How to Factor in Shares Rights Issue

2016-08-06T17:49:05+08:00By |Investing, Shares|

Background on rights issues, what is your action required & how do you calculate the stock pricing after.

rights-graph

We will use Public Bank (PBBANK) rights issue in 2014 June as an example.

RENOUNCEABLE RIGHTS ISSUE OF 350,212,513 NEW ORDINARY SHARES OF RM1.00 EACH IN PUBLIC BANK BERHAD (“PBB”) (“PBB SHARE(S)”) (“RIGHTS SHARE(S)”) ON THE BASIS OF ONE (1) RIGHTS SHARE FOR EVERY TEN (10) EXISTING PBB SHARES HELD AS AT 5.00 P.M. ON 23 JUNE 2014, AT AN ISSUE PRICE OF RM13.80 PER RIGHTS SHARE (“RIGHTS ISSUE”)

Ratio: 1 : 10
Rights Issues/Offer Price: 13.8

pbbank

What is Rights Issues?

Rights issues is used by companies to raise funds.

Existing shareholders are given rights to purchase additional shares at a fixed price.

You have 10,000 PBBANK shares. At a 1:10 ratio, you have the rights to purchase 1,000 additional PBBANK shares at 13.80 per share.

Note that the new shares price is at the rights price of 13.80. And not RM1.00 which is the ordinary shares price at launch.

What can You Do with your Rights?

  1. You purchase additional shares by paying RM13,800 for 1,000 shares.
  2. You do nothing. However your shares would be diluted. In this case by 10%.
  3. You sell part of your shares rights to other investors to take up the remainder of your rights (aka ‘swallowing your tail’)
  4. You sell all the shares rights to other investors via your broker prior to the rights issues date (renounceable rights).

PBBANK share prices is trading at 20. You sell your rights for 1,000 shares at 13.80. Your gains is RM6,200.

How do you Factor in Shares Rights Issue?

rights-issue

Old shares: 10; New Shares: 1 (Ratio 10:1)

Cum price: 19.60

Offer price: 13.80

rights-issue-pbbank

adjustment-factor-pbbank

For the targeted purchase price, factor in the rights issue to reach your new target purchase price

PBBANK target purchase price: 17.72

Factor in rights Issue – New target purchase price: 17.72 * 0.9730983 = 17.243

For historical per share data (e.g. Earnings per Share, Dividends per Share), factor in the Adjustment Factor for all years prior to the rights issue. Often the company would factor in the dilutions in the next company annual report thus no additional work is required on your side.

What are Other Common Shares Changes?

Share Splits: Share prices can rise very high & the company may want to split the shares for increased trading liquidity. For example a 2:1 splits of a share at RM10 would see the new share price at RM5 (50%) & the number of shares doubled.

Share Consolidations (Aka Reverse Share Splits): The opposite of a share split to increase the share price & reduce the number of shares in the market. For example a 1 for 10 consolidation would see a RM0.20 share rise to RM2 (x10) & number of shares reduced by a factor of 10.

Bonus Issues: Similar to share splits but stakeholders do not need to fork out additional money. It is treated differently for accounting & legal purposes with a bonus issue creating new shares reallocating shareholder equity.

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