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Monday 28 November 2011

REITs and rights issues: Dilutive or not?

Assuming 1 for 2 nil paid rights issue at 10% discount at $0.90 and nil paid rights can be sold at $0.02 in the stock market to reduce holding costs and stock can be purchased at $1.

EPS at $0.1 at 100% payout for DPS at $0.1 so the dividend yield at $1 purchase price = 10% ROC

Here is the Maths.

No point guessing or debating. See the Maths. See the truth for yourself.  Dilutive or not?


Investor A

Investor A has 10,000 shares but has decided not to subscribe for his entittled 5,000 nil paid rights issues. He then sold them at $0.02 and collected $100 as profit. After the sales of  his entitled 5,000nil paid rights, his invested capital for holding 10,000 shares has dropped to $9,900 as he used his $100 profit as cost reduction for holding 10,000 shares.

Investor B

Investor B has 10,000 shares and has decided to fully subscribe for his entittled 5,000 nil paid rights issues for $4,500 so his new invested capital for holding 15,000 shares has increased to $14,500

Dividends after right issues for the total enlarged shares of 150,000

Let see what happen?

Assuming the earning has increased from $10,000 to $14,500 for the enlarged shares of 150,000 as the company has successfully deployed the additional capital to earn more. But, due to enlarged share base of 150,000, the EPS has reduced to $0.0967. With 100% payout, the DPS is also at $0.0967.

ROC of Investor A for 10,000 shares = $967/$9,900 = 9.76%
ROC of Investor B for 15,000 shares = $1,450/$14,500 = 10.0%


Dilutive or not?

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6 comments:

  1. uncle u have to explain more cause i really dun understand the figures.

    ReplyDelete
  2. Hi CW,
    One way you don't have to worry about {REITs and rights issues: Dilutive or not?} is to buy NIL paid rights and subscribe for the shares. Of course you think the entry price and the quality of the REIT/sponsor/manager are all suitable for investment. Like the recent LMIR's rights issue, for me.

    ReplyDelete
  3. uncle the figures don't seem to be correct. isnt the tERP 96.7? why are we selling at 2cents?

    ReplyDelete
  4. That right. Must fully subscribe to nil paid rights issue to prevent dilution over long term. But, short-term may be offset by trading gain due to market sentiment and this trading gain hasn't nothing to do with future ROC dilution.

    ReplyDelete
  5. Hi CW,

    This is just one set of possible numbers and obviously numbers could be manipulated to show what we want to show. The nature of number crunching is such. What are the assumptions? Each set of assumptions will yield a different picture.

    Luck has a big part to play as well. In LMIR's rights issue, for example, some sold their rights at almost 9c a piece while some sold at the low of 2c a piece. A world of difference.

    In my blog post "REITs and rights issues: Dilutive or not?", I said that "not all rights issues are distribution yield accretive. Each rights issue should be assessed based on the circumstances leading to it and its pro forma numbers. Equity fund raising as a concept is simple enough to understand. To have a simple blanket statement that unitholders not taking part in rights issues would see dilution is, however, too simplistic".

    Read? REITs and rights issues: Dilutive or not?

    I am not, therefore, saying that all rights issues are good. In fact, I have spoken out against certain rights issues such as the one for CitySpring Infrastructure Trust.

    I try as far as possible to present a balanced argument in each instance although this might not always be the case.

    ReplyDelete
  6. Investor A's ROC will be dilutive relative to Investor B's ROC

    No need to manipulate the number.

    Just try to key in any reasonable figure into the worksheet and the result will always be the same. ROC of Investor A will always be lower than the ROC of Investor B. Maths is not biased.

    ReplyDelete

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