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23-03-2013, 07:18 AM
Quite a redundant question - obviously one must look at the QUALITY of the Company and its business model cum financials. Then again, one should wonder why the Company would want to issue rights in the first place? 
(Or maybe I forgot that the targets of this article are the traders, rather than the investors!) 
The Straits Times
www.straitstimes.com
Published on Mar 23, 2013
Can you profit from a rights issue?
Tactic shows mixed record on recent issues; best to proceed with caution
By Jonathan Kwok
AS YET another rights issue heads to the market, you cannot really blame investors for scratching their heads and asking: What's in it for me?
These capital-raising moves are highly effective for companies seeking to boost their funds but they can leave many shareholders confused about whether to participate or not.
Investors of Rickmers Maritime now face that question.
The firm wants to raise $102 million from its one-for-one rights issue with each unit priced at 24 cents, a large discount to the business trust's last traded price.
Shareholders - and traders who contemplate buying into a company after it announces a rights issue so they can then participate - need to weigh their options.
In fact, shareholders have many options when a firm announces a rights issue, which essentially allows investors to subscribe for new shares at a discount to the market.
They can ignore the issue and let their rights expire, sell their rights on the market to let someone else subscribe for them, or take up the rights shares themselves.
There is also the issue of when exactly to buy and sell the stock.
They all add up to dozens of possible permutations that traders can take to try to spin a quick profit from a rights issue.
There are several details that traders need to study before trying a punt.
First, they need to know the ratio of the issue.
In Rickmers Maritime's case, the one-for-one issue means holders of one unit in the trust can subscribe for one new unit.
Other firms may offer two rights shares for every five shares held, or one rights share for every 10 held.
Investors will also need to know the cost of each rights share, or how much they need to pay to convert a right into a new share.
This is typically below the stock's prevailing market price.
They will also need to mark several dates on their calendars: the last day they can buy shares in the firm to still be offered rights; the trading period of the rights on the market (if they want to sell the rights); and the date when the rights will be converted to new shares so the new shares can be traded.
The Straits Times worked out how a hypothetical investor would have fared if he had participated in five recent rights issues: those by Moya Asia, Ramba Energy, Annica Holdings, KTL Global and Oxley Holdings.
One assumption was that the trader did not have any shares in the company to start with but bought in on the last day that he would be entitled to the rights. This is the day before the stock goes "ex-rights".
It was assumed that the investor would buy the minimum number of lots to give him a full lot of rights shares. So, in a two-for-five issue, he would buy five lots to get two lots of rights shares.
It was also assumed that the trader would not sell the rights and instead pay to convert all of them into new shares.
On the first day that the new rights shares are listed, the trader would sell all his holdings to fully liquidate his position.
Unfortunately the recent issues we looked at show that making a quick buck is not that easy.
This would have yielded a gain with Ramba Energy, which offered a two-for-five rights issue. Buying 5,000 shares at the last "cum-rights" price would have cost $2,950 at 59 cents apiece. The 2,000 rights shares would have cost 20 cents each, to take the total cost of the 7,000 shares to $3,350.
These shares would have fetched $4,060 on the first day the rights shares were listed, at the closing price of 58 cents - a profit of $710, or 21.2 per cent of the total cost of shares and rights shares.
But trying the tactic on KTL Global's two-for-five offer would have led to a 25.5 per cent loss.
The tactic would have been profitable on three of the recent issues studied, with losses incurred on the other two - hardly a sterling record.
A relatively efficient market, which adjusts for the price of the rights shares and the dilution due to the issuing of the new stock, makes it hard to make money from the arbitrage.
"The price will adjust" for the issue of the rights shares, said remisier Desmond Leong.
"Although you buy the rights shares at a lower price, the fact that it drops negates any gains."
But Mr Leong said he knows of "people who trade these rights shares also", in the hope that the larger shareholders will push up or support the rights shares.
Of course, there are other trading methods, such as selling the rights rather than converting them to shares, or buying directly into the rights.
These could well lead to different outcomes for traders.
jonkwok@sph.com.sg
(Or maybe I forgot that the targets of this article are the traders, rather than the investors!) The Straits Times
www.straitstimes.com
Published on Mar 23, 2013
Can you profit from a rights issue?
Tactic shows mixed record on recent issues; best to proceed with caution
By Jonathan Kwok
AS YET another rights issue heads to the market, you cannot really blame investors for scratching their heads and asking: What's in it for me?
These capital-raising moves are highly effective for companies seeking to boost their funds but they can leave many shareholders confused about whether to participate or not.
Investors of Rickmers Maritime now face that question.
The firm wants to raise $102 million from its one-for-one rights issue with each unit priced at 24 cents, a large discount to the business trust's last traded price.
Shareholders - and traders who contemplate buying into a company after it announces a rights issue so they can then participate - need to weigh their options.
In fact, shareholders have many options when a firm announces a rights issue, which essentially allows investors to subscribe for new shares at a discount to the market.
They can ignore the issue and let their rights expire, sell their rights on the market to let someone else subscribe for them, or take up the rights shares themselves.
There is also the issue of when exactly to buy and sell the stock.
They all add up to dozens of possible permutations that traders can take to try to spin a quick profit from a rights issue.
There are several details that traders need to study before trying a punt.
First, they need to know the ratio of the issue.
In Rickmers Maritime's case, the one-for-one issue means holders of one unit in the trust can subscribe for one new unit.
Other firms may offer two rights shares for every five shares held, or one rights share for every 10 held.
Investors will also need to know the cost of each rights share, or how much they need to pay to convert a right into a new share.
This is typically below the stock's prevailing market price.
They will also need to mark several dates on their calendars: the last day they can buy shares in the firm to still be offered rights; the trading period of the rights on the market (if they want to sell the rights); and the date when the rights will be converted to new shares so the new shares can be traded.
The Straits Times worked out how a hypothetical investor would have fared if he had participated in five recent rights issues: those by Moya Asia, Ramba Energy, Annica Holdings, KTL Global and Oxley Holdings.
One assumption was that the trader did not have any shares in the company to start with but bought in on the last day that he would be entitled to the rights. This is the day before the stock goes "ex-rights".
It was assumed that the investor would buy the minimum number of lots to give him a full lot of rights shares. So, in a two-for-five issue, he would buy five lots to get two lots of rights shares.
It was also assumed that the trader would not sell the rights and instead pay to convert all of them into new shares.
On the first day that the new rights shares are listed, the trader would sell all his holdings to fully liquidate his position.
Unfortunately the recent issues we looked at show that making a quick buck is not that easy.
This would have yielded a gain with Ramba Energy, which offered a two-for-five rights issue. Buying 5,000 shares at the last "cum-rights" price would have cost $2,950 at 59 cents apiece. The 2,000 rights shares would have cost 20 cents each, to take the total cost of the 7,000 shares to $3,350.
These shares would have fetched $4,060 on the first day the rights shares were listed, at the closing price of 58 cents - a profit of $710, or 21.2 per cent of the total cost of shares and rights shares.
But trying the tactic on KTL Global's two-for-five offer would have led to a 25.5 per cent loss.
The tactic would have been profitable on three of the recent issues studied, with losses incurred on the other two - hardly a sterling record.
A relatively efficient market, which adjusts for the price of the rights shares and the dilution due to the issuing of the new stock, makes it hard to make money from the arbitrage.
"The price will adjust" for the issue of the rights shares, said remisier Desmond Leong.
"Although you buy the rights shares at a lower price, the fact that it drops negates any gains."
But Mr Leong said he knows of "people who trade these rights shares also", in the hope that the larger shareholders will push up or support the rights shares.
Of course, there are other trading methods, such as selling the rights rather than converting them to shares, or buying directly into the rights.
These could well lead to different outcomes for traders.
jonkwok@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
