Thursday, January 23, 2014

XDL - A costly free lunch!

XDL has just completed a Rights Issue that comes with free warrant and bonus issue. To wit:

Renounceable rights issue of up to 322,665,266 new ordinary shares of USD0.10 each in XDL (“XDL shares”) (“rights shares”) at an issue price of RM0.35 per rights share, together with up to 241,998,950 free detachable warrants in XDL (“warrants 2014”) and an attached bonus issue of up to 241,998,950 new XDL shares (“bonus shares”) to be credited as fully paid-up at par, on the basis of four (4) rights shares together with three (3) free warrants 2014 and three (3) bonus shares for every twelve (12) existing XDL shares held at 5p.m. on 23 December 2013 (Ex Date: 19 December 2013).
On the last cum date, XDL closed at RM0.385. The calculation of the theoretical ex-right value is as follows:

(initial shares held x closing price) + (RI shares x subscription price) + (warrants x exercise price)
initial shares held + RI shares subscribed + bonus shares granted + warrants

Based on this formula, the theoretical ex-right value would be RM0.3213. Instead of trading at that price, the stock rallied to an intraday high of RM0.665 on January 21, 2014.

Yesterday, the stock tumbled. Today it falls further. At the time of writing this post, XDL is trading at RM0.305. The reason for the drop: New shares will be quoted on January 27 and increasing the number of shares issued by 58%. Would the share price stabilize at the theoretical ex-right value would be RM0.3213? It is highly unlikely as a falling stock tends to overshoot on the downside. This proves that there is no such thing as a free lunch.

Chart 1: XDL's daily chart as at Jan 22, 2014 (Source: Tradesignum)

Chart 2: XDL's weekly chart as at Jan 22, 2014 (Source: Tradesignum)

In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, HIL.


lai said...

Hi Alex,

The dollar /myr now is reaching the level last seen in august which is precursor to massive selldown.

Do you think massive correction coming soon?


Alex Lu said...

Hi lai,

I think this time is likely to be different. The previous selldown ahead of FED's tapering was indiscriminate. This round the selldown, if any, will be more discerning and in any event, the funds have less to sell. Even if they choose to sell, where should they invest? US equity? That asset class has gone up so much that short sellers are now actively getting into the game. So I think it is wise for them to stay in emerging markets, especially Asia and especially well-managed countries, like Malaysia. They may however reduce their exposure to the Fragile Five (Brazil, Chile, Turkey, India & Indonesia) but they will reposition their fund in other emerging markets.

However, that's not to say that we will not drop if the global equity market were to undergo a selldown. That's my fear for 2014-2015 since equity market has been generally up for the past 5 years. The last time, we had a 5-year rally (on easy credit & easy money) was 2002-2007 and that ended badly in 2008. Thus, I think we have to keep a portion of our powder dry in the event of a selldown.