Markets
Issuing more shares good for shareholders
Koon Yew Yin 
Eversendai’s private placement is different from other usual private placements
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EVERY businessman wants to build up his company to list on the stock market so that he can create more shares to sell to the public at a higher price above par value.

To get his company listed is like getting a licence from Bank Negara Malaysia to print money.

After he has achieved a good track record in accordance with the rules set by the Securities Commission, he can issue new shares or at the same time, sell his existing shares to the public via an initial public offer (IPO).

With the cash he receives from the IPO, he should be able to expand his business to make more profit.

 

Rights issues

If he needs more money to do more business, he can call for a rights issue.

Shareholders must realise that this corporate exercise to get more cash is cheaper than borrowing money from banks.

On this note, the businessman can issue one new share to every shareholder holding four, five or any number of shares (to be decided by him at a price that he determines).

To encourage investors to buy the rights issues, he would issue one convertible warrant for every rights share. The warrant conversion price is usually the average price of the five trading days before the last day to buy the rights share.

Usually, the warrant has a lifespan of five years. Since the conversion price is fixed, the price of the warrant would move in tandem with the share price.

At the initial stage when the rights shares and warrants are issued, the price of the warrant is usually much cheaper than the share price because of the cost for converting it to a share.

Investors with good foresight would prefer to buy warrants, especially if the company has good profit growth prospects. Instead of buying one share, he can buy a few warrants.

As I said earlier, the business owner would have received a lot of cash from the rights issues. He will receive a lot more cash when the warrants are converted within their five-year life span.

As you can see, giving out free convertible warrants to shareholders is like giving cash angpows to shareholders. Unfortunately, I know of many companies with all the required qualifications – do not issue free convertible warrants to benefit their shareholders.

 

Share placement

After the business owner has undertaken all the abovementioned corporate exercises, he can place out not more than 10% of the total issued shares to institutional investors in the likes of the Employees Provident Fund (EPF) or other financial institutions to generate more cash to run his business.

The norm is such that he has to give a discount of not more than 10% from the average price of the last five trading days.

Unfortunately, many uninformed shareholders would feel cheated because the placement price is cheaper than the price in the open market. They would rush to sell all their holdings, resulting in a rapid drop in the share price.

In all fairness, shareholders must remember that unless the company has good profit growth prospects – the most powerful catalyst to move the share price – financial institutions would not buy placement shares even with a 10% discount from the average price of the last five trading days.

Shareholders must also bear in mind that financial institutions which have bought such a large amount of shares with a discount will ultimately support the share price. They would buy whenever the price falls.

Recently, Eversendai Corp Bhd proposed to place out not more than 10% of its total issued shares. This private placement is different than other usual private placements that we have seen.

The usual private placement is done straight away at 10% of shares issued at a discount of not more than 10% of the counter’s five-day volume-weighted average market price.

In Eversendai’s case, however, Macquarie Investment Bank has acted as an intermediary to look for investors to take up placement over few tranches over a 12-month period.

Should Eversendai continue to report increasing profit which would lead to increasing share price, the company can place out shares at a higher price at a later time.

This would help Eversendai to obtain higher proceeds instead of placing out all 10% at the current price which, in my opinion, is undervalued.

Oblivious to the above strategies, many uninformed shareholders immediately rushed to dump their holdings. As a result, Eversendai’s share price has taken a beating.

As announced, Eversendai has been making more profit and revenue increasing. It needs more capital to do more business. It is always better to place out shares than to borrow more money from banks.

 

Setting a good example

When I was on the board of IJM Corp Bhd, the company placed out shares a few times to raise cash to expand its business.

As a result of a few share placements, the market capitalisation of IJM Corp has surged to exceed RM12 bil today with big shareholders mostly institutional investors, such as the EPF and the Pilgrims Management Fund Board, solidly supporting the share price.

They will buy more shares whenever the price drops.

As I mentioned earlier, a listed status is like Bank Negara has issued a licence to print money; IJM created more shares to acquire Road Builders Group which has a lot of land in Seremban.

As a result, IJM is currently developing a few townships in Seremban. You can imagine how much more money IJM can make with the cheap land bought by issuing new shares which were priced at a premium. 

Koon Yew Yin is a substantial shareholder of several listed companies.



This article first appeared in Focus Malaysia Issue 249.