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Thursday, May 04, 2017

MKH-OR: What's The Fair Value?

MKH is carrying out its rights issue exercise. The rights issue share costs RM1.89 each and there will also be a bonus issue "on the basis of two (2) Bonus Shares for every one (1) Rights Share subscribed for".

Whenever there is a rights issue exercise, you can compute the theoretical ex-right price after the entitlement date has passed. In practice (for trading purpose), we called it the ex-date to distinguish it from the entitlement date when the shares appear or remain on the list of shareholders.

MKH is well-passed the need to compute the theoretical ex-right price as the share has gone ex on April 28. Today is the first day of trading of the rights issue share entitlement or MKH-OR. MKH is now trading at RM2.35 & MKH-OR is trading at RM4.92 (as at 9:25am). Is that correct? How much is the MKH-OR?

The formula to compute MKH-OR (assumed to be "a") is as follows:

Cost of rights issue shares  + Cost of bonus shares = Value of new shares
1000 (OR price + subscription price) + (2000 x 0)  = (3000 x share price)
1000 (a + 1.89)                                   +  0               =   3000 x 2.35
a + 1.89                                                                    =    7050/1000 
a                                                                               =    7.05 - 1.89
a                                                                               =    5.16         

Of course, the market price of MKH-OR will always be at a slight discount to the computed value above but it shouldn't be too far away. Be guided accordingly in your trading.

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