Forum Archive Index - September 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Hoop,

> 
> Dorchester Pacific shareholders got bonus issue warrants (ex19th Sept)
> 1:4 DPCWA and 1:4 DPCWB.
>      On the other channel some writers consensus were, that once the
> warrants were issued the head share DPC would fall back in price. This
> has not happened ,as yet. The demand for scarce stock I suspect is
> keeping the price up.
>

Hoop, to understand what might happen to the prices of these three 
Dorchester  listings now that they are all 'in play', there are no simple 
rules, unless you make simplifying assumptions.

We might start, for example,  by assuming the underlying business 
does not change and DPC are simply issuing more shares to back the 
existing business.

>
> DPCWA 35cents
>      and
> DPCWB at 40cents, 
>this pricing is illogical 
> 

A person wanting to get into DPC today can choose to buy into DPC in 
three ways

1/ Buy straight DPC shares on market at $2
2/ Buy DPCWA at 35c and stump up $1.70 in one years time, a total of 
$2.05
3/ Buy DPCWB at 40c and stump up $1.70 in two years time, making a 
total of $2.10.

$2, $2.5 and $2.10 means not a lot of difference in my eyes.  But 
generally a warrant will not be eligible for dividends until it becomes a 
share, so that fact must be taken into account when valuing the 
warrant.

> 
> By Sept 2006 there will be another 10 million ( 5m Sept 2005 + 5m Sept
> 2006) to add to the 20million shares on issue, so effectively with
> both warrants all successfully converted @ $1.70, in theory at present
> day price the DPC share is worth $2.55 (if the warrants are worth
> zero).
>

But the warrants are not worth zero.  You have just told us they are 
trading at 35c and 40c.   So lets not get hung up on some theoretical 
equivalent problem that does not exist.

If the current DPC share price is $2 as you told us...(continued).

>
>  However the market is seeing this differently at present with the
>  warrants
> worth around say 35c.......35c + $1.70 = $2.05 is what (an) investor
> (s) is seeing at present. If this becomes reality, this values DPC at
> present day price at $3.07.
>

You are moving too fast for me Hoop!  If you buy a DPC share today 
you will pay $2.  It is worth no more or less than exactly what you pay 
for it on the market.    I think you are assuming that if you buy DPC on 
the market today you will somehow get an entitlement to DPCWA and 
DPCWB as well.    Not so.   If you buy 1 xDPC share on the market 
today this is *all* you will get.      

> 
>So if any investor buys these warrants for say 35c now. The present
>day price (before dilution) has to be $3.07 + interest earned if money 
in
>the bank....
>

There is no such thing as the 'present day price before dilution'.  The 
shares have already gone ex-warrant and are effectively alreay diluted 
because the warrants are separately listed already.

Perhaps you are talking about the theoretical past ex-price *before* 
dilution?

If the three market prices immediately after the split are  $2, 35c and 
40c respectively that means the theoretical price before the split was 
$2+0.35c+0.40c= $2.75.

>
>So if any investor buys these warrants for say 35c now. The present
>day price (before dilution) has to be $3.07 + interest earned if money 
>in the bank....
> say 4% 1.4c x 2 years(or 3) = $3.10. This is the price DPC (
> undiluted of 2005 Warrants) has to be in Sept 2006 for that investor
> to break even.
>

Let's not introduce the time value of money into it right now.   It is a 
small effect and it is obscuring a simple clarity that you are trying to 
grasp.

The DPCWA warrant is worth 35c today , as you told us that is what 
the market is willing to pay for it.     You have to front up with $1.70 in 
one years time.   So you will be 'ahead' in holding your DPCWA 
provided the head share price is at least $1.70 + 35c= $2.05 by then.

Now lets bring the time value of money back into it.   You don't have to 
front up with that $1.70 for a whole year.  If you put $1.63 in the bank 
today at 4% interest you will end up with $1.70 in a years time (check it 
out on your calculator).

So the present day value of your DPCWA once it is paid up in a years 
time will be $1.63+35c= $1.98.    Notice that buying DPC today at $2 is 
slightly more expensive than this.   So the best deal is to buy DPCWA 
today and stump up with $1.70 in a years time.  Do not buy the DPC 
head share today, (all other things being equal and assuming a 
'discount rate' of 4%).

> 
> The burning question is ...is DPC going to be worth that amount
> considering that the market only valued the stock at a $1 last year.
> Answer ...don't know.
>

The fact that each DPC was worth only $1 a year ago is of no 
relevence at all.  

If you don't think DPC will be worth $1.70 in one years time then sell 
your DPCWA warrants now as they will be worthless if the head share 
price drops below $1.70 a year out from here

> 
>The facts .......DPC being a small stock usually gets forgotten, hence
>$1 around 2001-2002 when it should had been $1.60 at least. At 
present
>It has lost its forgotten status.The recent price surge from $1.40 -
>$2.18 and back to $2.03 is demand driven. What factor (or factors) is
>causing the demand?
> 
>Factor 1 ...Investors waking up to a hugely undervalued stock in short
>supply. Factor 2....Bonus issue of the warrants. Factor 3....Selling
>its pet poodle, Sterling Portfolio Management Ltd to Spices (a wholly
> owned subsidiary of AXA). 
> 
>I have a feeling Factor 3 is not a key driver in this momentum, 
>

What momentum?   Haven't the warrants only been trading for a few 
days?   That is hardly enough time to build up any kind of momentum!

> 
>DPC management usually has a 40% dividend payout  policy. So, 
with
>status
>quo, I estimate, $2.6M /20M shares X 40% = Dividend of 5.2cents
>(2002..3 6cents).
> 
>Therefore, on my estimated 10cents per year dividend payout on a
>growth share... $3 a share is not beyond belief, and this is after Nov
>2003, 
>

I don't know how you come to this estimated earnings payout, but I'll 
take your word for it.

>
>less alone at Sept 2005 or Sept 2006.
> 

But by then there will be 10million new shares - you just told us that.   
So if the business has not changed significantly then whatever 
earnings it has will have to be spread over 30million shares, not 
20million.  That means you can expect a dividend *cut* by then, 
provided the business remains substantially unchanged.

>
> DPC has had a remarkable growth period during the last 6 years 
> within the financial sector, and with the possible extra money it will
> receive with the warrant conversion ( $17millon),with great
> management, the future for DPC is looking very rosy. 
>

How rosy the future of DPC is depends on how wisely it uses that extra 
money.  And that is the great unknown.  If you have confidence in their 
business plan over the next two years you should do OK by just 
holding on to all three: DPC, DPCWA and DPCWB.

SNOOPY



--
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on Pegasus Mail version 4.02
----------------------------------
"Sometimes to see the wood from the trees, 
you have to cut down all the trees."




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