The last time round, it happened with Chartered.
This time round, it is with Lippo Malls Indonesia Retail trust.
In doing a 1-for-1 rights issue to raise almost $300 million, there is such a huge overhang of shares that the price of both Lippo Mall and their Rights have traded down over the past few days.
Investors who have no money to take up their rights issue have to either sell their shares, or sell their rights on the open market.
In today’s trading, the price of the mother share was hovering at $0.36 to $0.38 while the rights share went down to as low as $0.02. About ninety million units of rights were traded out of the total pool of almost one billion rights.
The market is hardly efficient in the sense that many investors have chosen to sell their rights when it would have made more sense to sell the mother shares.
As each investor is able to convert their rights to the mother share at $0.31, shouldn’t they sell the mother share at $0.36 instead of selling the rights at $0.02 or even $0.026?
Ok, so the mother shares entitles you to a dividend payout of about $0.0106. Let’s analyse the numbers.
At the last closing price, mother share was at $0.365 while the rights was at $0.026.
Revenue from selling mother share at $0.365 and then using the money to subscribe for the rights = $365 – $310 = $55
Revenue from selling rights at $0.026 and getting dividend of $0.0106 = $26 + $10.6 = $36.60
If you are currently holding Lippo Malls, (assuming the price differential stays the same) you should really sell all your Lippo Malls units and buy the corresponding number of Lippo Malls R back from the market place. And then subscribe to the rights.
That is a risk free profit of almost $0.02 per share. Depending on your execution, the bid-offer spread and commission charges, the profit margin might drop to only $0.01+ but even then, it is still pure profit.
Please note that Lippo Malls trade ex-div from Wednesday which means that from the next trading day, the calculations will have to be repeated without factoring in any dividends.