Forum Archive Index - October 2001

["G Stolwyk" <stolwyk@wave.co.nz>]

As far as any SKC split is concerned, there is no quarantee that there will be one! If institutions are against it, then there may not be one! 

 

In 1995, I became one of the first public shareholders when $5 shares were offered @ $ 27.50. In 1996, they were split into $1 shares and there has been no split since.

 

When a high quality stock is in demand and particularly when it approaches the 10 Index, then, shares are being locked in at a high rate with consequential price rises. And if it is chosen as a MSCI stock, then there will be another scramble for shares.

 

Finally, prices stagnate, reasons being that more substantial investors can't get enough of these shares at prevailing prices and therefore won't buy. They also want to move into or out of shares within a short time, should the need arise, but can't anymore.

 

( This need arises when a disaster occurs and a Fund needs to redeem units of a Unit trust. Getting reasonable prices within the shortest time, is paramount. If they are not successful, then redemptions can be frozen. This will result in unit holders exiting as soon as there is an opportunity. In any case, Funds and other investors are more than ever into trading and the timespan of holding shares is increasingly becoming shorter; they don't want to be caught having a share with little turnover ).  

 

Finally, the Directors step in, they release the log jam and make a share split ( there are also other methods to expand the number of shares, we won't discuss these ). 

 

It requires skill to judge when a split should take place. Some time ago, ERG made a 3:1 split, I thought then that it was a serious error as ERG had a low E/S rate and turnover of scrip was already high, and so it turned out to be. The market became flooded with unwanted shares. A share split also requires good timing to obtain the maximum effect.  

 

A consequential outcome of a successful split is to make the shares more expensive.

 

Say a stock is in high demand because of its earning history, the shares have risen to say $10. There is a much scarcity of stock; trading is erratic and so are prices. These have reached a plateau and further rises are slow. 

 

The Directors decide that a 1:1 split is in order.

 

Because of the now larger supply of stock, more and sometimes, big investors - often Funds - (re)enter the market. 

 

The 'ordinary' investor also thinks that now is the time to buy these shares as the  price has fallen from $10 to say $5. And if they buy while there are still lingering negative effects due to a large amount of new scrip coming into the market, they could do well: In most cases, given a relatively short time, the excess scrip has been soaked up and prices rise to say $6.   

 

The original holder will now have shares, worth $12 and everybody is happy! If the whole process is conducted with some well timed skilled publicity, all the better! Obviously, the prospects of this high quality stock must remain excellent!

 

Re SKC, there is still some reasonable supply of stock. There are also some capital notes but a decision on conversion is not due till 2005 and in any case, won't result in many shares. We have the DRP scheme and that creates extra shares, say only 3 mill.per year.

 

SKC shares should have been $ 14 by now  but are less, due to some - in my opinion - unfortunate decisions having been taken during the year. I believe that somebody wanting to take over the company, would have to pay $15. Some brokers value SKC @ $14+. 

 

As I said, there is no guarantee of a split; your proposal is similar to say, having a choice of soup with substance, or a watery, heavily thinned down entry; I know which one I prefer! And so do the larger investors!

 

Gerry