Every business man wants to build up his company to list in the stock market so that he can create more shares to sell to the public at a higher price above par value. Unless he has achieved a good track record in accordance to the rules as set by the Securities Commission, he cannot create more shares to sell to the public. From the initial public offer (IPO) he can receive more cash to do more business.
After the IPO, he can get more cash to do more business by private share placement to rich investors, like EPF and other financial institutions.
Unless the company has good profit growth prospect which is the most powerful catalyst to move share price, financial institutions would not buy placement shares even with 10% discount from the average price in the last 5 trading days.
Many uninformed Eversendai shareholders dumped their shares as soon as they the company announcement of the proposed share placement because they felt that their interest would be diluted. Moreover, the placement price is cheaper than the current market price.
That is wrong thinking. Let me explain.
Being the 2nd largest shareholder, I should also feel cheated and also dumped my holdings. But instead, I bought more shares because I understand why it is good and necessary for Eversendai to place out shares.
As announced, Eversendai has been making increasing profit and revenue. It needs more capital to do more business. It is always better to place out shares than to borrow more money from banks.
Let me give you a very good example to explain the topic better.
When I was on the IJM Corporation Bhd Board of Director, the company placed out shares a few times to raise cash to do more business. Unless the company has good profit growth prospect which is the most powerful catalyst to move share price, Financial Institutions would not want to buy the placement shares even with a 10% discount. As a result of a few share placements, the market capitalization of IJM Corporation is now more than Rm 12 billion and big shareholders, mostly financial institutions are supporting the share price. They will buy more shares whenever the price drops.
IJM also created more shares to buy up Road Builders which has a lot of land in Seremban. As a result, IJM is developing a few townships in Seremban.
I believe Eversendai will continue to produce increasing profit in the next few quarters. Investors must bear in mind that profit growth prospect is the most powerful catalyst to move share price.