One of the questions most frequently asked is "what is the target price ?"

In order to answer that question, let's do some simple calculations

1.   Discount of Rights Price to Theoretical Ex Price

The rights issue will be undertaken on 1 for 1 basis, with 0.5 free warrant.  It is possible that rights price be set at 50 sen (mentioned in announcement).

Theoretical ex-price = ( current price + rights price ) / 2

= ( 84 + 50 ) / 2

= 67 sen

Pre Warrant discount of rights price to theoretical ex price = 100% - 50 / 67 = 25.4%

However, subcription of rights shares come with 0.5 free warrants.  

The exercise price is likely be set at 67 sen

Without using complicated formulars, by referring to Ivory-Wa (which has exercise price of 75 sen, mother share price 62 sen, Warrants price = 24 sen), I would guess that GOB-Wa likely market price will be 24 sen.  

0.5 units would be 12 sen.

Meaning effective subscription cost is 50 sen less 12 sen = 38 sen.

Effective discount = 100% - 38 / 67 = 43%

Observation - since discount is so huge at 43%, the rights issue will likely be successful with full subscription 

2. Potential Capital Gain (price maintained at 84 sen)

Existing market price = 84 sen.  Cost of subscription = 50 sen.  Total input = 84 + 50 = 134

Post rights issue, shareholder will hold 2 shares at 67 sen and 0.5 free warrants at 24 sen each.  

Total value = 2 x 67 + 12 = 146.  Gain = 12 sen (the free warrants).

gain = 12 / 134 = 9%

3. Potential Capital Gain (price run to 95 sen)

Item 2 above is based on status quo, whereby from now until rights issue, share price maintain at 84 sen.

But what happen if share price moves during this period ? It is highly possible, as PLC usually makes sure they announce good results to makes the rights looked attractive.

Let's assume share price runs to 95 sen. 

Theoretical ex-price = ( 95 + 50 ) / 2 = 72.5 sen

72.5 sen is 8% higher than 67 sen

as warrant is out of money, lets make assumption that warrants will go up same percentage term (if warrants is in the money, will likely move in lock step in absolute term)

warrants price = 24 sen x 1.08 = 26 sen.

0.5 units = 13 sen

Existing market price = 84 sen. Cost of subscription = 50 sen. Total input = 84 + 50 = 134 (same as item 2 above)

Post rights issue, shareholder will hold 2 shares at 72.5 sen and 0.5 free warrants at 26 sen each.

Total value = 2 x 72.5 + 13 = 158.  Gain = 158 - 134 = 24 sen

gain = 24 / 134 = 18%

4. What is the Ultimate Target Price ?

To make sense of the whole thing, I always look 3 years ahead.  

First of all, as a shareholder, I have expectation of RM60 mil net profit for GOB management to deliver. The RM60 mil is arrived at based on Hua Yang and Tambun's past records.  These two companies grew their earnings from approximately RM30 mil to RM60 mil within three years.  I think this will also be the likely scenario for a small cap company like GOB.

Based on RM60 mil net profit, and 8 times PE Multiple, market cap will be RM480 mil.

Number of shares will be 227 mil x 2 = 454 mil

Meaning targeted market price in three years time = 480 / 454 = RM1.06.

What is the expected market price of warrants ?

Based on 20% conversion premium,  warrants price = RM(1.20 x 1.06) - 0.67 = 60 sen

Net worth in three years time = ( 2 x 1.06 ) + ( 0.5 x 0.6 ) = RM2.42

Original cost = RM1.34 (as per item 2 and 3 above)

Gain = 2.42 / 1.34 = 81%

Different people has different expectation. For me, I am ok with 81% gain within three years.

5.  How Should Shareholder Interprete All The Above Information ?

After finish reading item 2 and 3 above, I can imagine readers of this article start mumbling to themselves "after going through all these hassles, I only gain 9% (item 2) or 18% (item 3) from the rights issue ?  Why do I bother to buy GOB now and subscribe for the rights ? To be fair, 9% and 18% doesn't seem a lot in this kind of market"

Let me try to help you to answer this question.

(1) You shouldn't look at the rights issue from capital gain point of view. You should look at it from capital preservation point of view. By investing in GOB now at 84 sen and subscribe for the rights, YOU HAVE A MINIMUM 9% SAFETY MARGIN.  

If you are lucky and share price goes up to 95 sen before the exercise goes ex (could be higher), YOU HAVE AN 18% SAFETY MARGIN.  

Due to this safety margin, we can afford to take up a big position in this stock, and to wait fot it to grow its profit in next three years.  IT MAKES THE INVESTMENT DEFENSIVE.

Just to illustrate the point above, the KLCI is now 1840 points.  A 9% decline is equivalent to 166 points drop to 1674 points.

An 18% decline is equivalent to 331 points drop to 1509 points. (lets assume GOB is a market performer, it doesn't do any better or worse than the KLCI)

If next year a war breaks out between Japan and China, the KLCI has to drop 331 points before it can hurt my investment in GOB.

That is the benefits of investing in a defensive theme.

(2) Now that we have covered our downside by lets say 9% or 18%, we can patiently wait for the company to create value for us by growing its earnings. Different people has different investment horizon and expectations.

But in general, I do expect about 100% return in 3 years.

I belive GOB post rights issue is in a position to deliver that. The reasoning and details are as set out in my previous articles.

Have a nice evening.