertheless, these calculations do not factor in the conversion of warrants in the future.

At this time the power plant in Vietnam has already fired up according to plan and the bleeding Pacific Star project should be able to be completed in 2020. Investors have to wait for year 2021 when both units of power plant run at full steam.

However, there are risks as well, such as:

- further delay or failure of the power plants operation

- net profit & cash flow contribution from power plant turn out to be way lower than expected

- management of Jaks refuse to pay reasonable dividends 

- management of Jaks burn the cash with bad investment

Once the power plants are up and running in full throttle, not even a 10th wave of Covid or further global recession or stock market rout can prevent Jaks from making consistent profit and receiving fantastic cash flow for 25 years.

Please note that this is not a buy/sell call on Jaks. I can't guarantee all the calculations and information here are correct and accurate. Invest at own risk!

Jaks Worth Only 40sen?

On 22 May 2020, the share price of Jaks closed at RM1.03. 

Then it announced a corporate exercise of rights issue of shares (4 existing shares : 2 rights shares) and warrants (2 rights shares : 1 warrant).

The next trading day, its share price fell 15% to close at 87.5sen. 

I guess this type of reaction occurs to most cash calls as investors might be worry of the potential dilutive effect.

It might be the case in Jaks, and might also be possibly due the lowish illustrative price of Jaks rights shares at 40sen per share.

Public Bank quickly downgraded its target price substantially from RM1.13 to RM0.77 on "potential dilution of the cash call".

Obviously it will be a massive 50% increase in outstanding shares immediately, and potentially up to 75% when all the new warrants are converted into shares. EPS will be adjusted lower by 33% & 43% respectively. 

However, is there any dilution effect on shareholders' holding?

If I cut a large pizza into 4 equal pieces and I get one piece, I have 25% share.

Then there is a second pizza which is half the size of the first pizza up for sale. It is cut into 4 equal pieces as well and I'm eligible to buy one piece or 25% of it. Even though this piece is 50% smaller than the first one, it's still a 25% share for me.

Then I am given a voucher to buy 25% of a new pizza which is only a quarter of the size of the first large pizza. If I use the voucher to buy it, my overall share in these 3 pizzas is still 25%.

There are more pizzas now, but I still have 25% of all of them. So, there is no worry about the dilution effect for existing shareholders after the rights issue. 

Is it worth to buy those extra pizzas? If the pizzas are tasty and value for money, why not? If the pizzas taste terrible and are expensive, why should I buy more?

Even if you don't want to buy those extra pizzas, you can sell your rights and vouchers to get cash. You lose your shares but gain cash. 

The rights shares price is proposed at 40sen as illustrative purpose. The actual price will only be decided according to the latest share price when the final announcement is made. 

This 40sen does not mean that the true or expected value of Jaks share price is 40sen.

When the announcement was made on 22 May, the closing share price of Jaks was RM1.03, while the 5-day VWAMP (Volume Weighted Average Market Price) was RM1.07.

The price of rights share is usually determined by giving a discount to the TERP (Theoretical Ex-Rights Price).

TERP as its name suggests, is the theoretical adjusted share price after the rights issues are exercised. It is calculated as:

market value before rights issue + cash raised from rights issue

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            total numbers of shares after rights issue

For Jaks case, the share price used to determine the market value is the 5-day VWAMP (RM1.07), while the outstanding shares that day was 651.1mil

market cap before rights issue =  RM696.7mil (651.1 x 1.07)

cash raised from rights issue =  RM130mil (325 x 0.40)

total shares after rights issue =  976.1mil (651.1 + 325)

TERP = RM0.85

The proposed rights share of 40sec each is a 52.94% discount to the TERP of 85sen.

The management mentions that rights share price will be at least 50% discount to the TERP. So it might change if the share price move substantially up or down from RM1.07 when the price fixing date arrives. 

I don't have a lot of experience regarding rights issue but I think it is common for such a huge "discount" given to the rights shares, even though in reality share price will also be adjusted accordingly so that shareholders do not get anything at "discount" or "free".

In other words, you may think that you get the rights shares cheap at 40sen and earn big from it immediately. Actually it's not, share price after the rights issue will be adjusted lower and you have nothing to gain or lose.

I have subscribed to Inari's rights issue with warrant before in year 2014. When the cash call was first announced in early July 2014, Inari's share price stood slightly above RM3, with 5-day VWAMP of RM3.09.

It was a 8:1 rights share + warrant. TERP was RM2.91 and the illustrative rights share price was just RM1.50, which was also around 50% discount to TERP.

Did Inari's share price fell to RM1.50? Of course no, not even close.

The final rights share price was fixed when the market share price was around RM3, so the rights share price was the same to the proposed figure of RM1.50.

For Dayang's rights issue in 2019, initially its proposed rights share price was at RM0.80, which was a 33% discount to TERP of RM1.14 and the 5-day VWAMP was RM1.23.

Dayang's share price initially dropped to around 90sen in respond to the cash call but later went up higher and higher to over RM2 before the rights issue ex-ed.

The final rights share price was fixed at RM0.92, with around 50% discount to TERP of RM1.83, while 5-day VWAMP was at RM1.92 which was 56% higher compared to the time when announcement was first made.

These show that rights shares offered at 50% discount to TERP is not uncommon.

Rights issues can be good or bad. If it is for good reasons, share price will likely go up. If not, share price will inevitably drop.

For Jaks, whether it's good or bad, it's up to you to decide.

Inari Rights Go Ex-ed

Inari's rights issue (8:1) + free warrants (1 rights share : 1 warrant) are ex-ed today. Yesterday's closing price was at RM2.87.

So Inari's share price is adjusted to RM2.64 today, which is 1sen lower than RM2.65 calculated by RHB.

How to calculate the ex-ed & adjusted share price?

As we know, we actually get nothing free from corporate exercises like free warrants, bonus issues etc, as the share price will be adjusted accordingly on the ex-date.

That means what we own before and after the corporate exercise will be the same.

For example:

Lets say if I have 8 Inari shares, I will be entitled to 1 rights share and 1 "free" warrant.

I have to pay RM1.50 for 1 rights share.

Inari's share price closed at RM2.87 before ex-date.

My cost is: (RM2.87 x 8) + (RM1.50 x 1)

After ex-date, I will have 9 Inari shares and 1 "free" warrant.

Lets say P = adjusted Inari share price after the corporate exercise. So the warrant price should be (P - RM2.00), as its exercise price is RM2.00.

As before = after, thus (RM2.87 x 8) + (RM1.50 x 1) = (9 x P) + (P - RM2.00)

P = RM2.646

Theoretically its new warrant price should be 64.6sen.

I'm actually not too sure whether my layman style calculation is correct or not, but the outcome seems to match.

According to RHB, Inari's fully enlarged share base upon completion of rights and new warrants will be 804.5mil, which is 28% more than 629.6mil currently. 

So there will be a significant earning dilution once the new warrants which expires in 2020 are fully converted into Inari shares.

However, just look at RHB earning forecast for Inari until FY17 (Jun-17). Its net profit is expected to grow more than double in 3 years from FY14 to FY17!

       Inari's financial results forecast by RHB

With its rather aggressive expansion plan which include a new production space in Bayan Lepas which will start to contribute soon, I am confident that Inari can continue to produce better results for the next few years.

Inari: Should I Subscribe To The Rights?

Inari's net profit for its FY14 (ends Jun14) will surely doubles the figures of FY13. 

Can it grow at the same pace in FY15? It is unlikely because FY14 results are contributed largely by newly acquired Amertron.

Anyway, Inari itself still registered impressive organic growth at 50%.

Currently its four Penang facilities which mainly cater for RF products are running at a utilization rate of 90%. Even if it does not expand the floor space, it probably still can expect a satisfactory growth from maiden contribution from 51%-owned Ceedtec & 100%-owned Inari South Key.

Forecast by Maybank KE shows that both ISK & Ceedtec may contribute about RM100mil revenue (10%) in FY15.

Inari South Key, which was established just in 2012, has its facilities in Johor which manufactures fiber optics products. It is expected to do well due to increasing popularity of high-speed internet and cloud computing.

Anyway, I still can't grab the concept of cloud computing...

It was a surprise to me that Inari announced a cash call (1-for-8 rights issue with 1 free warrant) in early July 2014, since it just did the same thing a year ago in May 2013.

The first thing that came to my mind was, earnings will be diluted again...

However, as Inari urgently needs to expand its highly-utilized facilities, this can be a positive move. Perhaps it is better than borrowing from financial institutions which charge interest. Better save the loan interest to distribute as dividends right?

The indicative rights issue price is at RM1.50 per rights share and the indicative new warrant exercise price is at RM2.00 (1:1).

At current share price of RM3.25, this represents a great discount though the ex-ed share price will be adjusted. Anyway, the price is just indicative only.

Investors who subscribed to previous rights and kept the warrants are surely laughing all the way. The old warrant exercise price is just 38sen.

The table below from Maybank investment shows the possible dilution after the rights issues & new warrants.

The proposed rights issue will raise about 80+mil new shares (about RM120mil). It is expected that most existing warrants (expires in June 2018) & ESOS will be converted to Inari shares in order to be eligible to subscribe to the attractive rights issues.

Almost two third of the fund raised will be used to expand its production (new land/factory/machinery). It might set up a new facility in Batu Kawan.

Inari's major shareholder Insas has said that it will subscribe fully to the rights issue. However, I'm not sure whether it will convert its existing warrants before this.

As at today, Inari's total shares stands at 541 million.

The rights issues exercise is expected to be completed in the final quarter of CY2014.

It's a way to force myself to add more Inari shares. So I think I will subscribe to the rights issues.

Tambun: Rights Shares & Free Warrants

Tambun indah recently proposed rights issue with free warrant together with employees' share option scheme (ESOS). 

It will offer 88,400,000 Rights Shares at an indicative issue price of RM0.50 together with 44,200,000 new free detachable Warrants on the basis of two (2) Rights Shares and one (1) free Warrant for every five (5) existing Shares in Tambun Indah held on the Entitlement Date.

After the rights issue and full exercise of warrants and ESOS, Tambun Indah's outstanding shares will increase from current 221 million to 371.28 million, a 68% increase with significant dilution of EPS.

The fund raised from such exercise will be used to fund several projects in Penang such as  Bandar Tasek Mutiara (Pearl City), Carissa Villas, Kelisa Residence, New Juru Industrial Park and Straits Garden (Jelutong). Pearl Residence, another residential project in Pearl City, is estimated to be launched soon after the success of Pearl garden, Pearl Villa and Pearl Indah. Carissa Villas is a gated & guarded residential development with 42 units of 3 storey terrace houses at Bagan Lallang, Butterwoth.

     Kelisa Residence at Seberang Jaya

Bandar Tasek Mutiara (Pearl City) township (a mixed residential and commercial development) will be developed in phases over a ten (10)-year period with an estimated gross development value (“GDV”) of over RM2.0 billion. The Carissa Villas, Kelisa Residence, New Juru Industrial Park and Straits Garden has an estimated GDV of RM41 million, RM39 million, RM36 million and RM180 million, respectively. The Carissa Villas, Kelisa Residence and New Juru Industrial Park will be developed in phases over a two (2) year period and the Straits Garden will be developed in phases over a three (3)-year period.

If the raised fund is used wisely to increase its profit, then the rights issue is good. If not, then the dilution may make the stock less attractive.

Rights Issue: Good or Bad?

When a listed company declare rights issue, it means that the company wants to raise more money (cash!) by "selling" more new shares to its existing shareholders, not to the non-shareholders. Will it benefit  the existing shareholders?

Whether the rights issue benefit the shareholders depends on the purpose of the rights issue and how the company is going to spend the money raised. If the company is not making profit, has lots of bad debts, is difficult to get loan from banks and wants to get more money from the existing shareholders to pay debt or finance their operation, then this is not good.

If a financially sound company wants to get the money to expand its business or acquire other company's stake, then it should be good to shareholders.

Anyway, when the rights issue is exercised, total outstanding shares of the company will increase and the earning will be diluted.

The new shares issued usually will come at a "discount" price. Existing shareholders are given the option whether to buy it or not. Even if the shareholders buy the new shares at that "discount" price, it doesn't mean that they will gain anything, because the new share price after the rights issue will be adjusted.

For example:

Mr A has 1000 shares of company X at RM1.00. (total capital RM1000)

Company X declares rights issue of 1 new share for every 2 existing shares at RM0.50 each (50% discount!).

Since Mr A has 1000 shares, he is entitled to purchase 500 new shares at RM0.50 each.

If he decides to exercise his rights, then he needs to pay company X RM250 to buy this 500 shares at RM0.50.

So now Mr A has 1500 shares in company A that cost him RM1250 in total.

After the ex-date for the rights issue, the share price of the company will start at RM0.833, down from RM1.00 before ex-date.

As 1500 shares x RM0.833 = RM1250., Mr A does not gain or lose money from the rights issue. What has changed is that Mr A now has more shares in company X.

If Mr A decides not to buy the new shares, he can sell his rights of 500 new shares at RM0.334 per share and gain a net cash of RM167. After the ex-date when the share price falls to RM0.833, his existing 1000 shares will give him RM833, which is lower than his initial investment capital of RM1000. However, since he already gains RM167 from the sale of rights, in the end he also does not gain or lose money from the rights issue (RM833 + RM167 = RM1000).

Sometimes a company will give "free" warrants together with the rights issue. In the end, the final share price will also be adjusted and we can't earn any money from it. So the "free" and "discount" here are actually not really free and discount. There is no free lunch.

After the rights issue, the earning per share is diluted but it does not really affect the shareholders who buy the new shares under rights issue as their total shares also increase. For those who do not exercise their rights, their shareholding in the company will be diluted.