Forum Archive Index - November 2000

["Peter Riches" <peter@peaktechnology.co.nz>]

Many thanks Derek and Harry, for your very helpful explanations. You made it
seem so simple I'm thinking "now why didn't I think of that?"

Good comment Derek about the market not being good at maths. I noticed that
AIRVB traded _above_ its previous Friday close on the first day of rights
trading a few weeks back. It will be fascinating to see whether anything
like that happens with FFS on Monday coming. At this stage I think I'll
watch with interest from the sidelines.
=======================================
> Hi Peter, no problem.
>
> I see Harry has replied to you, here is my follow up as well.
>
> The assumption that I believe is generally made is that the current share
> price takes into account the fact that a rights issue is about to occur.
In
> other words the current price is equal to the sum of all securities held
> after the issue.
>
> FFS will issue 2 new shares for each share held at a cost of 25c for each
> new share.
> The theoretical price of fully paid shares after the issue can be
> calculated by taking the current share price, adding the amount that needs
> to be paid to take up the rights issue per share ((current price 34c) so
> 34c + 2 * 25c =  + 84c) and dividing by the final number of shares that
one
> share will split in to (in this case 3). 84/3 = 28c
>
> Therefore you can expect that the shares will trade at 28c after the
issue.
>
> The rights can be expected to trade at 28c - issue price = 28-25 = 3c
>
> Note that the sum of the new shares 28 + 3 + 3 equals the current share
> price (34c).
>
> If the market has under-estimated what FFS post the issue is worth and say
> for example that FFS will be trading at 29c after the issue (note that
this
> is only 1c more than 'theoretical') then if you bought at the current
price
> of 34c then you would have made  100 * (29 + 4 + 4) -34  / 34  =  8.8%
>
> If they trade at 30c post-issue then you'd have made 17.6%
>
> If on the other hand the market has over-estimated what FFS post issue is
> worth and say for example that FFS will be trading at 27c after the issue
> (note that this is only 1c less than 'theoretical') then if you bought at
> the current price of 34c then you would have lost  100 * 34 - (27 + 2 + 2)
>  / 34  =  9.1%
>
> Therefore there is very high gearing in FFS at the moment if you wish to
> buy now and sell immediately after the rights are issued.
>
> The above assumes that the difference between the rights and the head
> shares remains 25c and this may not be the case since gearing is alot
> higher in the rights (but the time that they will be traded is short) they
> can expected to be trading at a small premium.
> This would work in your favour were you to buy at the current price.
>
> But there is also the possibility that some people are waiting for the
> split to sell so watch out for that one.
>
> However I must retract my comment that the downside appears minimal,
here's
> an extract from the Herald:
> "Fletcher Forests shares could fall as low as 10c if the company does not
> resolve a dispute with its Chinese forestry partner Citic, says a broker
> report."
>
> The link to the full article is on the front page of sharechat.
>
> bye,
>
> Derek
>
> (bought some more FFS today at 33c)
>
>
>
> --------------------------------------------------------------------------
--
> http://www.sharechat.co.nz/          New Zealand's home for market
investors
> http://www.netbroker.co.nz/        Trade on Credit, Low Brokerage. Join
now.
> --------------------------------------------------------------------------
--
> To remove yourself from this list, please use the form at
> http://www.sharechat.co.nz/forum.shtml.
>


----------------------------------------------------------------------------
http://www.sharechat.co.nz/          New Zealand's home for market investors
http://www.netbroker.co.nz/        Trade on Credit, Low Brokerage. Join now.
----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/forum.shtml.