After my post yesterday on CDLHT issuance of the rights and acquisitions, this post is about the few choices you can do to play around exercising the rights or if you dont intend to.
My last participation was for sabana reits which happens not too long ago. In that event, I managed to buy the mother share in my strategy. Things are different now in the sense I am holding that mother share with me this time round.
There are generally 3 levels that you have to watch out for when a Reit announces rights that are not accretive immediately in nature. I define not accretive by mathematically referring to the dilution impact to the dpu before and after.
First Level – This happens usually within the next trading day when the rights are announced and the mother share will react negatively and fall close to the terp price. This is when investors sell because they simply wants to get out of it.
Second Level – This is when more guidance are released to public what they will be using the funds for. If the acquisitions aren’t accretive in nature, then the mother share will further plunge knowing there will be dilution impact to the dpu they are getting. In CDLHT case, they announced the acquisitions and rights issuance at the same time, so it immediately covers the first and second level.
Third Level – This is when the mother share started trading ex-rights and the rights are being traded in the market. The rights are trading typically for someone who wants to dispose their entitled rights or someone who wants to get into the shares by buying the rights from the market.
Then you have two groups of people typically in this sort of environment:
1.) People who are currently holding the existing mother shares (like me).
In my case, my best bet and plan is to apply and engage in plenty of excess rights to benefit more from it. Since it seems this particular rights are not popular in this case, there should be excess rights for ballot.
In my case, I am holding 60,000 shares and thus will be entitled for the rights for 12,000 shares at $1.28. I’d most likely apply an additional 20,000 to 30,000 shares of excess to see how much I can squeeze out of it.
My margin of safety in my cost price is high in this one, so I can do some experiment to see where I end up in this.
2.) People who are not holding the mother shares but want to get some of the actions.
In this case, you have a few options you can take.
The first is buying the mother share before it goes ex-rights and you will be entitled to the rights just like me.
The second is buying the rights in the market and you can then buy the entitlement at $1.28.
The third is simply buying the mother shares right after the whole episode is concluded and done with. That should set the tone how “low” they would go in this particular exercise.
I tried with the third option in my sabana experiment and was very successful.
I hope for the same in this one.
Thanks for reading.
If you like our articles, you may follow our Facebook Page here.