ICON: Ex for a 50-to-1 Share Consolidation [WARNING!]

ICON has gone ex the 50-to-1 share consolidation today. This means that if a shareholder has 50,000 ICON shares yesterday, he/she would be owning 1,000 ICON shares now. Most shareholders may miss that, and when they see the share price shooting higher this morning, they would rush to sell the shares based on the quantity they thought they have. This will lead to overselling and subsequently a costly buyback.

To safeguard our clients, Kenanga  has posted a notice on its trading platform, Kentrade to alert the online traders. Remisiers are also informed to alert their non online clients about the share consolidation.

BEWARE! Don't oversell ICON shares you own!!

The share consolidation is one part of multiple proposal (here). In particular, you will note that there will be a Rights Issue of 100 shares at RM0.105 each for every 1 share owned after the share consolidation. If you choose to apply for this, you will receive 1 free warrant for every 4 Rights shares applied for. 

What would be the fair price of ICON today? 

Assuming yesterday closing price of RM0.035 is the fair price then (a bit of a stretch for most penny stocks), then the theoretical ex-right price is computed as follows:

Theoretical ex-rights price

= [(Initial cost cum rights) + (Additional cost to exercise the rights)] divided by (Total shares owned)

This is an incomplete formula as the free warrants are not included in the computation. The reasons for this are because:

1) I am unable to find the exercise price for the warrant. This is a real hassle which I hope Bursa will one day address. All pertinent information should be made easily accessible rather than hidden in another announcement or attachment. 

2) If the warrant exercise price is higher than market price, the warrant is deemed to be out-of-the-money and it can be excluded. In the circular sent to the shareholders in November last year (here), it was stated that the "warrants exercise price is proposed to be priced at not more than a premium of 25% to the TERP per Icon Share and have a tenure of 8 years"; while "the issue price for each Rights Share for the purpose of this Circular is RM0.060 (for illustration purpose), representing a discount of approximately 14% to the TERP based on the Maximum Intended Gross Proceeds". With these 2 points, it is highly likely that ICON market price under normal trading condition (unlike today) will be lower higher than the exercise price of the new warrant.

Based on the formula below, we can exclude the out-of-the-money warrant in computing theoretical ex-right price.

The theoretical ex-rights price
= [(0.035# x 50*) + (0.105## x 100**)] / (1*** + 100**)                                           

= [1.75 + 10.50] / 101                         

= 0.1213

Legends:

#     Last cum price

##   Rights share subscription price

*     Original shares owned before consolidation

**   Rights shares entitlement

*** Original shares owned after consolidation

Chart: ICON's intra-day chart as at Jan 22, 2020_12.30pm (Source: Kenanga BTX)

Why is ICON share price trading at RM0.38-0.39 now? Besides being played up, there is possibility that a short squeeze is on. Those who oversold this morning is now being forced (or, squeezed) to buyback at much higher prices. Over times, the share price of ICON should reflect the theoretical ex-right price as computed above, which is about RM0.12.