Tuesday, 7 April 2015

I FINALLY made money from a Share Purchase Plan

If you have been reading this blog for a few years now you will know that I almost always get shafted when it comes to share purchase plans (or SPPs).  My investment rationale is always sound however I am always shafted by the mega scale backs that come with guaranteed profits.

Interestingly this time I ended up with a larger profit because the end result wasn't as guaranteed as in the past.

A recap on how to make money from Share Purchase Plans

I have gone through this in a significant amount of detail before but basically you make money from share purchase plans because
  • You are able to buy shares at below the current market price (often in excess of your pro rata entitlement)
  • If the current market price is higher than your purchase price from the share purchase plan you have made an (almost) instant profit
Basically the bigger the discount is to the current market price the more certain you are of making a profit.

However the big downside to SPPs (as I mentioned above) is that because the profit is so certain everyone wants to take part and everyone applies for their maximum allocation.  Companies often don't need this much money and scale back your allocation significantly.  They also don't issue the shares for a long time and take even longer to return your money.  You therefore lose out by having lost the ability to earn interest on this cash in the interim.

I participated in the recent Macquarie Group SPP...even though the terms didn't look as good

Macquarie Group (ASX: MQG) recently decided to do an institutional equity raising and an SPP to raise cash for a purchase that they had done.  When I first looked at this deal it didn't look great at all:
  • Macquarie's share price was already incredibly high.  
    • I was actually looking to sell out of my MQG shares after years of holding them
    • A high share price isn't great because it can go anywhere in the time it takes for you to be allocated your shares and able to sell them
  • The discount was tiny
    • The higher the discount the higher the guaranteed profit.  In the case of Macquarie SPP it was only a 1% discount which is not really worth your time and effort (especially if you think the stock is expensive)
  • They weren't actually issuing that much capital
    • Relative to the size of Macquarie this was actually a really small capital raising.  In smaller capital raisings you are more likely to get scaled back which is the thing you want to avoid at all costs

This deal on the face of it didn't look that good...so why did I participate?

There were a few key points in the fine print which caused me to participate in the deal.  They included:
  • As a retail shareholder you could elect to participate very late
    • Being able to decide whether to participate very late is incredibly valuable.  It allows you to see where the share price actually trades.  The 1% discount is to the price as at the institutional raising...not the retail SPP
    • In the case of Macquarie the shares were trading 4% above the raising price by the time I decided to participate...a 4% profit still is pretty slim but it was enough to make it worthwhile on a $10,000 investment
  • The shares were being issued very quickly
    • Normally you have to wait weeks, even months for the SPP allocations to be made and to be able to trade out of it
    • If you are being scaled back your money is locked up for ages.  In the case of Macquarie you were only locked up for a week and a half if you elected to participate at the last minute (as I did).  It made the downside of a scale back much less
  • The terms looked so bad that I thought people may ignore it
    • The downsides were so obvious to this deal I thought a lot of people may actually sit it out thus reducing the likelihood of scale back

Things went even better than I hoped...and I got a bit lucky

In this SPP everything went to plan:
  • There was no scale back - so few people participated that I actually got my entire allocation
  • The share price actually increased by the time the shares were allocated - I was sitting on a 5% profit when the shares hit my bank account
  • I was able to trade out of the shares very quickly and lock in my profit

I got a bit lucky when I traded out of the shares.  They were trading at a price which gave me a 5% profit (excluding trading costs).  I considered holding onto them for a bit longer but then I remembered that I thought the price was overvalued in the first place so I sold them and locked in my profits.

Almost immediately after the price began to fall so my timing was perfect.  This was pure chance.  There was every chance that the price would continue to rise.  I think one thing I learned from this exercise is that if you see a price you are happy with...don't be greedy...take it and trust the analysis that you have done.

As with all of my stock specific pieces - this is not financial advice.  Please seek advice from a qualified advisor who can look at your specific requirements.

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