AEONCR: Rights Issue Selling

AEONCR's share price has risen substantially from a low of RM2.00 in 2011 to RM13.00 today. The price rally was due to the company's impressive profit track record (see the chart below).

Chart 1: AEONCR's monthly chart as at Aug 7, 2017 & quarterly profit during that period

A cursory glance at the above chart will reveal the fact that the share price from 2013 till today has been rather disappointing compared to the profit increase. The main reason for the lag in the share price performance is because of the sharp increase in gearing ratio as the company borrowed to fund its advances. See the next graph and table below.

Graph: AEONCR's gearing ratio over the past 10 years

Table: AEONCR's Financial Position over the past 10 years

The above table actually masked the acute increase in borrowing as part of the borrowing took the form of Perpetual Private Debt Securities, which has been classified under Total Equity. This PDS - amounted to RM276 million as at May 31, 2017 - is due for settlement in 2018. The interest rate of this debt instrument is rather high at 6.5%.

AEONCR is now carrying out a Rights Issue of ICULS in order to retire the PDS. The ex date of this Rights Issue is August 11. The ICULS is convertible to share at an exercise price of RM10.99. The mode of conversion is by surrendering 10990 ICULS in exchange for 1000 ordinary shares. The theoretical ex rights price should be about RM12.50 (assuming the share price is at RM12.80 on the last cum date).


Note on the mode of exercising the conversion of ICULS to shares

Due to poor market sentiment, AEONCR is now under heavy selling as investors are trying their best to avoid owning a stock where they will have to cough out money to subscribe for its Rights Issue.


Chart 2: AEONCR's daily chart as at Aug 8, 2017_12.30 (Source: Shareinvestor.com)

Before you join this charge of the Light Brigade, there are 2 things that you need to consider:

1) The Rights Issue is extremely small. 

If you own 1000 AEONCR now, you are entitled to subscribe for 2000 ICULS at RM1.00 each (or, total amount of the subscription money of RM2000 only). If you don't want to subscribe for the rights, you can sell it off but the price will be very minimal (about RM0.13 per unit). If you choose to just ignore it, it also fine as the opportunity loss is about RM260 for 2000 rights (though it's a sin to throw good money away).

2) The Rights Issue will rectify the gearing position somewhat

As mentioned above, the concerned about AEONCR's gearing ratio - the irony of paying a stiff  price being too successful - will be somewhat addressed. I say "somewhat addressed" because AEONCR is growing at such rapid pace, it will soon need to raise more fund. Thus investors have to ask them this question: Are you investing in good companies that's growing at rapid pace or companies that's good at financial engineering initiatives like bonus issue & share splits. The sad fact is that Bursa Malaysia today is rewarding companies in the latter categories and that will not make us a world class exchange.

Instead of charging in to sell your AEONCR, you may want to consider getting into this stock which has grown steadily over the past 6-7 years while paying out good dividend (at a yield of 4.9%).
Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.