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. To get his company listed is like getting a lesson from Bank Negara to print money.
Initial Public Offer (IPO)
After he has achieved a good track record in accordance to the rules as set by the Securities Commission, he can issue new shares or at the same time, to sell his existing shares to the public at an initial public offer (IPO).
With so much of cash he received from the IPO, he should be able to expand his business to make more profit.
Right Issues with free convertible warrants
If he needs more money to do more business, he can call for a right issue to sell shares to existing shareholders.
Shareholders must realise that this corporate exercise to get more cash is cheaper than borrowing money from banks.
For example, he can issue one new share to every shareholder holding 4, 5 or any number of shares to be decided by him at the price to be determined by him. To encourage investors to buy the right issues, he would issue one convertible warrant for every right. The warrant conversion price is usually the average price of the 5 trading days before the last day to buy the rights.
Usually, the warrant has a life span of 5 years and 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 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 who have good foresight prefer to buy warrants, especially if the company has good profit growth prospect. Instead of buying one share, he can buy a few warrants.
As I said earlier, he would have received a lot of cash from the right issues. He will receive a lot more cash when the warrants are converted within the 5 years life span of the warrants.
As you can see, giving out free convertible warrants to shareholders is like giving cash ‘Ang Pow’ to shareholders. Unfortunately, I know many companies including Lii Hen and Latitude Tree, with all the required qualifications do not issue free convertible warrants to benefit their shareholders.
After he has undertaken all the corporate exercises as mentioned above, he can place out not more than 10% of the total issued shares to institutional investors, like EPF and other financial institutions to get more cash to do more business.
Usually, he has to give a discount of not more than 10% from the average price in the last 5 trading days.
Shareholders should know
Unfortunately, many uninformed shareholders would feel cheated because the placement price is cheaper than the price in the open market. They rushed to sell all their holdings causing the share price to drop rapidly.
Shareholders must remember 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.
Shareholders must also bear in mind that financial institutions who have bought such a large amount of shares with a discount, will support the share price. They would buy whenever the price falls.
Recently Eversendai announced its proposal to place out not more than 10% of the total issued shares. This private placement is different than the 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 five-day volume weighted average market price. However, for Eversendai, Macquarie Investment Bank act as intermediary to look for investors to take up the placement over few tranches over 12 months’ time. If Eversendai can continue to report increasing profit which would lead to increasing share price, Eversendai could place out shares at higher price at later time. This would help Eversendai to obtain higher proceed instead of placing out all 10% at current price which in my opinion, is undervalued.
Immediately many uninformed shareholders rush to dump their holdings. As a result, the share price drop quite rapidly.
I hope Eversendai shareholders will stop dumping their shares after they have read this article. If they have sold earlier, they should buy back even at higher prices.
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.
IJM Corporation Bhd is a good example
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 like EPF are supporting the share price. They will buy more shares whenever the price drops.
Issuing new shares for acquisition
As I said earlier, the listed status is like Bank Negara has issued a lesson to print money; IJM also created more shares to buy up Road Builders 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 with a premium.