Rights Issues

It was on the 5th day of March that Maybank proposed rights issue at RM2.74 per share (43.2% discount to the closing price of RM4.82 of Maybank Shares as at 5th March 2009) on the basis of 9 shares for every 20 existing shares.

Ok. Let's analyse it in a simple way. If the market value of a product which you are selling stands at RM5.00, and you are selling it at RM2.80, what will people think? There must be something wrong with the quality of the product that leads to selling of the products at fire-sale prices? This is what most people would think of during economic downturn.

Yes it is true that Maybank is facing a deluge of problems which are yet to be solved and that is why it plans to raise RM 6 billion through rights issue. These problems include chalking up RM 9 billion worth of debts over the past few months and expensive acquisitions in Inodonesia and Pakistan. HwangDBS Vickers Research said that it is concerned on Maybank's ability to consolidate the recent bank purchases and on further impairments it may have to make, especially for MCB (Pakistan) and BII (Indonesia). In addition, investors are worried that the issue of rights would dilute the banking group's earnings per share by 27% to RMo.38 at 2010 (For those who do not understand, do not worry as my next post will be talking on EPS ^^).

So what happened the next day was the share price fell RM0.28 to close at RM4.54 and it continued to drop for the next few working days until it hit RM4.00. Some investors were dismayed. If you are holding 2,000 Maybank's share which you bought at RM5.00, how would you feel (The value of your share had just dropped by RM2,000 in total) and what will you do?

Some investors tend to sell their shares at low prices (Scenario 1). What they had in mind is that its better to lose RM2,000 than to lose more. Others might want to take a risk by holding on to their shares but are not willing to take up the issued rights because they are afraid that they might lose more (Scenario 2). Are you thinking one of these ways?

You shoudn't be one of them. You should hold the shares you had, and get more shares at low price (if you have the capital), and lastly take up the rights issue (Scenario 3). Let me put in some figure to depict a clearer picture.

Scenario 1 - Say Byebye to your RM2,000 + Commissions. Then you will curse when you see the share price rise till RM5.00 on the 7th May 2009. =P

Scenario 2 - On the 7th May 2009, the share closed at RM5.00. If you sell at this price, you are still losing money as you need to pay Commissions.

Scenario 3 - You buy another 2,000 shares @ RM4.00 per share and take up all the rights issued to you on the 7th April 2009 (1800 shares @ RM2.74 per share). In total, you actually buy 5,800 shares at RM22,932. Which MEANS that you have 5,800 shares @ RM3.95 per share! So if u sell all your shares on the 7th May 2009 at RM5.00, your are getting a gross profit of RM6,090!!!! Isn't that great?

Now, some might ask me why am i so confident that the share price will not drop but instead increase? Price falling will beget further losses. I can tell you why. Because it's MALAYAN banking bhd. The government will not let a bank which hold the name of our country falls like Lehman Brothers. If it falls, it is like telling the whole world that "Malaysia tak boleh". Undertaking of rights issued were secured where nearly 90% of the rights shares were taken up by major institutional shareholders which includes PNB, EPF and certain unit trust funds managed by ASN Bhd. If you are in Scenario 3, and even if you manage to sell all your shares only @ RM4.00 per share on 7th May 2009, which you can do so around 2 months ago, you still make a gross profit of RM290! HAHA, so wat is there to worry about? =)