You will be able to work out what a corporate action does to your holding and whether it changes value.
An envelope from CDP sits unopened on Marcus's desk for three weeks. Inside is an offer to buy new shares in a company he holds. By the time he reads it the deadline has passed, and his holding is worth less than it was. Nothing went wrong with the business. He simply did nothing while the company issued new shares at a discount.
A corporate action is anything a company does that changes its shares: the number of them, who holds them or what each one is entitled to. Some change nothing of value. Some move value between groups of shareholders. The test is the same each time: what happens to your share of the business, and to what you paid or received?
In a two-for-one split, each share becomes two, and the price roughly halves. Holding 5,000 shares at S$1.60, worth S$8,000, you'd hold 10,000 shares at about S$0.80, still worth S$8,000. Your share of the company is unchanged. A consolidation runs the other way, turning several shares into one, and is often used to lift a very low share price.
A split can make shares easier to buy in board lots and sometimes draws a little extra trading, but it doesn't change what the business earns. Treat a split announcement as housekeeping, and adjust your records so your cost per share is halved too.
A rights issue offers existing holders new shares in proportion to what they own, usually below the market price. Dividend stocks and S-REITs works through the mechanics, including the theoretical ex-rights price, in lesson 7.2, Rights issues, preferential offerings and TERP. Here is the analyst's question: what does it cost a holder who does nothing?
Suppose, with made-up figures, Larkspur offers one new share for every five held at S$1.20, when the shares trade at S$1.60. After the issue, the theoretical price blends five old shares at S$1.60 with one new share at S$1.20: S$9.20 over six shares, about S$1.533.
Marcus holds 5,000 shares worth S$8,000. If he takes up his 1,000 rights, he pays S$1,200 and holds 6,000 shares worth about S$9,200, his S$8,000 plus the cash he added. If the rights can be sold and he sells them, each is worth about S$0.33, the theoretical price minus the issue price, so his 1,000 rights bring about S$333 and he keeps his value in a smaller stake. If he does nothing and the rights lapse, he holds 5,000 shares worth about S$7,667. He has lost about S$333, or about 4.2%, and his share of the company has fallen by one sixth, about 16.7%.
So ignoring the letter is the one choice that reliably costs money. Whether to take up the shares depends on what the money is for, which the offer document has to explain.
A placement sells new shares to selected investors, usually institutions, often at a discount to the market price. Existing retail holders aren't offered them. Placements are quick and cheap for the company, which is why they're common on SGX, and SGX's listing rules limit how large a general placement can be without holders' approval; check the current rules in the SGX Rulebook.
Say Larkspur places 30 million new shares, 10% of its existing 300 million, at S$1.44, a 10% discount. The company raises S$43.2 million. Before, the business was valued at S$480 million. After, at the same total value plus the new cash, it's S$523.2 million spread over 330 million shares: about S$1.585 each, a fall of about 0.9%. Marcus's stake shrinks by about 9.1% because there are more shares in issue.
A small loss per share is acceptable if the cash goes into something that earns more than it cost. It's a slow leak if the company places shares every year or two to cover spending its own cash flow can't fund. Count how many shares a company had five years ago and how many it has now. A rising share count with flat profit means each share owns less every year.
A buyback is a company using its cash to buy its own shares. The remaining holders each own a larger share of the business. Whether that helps them depends entirely on the price paid against what the shares are worth.
Say Larkspur's shares are worth, by Marcus's estimate, S$2.00 each, so the whole company is worth S$600 million. If it spends cash buying back 30 million shares at S$1.60, it pays S$48 million. The remaining business is worth S$552 million over 270 million shares: about S$2.04 each. The holders who stayed gained.
Now suppose the price had run up to S$2.40 and the company bought the same 30 million shares anyway. It pays S$72 million, leaving S$528 million over 270 million shares: about S$1.96 each. The same buyback destroyed value for the holders who stayed, and moved it to the holders who sold.
Management often presents buybacks as returning cash, and announcements rarely mention what the shares are worth. Your estimate of value, which module 8 teaches you to build, is what tells you which kind of buyback you're looking at. Module 9 returns to this in lesson 9.5, Capital allocation: dividends, buybacks, acquisitions and reinvestment.
SGXNet lists every corporate action announcement by company and date. Find one rights issue or placement from the past two years and run the same sums for a holder who did nothing.
Find one rights issue or placement on SGX in the past two years and calculate its dilution for a holder who did nothing.
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