Friday, June 17, 2011

Malton- a unique trading opportunity

One reader inquired earlier about Malton's Rights Issue of RCSLS which come with free warrant & bonus share. My reply was as follow:
MALTON has gone ex for a Rights Issue of 2 RCSLS of RM1.00 each [c/w 2 free warrant & 1 free share] for every 5 MALTON owned on ex-date. If you subscribed for the RCSLS, you would get the free warrant & share. If you don't, you get nothing.

The RCSLS is convertible to share on 1-to-1 basis. Since you are paying RM1.00 for each RCSLS, you are sure to be at a loss but the issuer sweetened the deal by giving you 2 warrant & 1 share free. Would that be sufficient to make up for the loss? The bonus share is worth 50-60 sen. The warrant is worth 10-12 sen (assuming a 20% premium & ignoring the negative intrinsic value as the exercise price is at RM1.00). If you used the lower numbers, 2 warrants plus 1 share are worth 70 sen. If you were to use the higher numbers, they are worth 84 sen. Your RCSLS is probably worth 50-60 sen- which will give you a loss of about RM0.80-1.00 for 2 RCSLS. Some may opined that the RCSLS should attract a higher value, due to the high coupon rate of 6%. I doubt it would be worth more than 60 sen, if the share is trading at 50-60 sen. (Currently, it is trading at RM0.52). As such, the exercise has a high odd against a profitable outcome for someone subscribing for the RCSLS, ranging from a small profit of 4 sen to a sizable loss of 30 sen for every 2 RCSLS subscribed. It is better to buy the RCSLS or the warrant after the whole exercise has been completed.

Now, one of my client asked me what to do with his allotted Malton-LR, which currently trading at 16.5 sen. Malton is trading at 53.5 sen. I calculated the value of Malton new warrant, Malton RCSLS and the expected P&L from subscribing for the Rights Issue.



The computation is based on the following assumptions:
1) Warrant, which has an exercise price of RM1.00, is valued using conversion premium ranging from 15% to 20%, depending on share price. Negative intrinsic value is ignored.
2) Malton RCSLS is equivalent to share price since it is convertible 1-to-1.
Based on the above table, I advise him not to subscribe for the Rights but to sell the Rights at the current price of 16.5 sen. In fact, I further advise him that he should consider using the proceed to buy the share now. Why?

As I have said before, the trading of Rights tends to result in arbitraging activities, where shareholders would sell their shares & buy the Rights. Unfortunately, the share price dropped more, leading to a drop in the Rights traded. Normally, this would lead to a vicious cycle of further drop in share price & the traded Rights. I believe something similar also took place in Malton share trading over the past few days, with the net result being the drop in the share price & concurrently the drop in the price of Malton-LR. After ceasation of trading of Malton-LR, the share price would slowly recover back. Sometime, the recovery can be pretty sharp which may be a tradable situation. The rebound in the share price is partly due to reversion to the mean as well as some pushing of share price in the market to induce the hesitant shareholders to commit to the Rights Issue. If you choose to buy the share now, using the proceed from the sale of Malton-LR, you are effectively getting into Malton at a lower basis cost. Assuming you were holding onto 5000 Malton before the ex-date, you would be given 2000 Malton-LR. If you sell off your allotment, you would receive RM330. Then, you buy 5000 Malton at 53.5 sen, your net cost would be RM2345 [(53.5 x 5000) - 330]. Your basis cost would be 46.9 sen per unit. At this lower cost, you would be ready to sell in 2 weeks time when the share price recover from the present low.

Good luck.

8 comments:

Chong said...

Hi Alex,

The information that we received is quite different from what you were describing.

As far as I understand, there is no obligation for those who hold the RCSLS to convert it into mother share. In fact, if we were to look at the prospectus, it says that, the RCSLS would be redeemed by the issuer by a proportion that has been fixed (eg, end of 3rd year, 10%) at nominal value. Thus, we would not lose any money in buying the Loan, on top of earning 6% interest, which is to be paid on quarterly basis.

Of course, if the share price increase > RM1, then we could have the option of converting it to mother share.

Please confirm whether my understanding is correct. Thank you.

Alex Lu said...

Hi Chong


All the redeemable loan stocks in the market is redeemable in full at the end of their tenor. This means that if you hold them up to maturity & you will get back your full capital. However, if you use the market price, you have a paper loss. You can ignore that paper loss & just hang onto the loan stocks.

KC said...

Let see the discount on Malton-LA will be 10% or 40% when the LA start trading.

What Alex recommendation is purely on trading strategy.

I see Malton is a Good Investment base on Longer Term basis which I will continue to holding it Mother & Son.

vincent said...

Hi Alex,

Can you comment on TCHONG?

Jimmy said...

Hi Alex,
Is STAR a good buy ? On friday, its price dropped 9 cent, make it to 3.30 which is 1 year low.

Please kindly comment a bit on the analysis. Thanks a lot.

Regards,
Jim

Alex Lu said...

Hi Jimmy

STAR is testing the medium-term uptrend line support at RM3.30. That could be a good entry level.

At RM3.30, Star is trading at a PE of 15 (as its annualized EPS id about 21.8 sen). At this PE, Star is nearly fully-valued. It could command a PE of 16 times.

Alex Lu said...

Hi vincent

At RM4.46, TChong is trading at a PE of 9.8 times (based on annualized EPS of 45.4 sen). At that PE, TChong is fully-valued.

However, TCHONG is on the verge of breaking above its medium-term downtrend line at RM4.55-4.60. It could be a trading BUY if it succeed in breaking above that level.

RedsArmy said...

hi alex, malton already ex last week. But if i still interested to buy it, what are the things should i monitor now for a better entry price?
as i know malton's boss also own Pavilion which propose to list in near future, will the listing benefit Malton?

Thank you.