- Recap of Corporate Exercise. Back in Dec-13, IBHD made a series of corporate exercises. These proposals are as follows: - share split, rights issue with warrants, bonus issue, offer for sale of ICULS and also RCULS to fund its property development expenditure, working capital, and also repayment for its land costs (refer overleaf). The entitlement for the rights issue with free warrants and the offer for sale of its ICULS are scheduled to go “ex” on 10-Sep-14.

- We had published a ‘take profit’ note on IBHD dated back on 14-Aug-14. Our FV remains unchanged at RM0.96 which implies a 47% discount to its FD RNAV of RM1.79 (post rights and bonus) or a pre-Bonus issue FV of RM1.16 implying the same 47% discount to its pre-Bonus Issue RNAV of RM2.18. However, this is very much based on just the mother share post the corporate exercises. We realized there are some arbitrage opportunities that may arise during the corporate exercise period. Note, throughout this report, we will be referring to prices post rights/ICULS issuance but not pre-Bonus issue.

- More than one way to ‘skin a cat’? Based on our analysis on the upcoming entitlement of the rights issuance and ICULS, we note that there could be a potential arbitrage opportunity should one own IBHD shares before the entitlement goes “EX” due to the steep discount of its rights and ICULS offered for sale as compared to market price. As such, we came up with several scenarios illustrating the potential gains and risks that could arise from the entire exercise. The scenarios are all based on 4,000 units of IBHD shares owned at the cost of RM2.41 (5-Sep-14 closing price) at an initial cost of RM9.6k (Kindly refer overleaf for our scenario assumptions).

- Scenario 1. In the 1st scenario, investors going through the whole corporate exercise process by subscribing to all the rights and ICULS. Investors will need to fork out additional RM13.5k to subscribe to the (i) rights issuance that is priced at RM0.69 per rights share that comes with 1 free warrant and (ii) ICULS that are offered for sale at RM0.50 per ICULS, bringing up the total capital invested to RM23.1k. Investors will enjoy a potential total return of 35% from its initial investments.

- Scenario 2. In the 2ndscenario, investors can opt to sell-off the rights to the rights shares that will be traded on the market on 15-Sep-14 and utilise the freed cash flow to subscribe to its ICULS. By doing so, investors will only need to fork out an additional RM10.0k to subscribe to the ICULS that are offered for sale at RM0.50, bringing up the total capital invested to RM19.6k; but in this scenario, investors will forgo the free warrants attached to the rights. However, investor could potentially enjoy a total return of 40% from its initial investments.

- Scenario 3. In the 3rd scenario, investors can opt to realise profit by disposing the mother share and the subscription rights of the rights and ICULS issuance, post the ex-date of the entitlement without forking out additional cost of investments other than the initial capital invested of RM9.6k for 4,000 units of IBHD shares (must be owned prior the ex-date of entitlement of rights/ICULS). This scenario could reap a huge return of 81%.

- Risks. The scenarios above indicate a combination of a few potential arbitrage opportunities, of which some maybe ‘too good to be true’. We would like to highlight that our three scenario assumptions which yields a total return gains of 35%-81% are based on IBHD share price remaining unchanged at RM1.45 post entitlement of rights/ICULS; this means that we followed the Bursa convention whereby the share price is only adjusted for the rights but not the offer for sale of ICULS. However, in reality the market may adjust the mother share price on its own to take into account the dilution effects of the ICULS issuance. So the total gains could be lower if IBHD’s share price post-entitlement of rights/ICULS goes lower than RM1.45; in fact, there are zero total returns for all three of our scenarios if IBHD’s post rights/ICULS share price drops to RM1.09.

Source: Kenanga