CHAPTER 17: UNDERSTANDING CORPORATE EXERCISES

CHAPTER 17: UNDERSTANDING CORPORATE EXERCISES

Previous Chapter
CHAPTER 17: UNDERSTANDING CORPORATE EXERCISES

Next Chapter

In this chapter, we will discuss some of the common corporate exercises undertaken by listed companies, starting with Share Split and Share Consolidation.

Bonus Issue

Bonus issue is the issuance of shares, free of charge, to all shareholders of the company. Bonus issues are issued from retained earnings (or accumulated profit) or share the premium account of the company. Let’s take Elsoft Research Bhd (“Elsoft”) for example.

On 2 December 2016, Elsoft announ ced the following on Bursa Malaysia:

Table 1: Summarised Elsoft’s Announcement to Bursa Malaysia
Description Bonus Issue of up to 93,481,000 new ordinary shares of RM0.10 each in Elsoft on the basis of one (1) bonus share for every two (2) existing Elsoft shares held as at 5.00pm on 20 Dec 2016
Amount 1:2
Ex-date 16 Dec 2016
Entitlement Date 20 Dec 2016

The announcement means that Elsoft will be issuing one bonus share for every two Elsoft shares held by investors. Entitlement date refers to the physical transfer of ownership of the shares. What is more important for investors is the ex-date. As long as investors hold on until ex-date, any entitlement, be it bonus issue or dividend, the existing investor would still be eligible for the entitlement.

The adjustment for Bonus Issue is based on the following formula:

Reference Price = No. of existing shares x Existing price
No. of existing shares + New shares entitled

Existing price refers to Elsoft’s closing price on 15 December 2016, which is the last traded price before the ex-date, which is RM2.06. The bonus is issued using the ratio of 1:2, meaning 1 new share (or bonus share) will be issued for every 2 existing shares. Putting this information into the formula:

Reference Price = No. of existing shares x Existing price
No. of existing shares + New shares entitled

= 2 shares x RM2.06
2 shares + 1 share

= RM4.12
3 shares
= RM1.373

That is why on 16 December 2016, Elsoft’s reference price (i.e the closing price on the 15th after adjusting for the bonus issue) was RM1.373.

What is the impact to investors? Now assume you own 3,000 shares in Elsoft. Your investment on 15th December 2016, before the ex-date, is worth:

Value of your investment on 15 December 2016:
= 3,000 shares x RM2.06
= RM6,180

Your bonus shares entitlement would be 1,500 new Elsoft shares (ie 1 share for every 2 shares held). The value of your investment on ex-date would be:

Value of your investment on 16 December 2016 (ex-date):
= (3,000 shares + 1,500 shares) x RM1.373
= RM6,180

So, in reality, like share splits, bonus issue does not increase the value of investors’ investment.

On Elsoft’s perspective, it has 181,132,000 shares at the time of the announcement of bonus issue. Since each two existing shares are entitled for one bonus share, the number of bonus shares issued is equivalent to 90,566,000 (ie 181,132,000 ÷ 2). Table 2 shows the impact of the Bonus Issue on Elsoft’s balance sheet. As Elsoft’s par value is RM0.10 per share, the issuance of 90,566,000 new shares is equivalent to RM9,056,600. Notice in Elsoft’s case, the value of the bonus issue is taken out from Share Premium account.

Table 2: Impact of Bonus Issue Extracted from Elsoft’s 2016 Annual Report
(in RM) Share Capital Share Premium
Balance as at 1 Jan 2016 18,113,200 15,165,965
Disposal of treasury shares – 211,500
Ordinary shares issued pursuant to bonus issue 9,056,600 (9,056,600)
Balance as at 31 Dec 2016 27,169,800 6,320,865

Rights Issue

Unlike Bonus Issue where the new additional issued shares come at no cost to shareholders (and thus the term “bonus”), rights issue is an offer to existing shareholders to purchase new shares of the company to be issued at a discounted price compared with the market price. The offer is proportionate to the number of shares held by the shareholders. The reference price for Rights Issue is derived by using the following formula:

Reference price = (Existing no. of shares x Existing price) + (Allocated shares
x Price of Rights)
(Existing no. of shares + Allocated shares)

On 30 November 2017, SP Setia (“SPS”) undertook renounceable rights issue of up to 451,916,434 new SPS shares at issuance price of RM2.65 per share at an entitlement basis of 2 Rights Shares for every 15 existing SPS shares held. The reference price on 28 November 2017 (being the ex-date for the exercise):

Reference price = (Existing no. of shares x Existing price) + (Allocated shares
x Price of Rights)
(Existing no. of shares + Allocated shares)

(15 shares x RM3.40) + (2 shares x RM2.65)
(15 shares + 2 shares)

= RMRM51.00 + RM5.30
17 shares
= RM3.31

Note that in the same proposal, SPS also issued new Class B Islamic Redeemable Convertible Preference Shares (“RCPS-iB”) on the basis of 2 RCPS-iB for every 5 SPS shares held. There is no adjustment made to SPS share price for the RCPS-iB as this is a different class of shares.

Warrants

As briefly explained in Chapter 16, warrant is a security that offers the holder the rights, but not the obligation, to convert the warrant to the underlying share (or commonly termed as “mother share”) at a pre-determined price (also known as exercise price or strike price).

There are two scenarios for warrant. If the strike price of the warrant is higher than the market price of the mother share, then there will be no adjustment to the price of the mother share on the ex-date. However, if the exercise price for the warrant is lower than the current price of the mother share, then the price adjustment for the warrant on the mother share will be treated similar to a Rights Issue.

Let’s look at two examples to illustrate the above. The first is SCGM Bhd (“SCGM”). On 22 June 2017, SCGM announced:

1. Bonus issue of new SCGM shares on the basis of 1 bonus share for every 3 existing SCGM shares held; and
2. Issuance of new free warrants on the basis of 2 warrants for every 15 SCGM existing shares held.

On 12 July 2017, SCGM announced that the exercise price for the warrant will be priced at RM3.96, which is at a premium to the theoretical ex-all price (i.e prices after adjusting for the corporate exercise) of SCGM on the price-fixing date (see SCGM’s announcement to Bursa Malaysia on 12 July 2017).

Warrant is viewed as a different class of security than the mother share. Thus, in this example, only the bonus issue is being factored into the calculation of reference price. Thus, the same formula for bonus issue is used for SCGM.

Reference Price = No. of existing shares x Existing price
No. of existing shares + New shares entitled

= 3 shares x RM4.17
3 shares + 1 share

= RM12.51
4 shares
= RM3.13

The second would be Perak Transit Bhd (“PTRANS”). In June 2017, PTRANS proposed:

1. Bonus issue of new PTRANS shares on the basis of 1 bonus share for every 10 existing PTRANS shares held; and
2. Issuance of new free warrants on the basis of 1 warrant for every 2 PTRANS existing shares held.

Note that “free warrants” means shareholders need not pay for the warrant. However, shareholders would still need to pay the exercise price if they wish to convert the warrant to PTRANS shares. The ex-date for the proposals fell on 12 September 2017.

The warrant’s exercise price is priced at RM0.235 on 28 August 2017, which is the price-fixing date. Based on the calculations on the price-fixing date, the reference price of PTRANS post-corporate exercise, i.e. ex-date price, should be RM0.3332 (see PTRANS announcement to Bursa Malaysia on 19 August 2017).

Under this scenario, notice that the exercise price of the warrant is at a discount to the theoretical ex-date price. Unlike the earlier example where the warrant’s exercise price is at a premium and thus no adjustment needed on the mother share’s price, warrants issued at a discount is considered as a form of Rights Issue.

Thus, in this case, in the calculation of reference price, the warrant has to be taken into consideration.

Reference price = (Existing no. of shares x Existing price) + (Allocated warrants
x Price of warrants)
Existing no. of shares + New shares issued + Allocated warrants

PTRANS last closing price pre ex-date was RM0.41. To calculate the reference price, we have to work this way:

For every 10 PTRANS shares, shareholders will get:
1. 1 bonus PTRANS shares
2. 5 free PTRANS warrants

Keying in the numbers above:

Reference price = (Existing no. of shares x Existing price) + (Allocated warrants
x Price of warrants)
Existing no. of shares
+ New shares issued + Allocated warrants

= (10 shares x RM0.41) + (5 warrants x RM0.235)
(10 shares + 1 bonus share + 5 warrants)

RM4.10 + RM1.175
16 shares
= RM0.329

Next week will mark the last chapter of our education series, which is Investment as Social Enterprise.

 

Previous Chapter  |   Chapter List    |   Next Chapter