Tag Archives: capital reduction

Capital reduction

We all know that for a company to operate, there is always a need for capital. Capital can come in the form of cash input from the owners of the company and, if the company has been profit-making, funds can also be re-channeled into the business instead of distributing to the owners. If the business is a public-listed company, then additional capital can be raised through IPOs and rights issues. All these form the equity capital for the business. There is also another type of capital known as debt capital. This involves borrowing from financial institutions such as a bank or through unsecured borrowing such as raising bonds and notes. Then, there is also preferential share, which depending on how one looks at it, can be seen as equity capital or debt capital. All these form the various avenues for the directors to tap upon to enable the company to operate as an on-going concern and, of course, to optimize shareholders’ value.

 

When a business is in need of funds, the directors would have to look into what channels can be tapped to inject funds into the business before the business run into cash-flow problems. In the past one to two years, we have seen several offshore and marine related companies and business trusts running into cash-flow problems because the business were deprived of capital injections. Swiber Holdings, Erza Holdings and Rickmers Maritime are just few eye-catching examples that cropped up recently due to difficulty in seeking additional funds for their businesses.

 

 At the other extreme, there are also companies that have ‘extra’ capital in the form of cash that it becomes necessary to carry out a capital reduction in order to optimize the capital structure of the business.  Capital reduction can come in several forms, and this usually ends positively for shareholders. It can be carried out through share-buyback program in which a company buys back its own shares and then cancels them out at the treasury. This, in the way, reduces the number of shares in the market and thus increases share price per share. OSIM as well as several American companies had previously done this after emerging from the global financial crisis in year 2009.

 

Another form of capital reduction can be in the form of returning capital back to shareholders. A good example is IPC. IPC had been a penny stock before its consolidation of 10:1 in 2015. Its share was around 3 cents in year 2004 and around 6 cents during the global financial crisis. During the normal times, the stock price had been oscillating between 9 cents and 17 cents. The business had undergone a significant transformation changing from a PC manufacturing company in the 90s to a hotel operator today. With the sale of 7 hotels in Japan followed by a share consolidation of 10 shares into 1, the company returned a total of about $136.5m to the shareholders. Hence on the balance sheet of the FY 2016 financial report, the share capital was reduced from $169,658,000 to 33,190,000. Each shareholder got cash return of $1.60 per share after consolidation even though the number of shares that one holds remains unchanged. This means that those investors who had purchased the share at an average price of 16 cents or below before the shares consolidation would have recouped and profited for investing in IPC. Of course, the share capital on the balance sheet of IPC’s financial statement is set back by $136.5m, meaning that the scale of the business has been down-sized, but who really cares if we are in a business with no money down and had enjoyed the dividends that had been distributed previously. Hopefully, going forward, the management continues to deliver and help increase shareholders value. This would help maintain the stock price and possibility of future dividends in the currently scaled-down business. Perhaps, the cash return had been partly due some pressure from the substantial shareholder, Mr Ooi Hong Leong, who owns 30% of the business. But, again as an investor, is it not what we are looking for – an investment that provides us a solid return somewhere in the future with consistent income along the way?

 

At the moment, unfortunately, the stock has been quite illiquid due to the mandatory stock consolidation. Even though there is a trading price of between 50 and 60 cents per share, it is still not worth trading the stock as it is difficult for one to buy or sell the shares optimally due to its trading liquidity, which resulted in steep share price changes.   With the only hotel business left in China, it is hoped that company delivers another magic to maintain the share price that come with future dividends. Of course, it does not preclude the fact that it may have to raise funds for expansion in the future. But at the moment, it’s a nice feeling of enjoying a significant profit and, at the same time, participating in a business with no money down due to its capital reduction exercise. 

 

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

   

 

IPC – Moving at last!

On March 19, I had written about IPC and had made a comparison against other property counters. At that time, the share price had just broken its $0.40 cents barrier and ended at $0.405 the previous day. Before 19 March, it had been trading between $0.30 and $0.37 after netting off $1.60 per share as a result of its capital reduction. Today, its share price is trading at $0.55, an increase of close to 40% after 15 trading days or so. Frankly, I had made a prediction that share price should hit $2.20 and $2.40 (before the capital reduction) or about $0.40-$0.60 per share after the return of $1.60 per share to its shareholders. Unfortunately, my prediction had been too early and I missed my target because the market seemed not ready and, also, that it was a bad time for stocks in general around January 2016. Well, I decided to practice what I preach and I still hold my shares to date. I rather missed my target but gained financially than to listen to the market and sell my shares. At the end of the day, it is always important to make our own analysis and get into a first-mover advantage position and wait for the others to catch up.

I wish you luck.

Disclaimer : The above does not constitute an advice for readers to buy (or sell) the said stock. The contents are the personal opinion of the author who has been in the market for more than 25 years. It is just means of sharing his observation on the stock. The contents are purely for private consumption only as he has no interest in readers’ stock investments. In other words, invest at your own risks!

(1) Investors are advised to do their homework to ensure that the value of the remaining assets are at least not impaired, or better still appreciating.

(2) The market may continue not to recognize the value of underlying assets, and therefore the share price continues to languish even though it had appreciated $0.03 cents or advanced 8% on Friday, 18 March 2016.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

IPC – Did investors missed out this value stock?

It appears that investors start to realize that IPC stock has been undervalued. It jumped 3 cents yesterday from $0.375 to $0.405 per share. For the last 2 months. It has been trading between $0.30 and $0.37, after netting off $1.60 per share following the capital reduction announcement in mid-December 2015.

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In the circular sent by IPC, it was mentioned based on 2014 annual report numbers that the NTA after capital reduction exercise would have been $1.21. This would mean that IPC was trading between 25% and 30% of NTA. With better financial results in 2015, the ratio should have reduced further. Unfortunately, investors seemed to ignore this. Of course, evaluation is a very subjective thing and even professional evaluators can get very wrong with their evaluation, but the market’s trading price at more than 50% discount would make it grossly undervalue.  Even at this state of the economy and the poor sentiment, property stocks such as Wing Tai and Capitaland were trading at 44% and 75% against their NTA, but still comparatively higher than the same matrix for IPC. However, the properties that it owns outside Singapore may make it difficult for us to compare on apple-to-apple basis.

Based on this argument, I have decided to hold my IPC shares even after XD for the capital reduction distribution to shareholders. With the return of $1.60 per share, it would mean that I have not paid anything for the IPC that I own while waiting for more investors to discover the value of the shares currently priced at about $0.405. Unless the market is extremely pessimistic, personally, I think there is still some way to go up as the trading price has been too low for too long.

Disclaimer : The above does not constitute an advice for readers to buy (or sell) the said stock. The contents are the personal opinion of the author who has been in the market for more than 25 years. It is just means of sharing his observation on the stock. The contents are purely for private consumption only as he has no interest in readers’ stock investments. In other words, invest at your own risks!

(1) Investors are advised to do their homework to ensure that the value of the remaining assets are at least not impaired, or better still appreciating.

(2) The market may continue not to recognize the value of underlying assets, and therefore the share price continues to languish even though it had appreciated $0.03 cents or advanced 8% on Friday, 18 March 2016.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.