This article was written by Royston Tan and first published on New Academy of Finance. Views are the author’s own and republished with permission.
SIA went ex-rights today and there was some pretty weird action in its share price which is pretty mind boggling and many can’t explain.
For those not caught up yet, you can read, SIA Rights Issue: Debunking The Complication Behind The Math, which “simplifies” the seemingly complicated SIA rights issue announcement and attempted to calculate what might the trading price be for the Rights and Mandatory Convertible Bonds (MCBs) when they start trading on the bourse.
Did SIA’s Value Go Up By 26% Overnight?
SIA’s share price closed at S$5.91 on 5 May 2020. On 6 May, the stock went ex-rights. First I believe that the “Rights” here includes both the 1) Right Shares as well as 2) the Rights MCBs.
SIA previously calculated that the Theoretical Ex-Rights Price (TERP) was S$4.40/share based on the last traded price of S$6.50 before the announcement of the intended rights issue was made. This TERP only includes the Rights Share component, based on the issuance of approx 1.78bn shares.
We previously shown that the calculation of the TERP price was as such:
At S$6.50/share with 1.18bn of outstanding shares, the market cap of SIA is S$7.67bn.
With the issuance of 1.78bn rights shares, the total number of shares will increase to 2.96bn.
Total amount of capital raised = 1.78bn * S$3.00 = S$5.34bn.
So post rights issuance market value of SIA = (existing market cap (S$7.67bn) + new cash raised (S$5.34bn)) / total number of new shares (2.96bn) = S$4.40/share.
Based on the last closing price of S$5.91 which indicates a market cap of S$6.97bn, the TERP should be (existing market cap(S$6.97bn) + new cash raised (S$5.34bn))/Total number of new shares (2.96bn) = S$4.16/share.
This morning, SIA’s share price open at S$4.20 which is around the calculated TERP. However, it traded up to as high as S$5.04 and as of this writing, it is at S$4.77.
The current price of S$4.77 is even higher than the TERP price of S$4.40 base on a pre-ex-rights price of S$6.50. The current S$4.77 price would indicate a pre-ex-rights price of S$7.44!
Overnight, SIA’s price/share has increased from S$5.91 to S$7.44 which is an appreciation of 26%! What is going on here?
It is hard to fathom what the market is thinking at this moment pertaining to SIA. In the analysis above, we excluded the impact of the MCBs which should indicate a much lower TERP of S$4.16/share. Granted that these MCBs are not convertible to shares immediately. We have previously calculated that the ex-right price after all the conversions would have been in the arena of S$3.71/share based on the last closing price of S$5.91.
What is going to happen if the share price of SIA stays at S$4.77 when the rights are converted to shares (on the 8 June)?
Let’s assume that an investor bought 1,000 shares of SIA yesterday at S$5.91/share. The total outlay will be S$5,910 (excluding comms etc). For 1000 shares, he will be entitled to 1,500 right shares. He can exercise the rights, paying S$3/rights, and convert them into actual shares.
His total outlay will be S$10,410 (S$5,910 + S$4,500) and he is now the proud owner of 2,500 SIA shares. At S$4.77/share, that will equate to a market value of S$11,925 which is a quick profit of S$1,515. In addition, he will still have 2,950 Rights MCB which should be worth some value when they are tradeable.
I last calculated that value to be approx S$0.37/Rights MCB. 2,950 of them will equate to another S$1,091 in value. Total profit could be a hefty S$2,606 based on an outlay of S$10,410 or a quick turnaround of 25%! Even if I am wrong in the calculation of the Rights MCB value, it cannot be negative.
Hence an investor who bought SIA shares at S$5.91/share before the ex-right date (which is May 6) will be able to pocket at least S$1,515/share if the share price remains at S$4.77/share when his rights are converted to shares. Alternatively, if he is concerned that the share price might decline from the current level, he can hedge and lock in the profit by shorting the counter (perhaps through CFDs or borrowed shares) until his rights are converted to actual shares.
If SIA’s share price is lower at that point, his hedges make money. If SIA’s share price is higher at that point, he can offset the losses on his hedges with his actual shares which are now worth more.
There could be other factors in play that might explain the price action of SIA such as potential redemption of short positions driving its share price up or the market all of a sudden became extremely positive over this rights issue. Bloomberg claims it could be due to hopes of easing lockdowns.
Already there are casualties in the market. The Daily Leverage Certificate 5x counter for SIA has been suspended as the underlying price has appreciated more than 20% from their theoretical adjusted price of S$3.71 which means that losses are now in excess 100% for this leverage product.
Key Timeline Of SIA Rights And MCB Issuance
6 May: Ex-rights
13 May to 21 May: Rights and MCBs are being traded on the bourse
28 May: If you still own the Rights or MCBs (as original SIA shareholders who are entitled to it or if you purchase on the open market), this will be the last day for subscription. You can pay for your rights through the ATM if your SIA shares are held under your own CDP or pay it through your custodian broker account.
8 June: Rights share will start trading (if you have subscribe to your rights by paying S$3/rights, you will now have additional SIA shares)
9 June: If you have subscribe to your Rights MCBs at S$1/MCB, your rights will be converted into bonds which are also traded.
An Eye-Popping Phenomenon In The Market
This has really been an eye opener and frankly a development which many did not expect. SIA’s market cap has just appreciated by 26% overnight!
It remains to be seen what will happen in June. Readers who have more insights pertaining to this “unique” situation, do feel free to share your thoughts.