Thursday 10 July 2014

Public Bank Shares Rights Issue

Public Bank Bhd shares has always been strong in the KLSE stock market. Whenever I'm browsing the StarBiz Top 100 volume traded shares, PBB is up there within the top 5 shares traded. Holding on to this blue chip share you can never go wrong in the Malaysian KLSE.

So when Public Bank announced that it wants to go for right issue sometime in May 2014, this was something new to me. My dad said it was time to let go the share because right issue would dilute the market value. I didn't look up this matter until I received the form to purchase the right issue shares.

That got me going to find out what is this thing called right issue. Digging around I found some explanation in Investopedia that explained a right issue is an invitation to existing shareholders to purchase additional new shares in the company as lower price than what was traded in the share market.

Companies want to do right issues usually are
1) the company need funds to pay down debt due to inability to borrow
2) to raise funds for acquisitions and growth strategy

When the PBB right issues was announced, there was some selling of its shares probably due to reason (1) above and of course later dilution of the market price or people just didn't want the hassle of going through the process of right issue.

Since this was something new to me, I had to study rather carefully since in order to take up the right issue, I must put in more money.

For PBB, they are rather strong financially, they just wanted to raise funds to meet certain national ruling from the central bank in Malaysia. They were talking about bolstering the banks's CET-1 ratio (common equity tier 1 ratio) to a comfortable level, whatever that means. So the bank's rights issue was more due to reason (2) above. As a shareholder, all I want to know is whether it is worth it to take up the rights issue, don't take up the rights issues, or to sell off all my current holdings.

Just for note, Maybank and CIMB bank were the other banks that needed to raise funds to meet the CET-1 requirement. While Maybank and CIMB raised their funds via private placement to foreign and local institutions, Public Bank is doing this through the public.

As much as share analyst went in their analysis, of the 27 analyst: 15 said to "hold", 7 said "sell", and 5 said "buy". Seemed rather negative if you go by the numbers. However share prices sometimes is not by the numbers all the time. Some sentiment as well as past performance and strength of the company also determine the price.

A quick calculation yields me this:
Current price: RM20.04 as of 9/July/2014
Rights issue price: RM13.80

If 1,000 units x 20.04 = RM20,040

Offered rights issue units
100 x 13.80 = RM1,380

So total 1,100 shares value = RM21,420

After dilution, estimated market price
RM21,420 / 1,100 units = RM19.47

Possible gain from the 100 units
19.47 - 13.80 = 5.67 x 100 units = RM567 +/-

So it still looked profitable on paper. There was some analyst who said that after the rights issue exercise the market price may hover around RM18.00, even if it falls to RM18, there is still a profit of 4.20/unit (RM420 if going by above calculation if holding 1,000 units)

So for all its worth, I'm going for the Public Bank rights issue!


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