Koon Yew Yin 5 May 2020
Many investors would have seen the following announcement yesterday evening and wonder what to do. The question is: To sell or not to sell or to buy more shares?
On behalf of the the Board of Directors of Rubberex, RHB Investment Bank Berhad wishes to announce that Rubberex is proposing to undertake a proposed private placement of 25,219,500 new ordinary shares of Rubberex, representing approximately 10% of the total number of issued shares (excluding treasury shares) of Rubberex (“Proposed Private Placement“).
This phrase “acid test” is derived from the test that the goldsmiths used during the 18th century to check the purity of gold. It was the test based on putting gold in nitric acid that dissolves every other metal except gold.
I use this phrase in the title of this article to provide definitive proof of whether the share placement is good or bad, effective or ineffective to the company and its shareholders.
As far as the company is concerned it is a good and easy way to secure cash from investors for production expansion which will eventually benefit all the shareholders. It is better and cheaper than borrowing money from the bank. According to listing rules, the company can give a maximum discount of 10% to the 5 day average price prior to the price fixing day. Shareholders would naturally feel that their interest is being diluted.
Fortunately or unfortunately, many ordinary investors would feel that they are being cheated because the price for the share placement is much cheaper than the current open market price, especially when the price shot up 28 sen and 19 sen in the last 2 trading days. Investors should be happy because the share price shot up so rapidly for a good reason.
The share price shot up so rapidly because the demand for gloves far exceeds supply due to Covid 19 pandemic. As a result, the selling price for gloves continues to go up- thus benefiting all the glove manufacturers and their shareholders.
The share price may drop initially because of share placement and also because it has shot up too rapidly. It should continue to go up higher and higher because it has very good profit growth prospect which is the most powerful catalyst to move up share price. Moreover, even with the placement shares its total issued shares is only 280 million shares while Comfort Gloves is 580 million shares.