Thursday, 7 November 2013

FKP: Another year, another rights issue

When I write posts about stock investing I generally try and stay away from stock specific examples especially when I am writing about ways to make money because I don't want readers to invest in anything I am doing unless they really understand it.  That being said, one of the stocks that I do write about reasonably often is FKP because so much seems to be happening with it.

I have posted several times on the stock because

Now the stock is back again and I seem to have done everything right this time around (by absolute fluke).  The day after I sold my partial holding in FKP taking a large profit, they announced a large rights issue which once again offers to the potential to make quite a bit of money.  You can't buy into the rights issue unless you hold stock so please keep that in mind as I'm writing this post.

A recap on how rights issues can make you a lot of money

As I have posted about before, rights issues can make you a lot of money.  For the full details see the prior post that I wrote on this topic.  However basically it came down to
  • You can buy stock at a discount (in this case significant discount) to the prevailing share price
  • If you buy your rights (proportionate to your share holding) you are typically even if the share price trades at TERP (the theoretical ex-rights price - see how to calculate TERP here)
  • However if you apply for an over-allocation of shares that people don't take up then you can make instant profits by selling the shares at the market price and buying them at the discounted price
The biggest risks involved in this are
  1. The share price trades below the issue price straight away or by the time you get around to selling the stock
  2. You get scaled back significantly and the company just returns your cash but you've lost any interest you could have been making on this in your home loan or savings account

FKP traded really poorly last time after their rights issue...what is different this time?

After FKP did their rights issue last
time they traded very poorly for quite a long time and it is only more recently that their share price has had a run.  This was because they were leveraged too high and the market simply didn't believe in their Net Asset Value.

More recently they have been selling their non core assets typically at their Book Value (or NAV) and thus proving up their NAV and they have also been repaying their debt slowly.  With this equity raising they will have almost eliminated their debt risk and so the market is once again focused on the fundamentals of their business.

The business is therefore much more robust this time and I am confident in their prospects and so am looking at taking up my rights (I will probably not hold onto these shares for too long).

However...with this improved business performance the risk of scale back is much greater

There is a significantly increased risk of scale back given how much 'safer' this bet is.  There is little risk that the share price will trade below the raising price and so everyone will probably take up their allocation.  There is the risk therefore that I send $100,000 (the maximum allowed) for an over-allocation and I only get a few hundred dollars worth. 

If this happens they will then hold onto my cash for ~2 months and I lose the 5% I could be making by keeping it in my home loan offset account.  There is the potential for a large profit to become a loss of ~$800.  

I have not decided how much I will allocate to this rights issue however it will probably be something less than the maximum of $100,000.  I am currently thinking of allocating $50,000 to it but there is no science behind is just a number that I am comfortable holding in one stock in the short term.

Once again this is not investment advice and please do your own research before doing an investment like this.

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