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Magni-Tech: What will its share price be coming Monday? kcchongnz

kcchongnz
Publish date: Fri, 11 Oct 2019, 07:50 PM
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MAGNI - Notice of Book Closure

1)  Share split involving the subdivision of every one (1) existing ordinary share in Magni-Tech Industries Berhad ("Magni") held on the Entitlement Date into two (2) ordinary shares in Magni ("Share Split").  

2)  Bonus issue of108,487,894 new ordinary shares in Magni-Tech Industries Berhad ("Magni") on the basis of one (1) Bonus Share for every three (3) ordinary shares held in Magni after the Share Split. 

 

Dear KC, what will be the share price of Magni-Tech when it is traded ex-dated on its share split and bonus issues next Monday on 14th October 2019, and is it worth to sell the shares?

John”

 

 Hi John,

As I have told you guys before, although I had picked this Magni 美女when it was trading at RM4.95 a year and a half ago for this group, with detailed analysis and a comprehensive report and valuations, I have no crystal ball in front of me, and I won’t know the share price movement of Magni, or any stock, in the future, especially in the next few days.  In the short-term, the stock market is a voting machine.

However, I may be able to give you an indication what the share price should be about certain number, based on its closing price today when it closed at RM6.72.

 

What are bonus issues and share split?

Bonus is fully paid-up new ordinary shares issued free to existing shareholders in proportion to their current stock/shareholdings. It capitalizes a part of distributable reserve in retained earnings to bring:

(1) share capital more in line with the assets employed; and

(2) a high share price back to a more manageable amount, thus seemingly enhancing its marketability.

In this case of bonus issues, at least the company has been making money and has substantial retained earnings over the years. Although the number of shares held by each shareholder increases, few investors realize that the value of the total shareholding remains the same as before the bonus issue. Where does the extra value comes from, the sky?

Share split is quite similar to bonus issues, but by splitting say from one share into two shares, with double the number of shares outstanding, in this case of Magni. Unlike bonus issues, the company doesn’t even have to have retained earnings, or accumulated earnings from the past to split the shares, and whoosh, one share becomes 2 shares, money falls from the sky and investors become twice “richer”!

 

Share split and bonus for Magni

If you hold 1000 shares of Magni today, you have 2000 shares upon splitting them. That is according to item (1) in the above notice. According to item (2) in the above announcement, if you have 3 shares after split, you will get an additional bonus share. However, you only have 2000 shares after split, hence the additional shares is in the proportion of 1/3*2000, or 667 shares. Hence the total number of shares you will have now is 2000+667 or 2667 shares.

In general, if you have X shares, the total shares after the corporate exercise is

=2*X + 2*X*1/3 = 2*X *(1+1/3) =2*X * 4/3 = 8/3*X

To make it simple, if you originally have 3000 shares, you will first get another 3000 shares upon split, or a total 6000 shares. The additional bonus shares will be 2000 shares. The total shares owned will be 8000 shares.

Total number of shares = 8*3000/3 =8000

Bonus, and share split will cause a company’s net profit to spread over a larger number of shares. In other words, a company’s earnings per share will decrease as earnings allocated to each ordinary share an investor has invested in will be diluted.

As no value is created from the corporate exercise, unless one argues that the corporate exercise unlocks the value of Magni, and the number of shares has increased by 8/3 times, the best guess of the opening price of Magni on next Monday will be RM2.52.

6.72 * 3/8 = 2.52

So, is it worthwhile to hold, sell or buy more Magni on coming Monday?

That depends on what price it is selling, and the future cash generation and the growth of its business. More importantly, how is the price compared to the intrinsic value of its business based on the future cash generations or dividends payment.

That will be a few major topics by themselves.

I discuss more about this and other corporate exercise in an eBook on personal finance and investment that I have written. If you are interested to get hold of a copy, please email me at,

ckc13invest@gmail.com

Happy investing.

 

KC Chong

 

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1 person likes this. Showing 5 of 5 comments

pputeh

6.72x3=20.16/8=2.52

2019-10-11 20:05

luwenfu

6.72 * 3/8 should be 2.52 and not 3.52

2019-10-11 20:07

kcchongnz

Thanks corrected

2019-10-11 20:14

probability

wondering if sudden rise in liquidity on Monday will raise selling force more than buying on Monday..

as the rise earlier was in anticipation of the positive effects of liquidity (market had already priced the good news)

good time to buy if it drops significantly

2019-10-12 14:22

kcchongnz

Posted by factorrumour > Oct 12, 2019 6:19 PM | Report Abuse
after bonus issue and/or share split, does the company total equity increase, ROE decrease?

Company can increase the number of shares by share split and bonus but can't produce more equity by doing so, unless shareholders, existing or holders put in more money for rights issues or placement. It is like cutting a cake into different number of pieces but the amount of cake remains the same.

R in ROE is the net income of the company. Splitting the shares or bonus issues don't increase the earnings of the company, does it?

2019-10-12 22:15

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