Over here, I'm going to touch on a potential trading strategy that could benefit some holders who have extra cash on hand. Before I begin, I need to highlight that this strategy contains a fair degree of inherent risk, and readers should do your due diligence to assess whether the risk and outcomes associated with this strategy are suitable for their investment profile.
Subscribing to excess rights
The strategy takes advantage of a market inefficiency arising from uninformed SIA shareholders - it pays to be astute and it pays to be awake. A sleeping giraffe is more likely to be a lion's dinner than an awake and alert giraffe, so that's why giraffes sleep less than 5 hours a day. But I digress...In a theoretical efficient market, every SIA shareholder who receives the rights shares (this post doesn't touch on the rights MCBs) will make a considered decision and do one of two things:
- Exercise the rights by paying $3 per share, thereby obtaining SIA shares of (presumably) around $4+ value; or
- Discard the rights by selling them in the open market between 9am on 13 May 2020 and 5pm on 21 May 2020, potentially receiving $1+ per rights share.
- Do absolutely nothing.
The composition of this group of SIA shareholders is likely to be a mix of the following:
Now this is a more realistic picture: the value of the original 1,185,128,324 SIA shares has fallen from over $11 billion, to $7 billion, to just $4.2 billion. This a devastating illustration of how quick value is evaporating. [edit: as the rights MCBs are bond-like, I have revised the calculation to not remove the $3.5b coming from the rights MCBs, which should be a fairer calculation] As the MCBs are effectively bonds that require SIA to pay back either by (a) redeeming the bonds sometime down the road or (b) converting these bonds to new shares, I only deduct the value of the newly injected cash from the rights shares from the $13b market cap: $13 - $5.3 = $7.7b. It is fairly interesting that, between 5 May and 6 May, the value of SIA based on its market cap rose from $7.004b to $7.7b. It is akin to saying that the $5.3b cash infusion is worth $6.0b instead, but more likely it is the result of certain market inefficiencies arising from (a) heavy selling in the lead-up to 5 May, or (b) some unknown optimism driving up the price on 6 May.
- SIA shareholders whose shares are held in a depository account (e.g. CDP) with a non-Singapore mailing address. These holders do not get any rights shares, even though SIA will "issue" these rights still (because SIA needs money).
- Sleepers, who simply do not know that they need to take one of the above two actions.
- SIA shareholders who invested using CPF or SRS funds, and are stuck because they have insufficient CPF or SRS balance to exercise the rights. They may also be unable to top-up their CPF or SRS if they have hit the respective annual limits for each account.
I anticipate that this group will not be small. I hope that none of the readers of this post fall into this group! But anyway, because of this market inefficiency, there may be "leftover" rights, also known as excess rights. Anyone who does option 1 (exercise) is eligible to apply for excess rights, although you will not know upfront whether you get a full allotment. You might say "I am prepared to take 10,000 excess rights and I am setting aside $30,000 to show you I'm serious", but after everything settles, you might only get 1,000 excess rights at a cost of $3,000 and the remaining $27,000 will be returned to you.
And the magic is in the 1,000 (or whatever amount) of excess rights that you manage to obtain and exercise. Since these convert to regular SIA shares, there are potential profits if SIA shares remain anywhere above $3, ignoring brokerage fees. The current price of SIA is around $4.40 and this is already accounting for the dilutive effect of the rights issue. The question is how likely is it that SIA's share price may fall below $3 - because that is the inflection point below which the excess rights strategy starts to become an excess rights disaster, and we don't want that.
Market Capitalization analysis
This section is going to be numbers heavy. While there are many ways to try to assess the likelihood of SIA's share price dipping below $3, I have kept to a fairly simple method of using market cap. Market cap is simply the amount of shares outstanding x the share price, and is supposed to represent the market's perception of the value of the company.
From SIA's financial report, we know that SIA has 1,199,851,018 ordinary shares, of which 14,722,694 are treasury shares. This means that there are 1,185,128,324 shares outstanding.
At the last pre-dilution trading price of $5.91 on 5 May 2020, SIA's market cap was around $7.004 billion. While $7b sounds like a lot, just compare it to 22 July 2019, when everything was rosy pre-Covid. Based on that day's close of $9.62 (the highest in the past 1 year), SIA's market cap was $11.46 billion. SIA's market cap shed a cool 38% between July 2019 and May 2020.
The rights issue involves 3 new shares for every 2 existing shares, hence 1,777,692,486 new shares are being issued, resulting in 2,962,820,810 total outstanding shares. We know that the full amount of new shares will be issued because Temasek has stated that it will backstop the deal.
Based on the post-dilution trading price of $4.40 on 6 May 2020, SIA's market cap is now $13.04 billion. Wow, this is more than on 22 July 2019, you say. Hold your horses, let's look into this deeper. Out of the $13.04 billion, a huge chunk is coming from the cash being raised through the rights issue. We know that $5.3b is coming from the rights shares, and $3.5b is coming from the rights MCB. So we deduct both of these newly injected cash from the $13b market cap: $13 - $8.8 = $4.2 billion.
Now, what happens if SIA's share price were to fall to $3 sometime in the next month? That $13 billion market cap drops to $8.888 billion, and if you take away the $5.3b and $3.5b fresh injections, you are left with next to nothing $3.5b. Can value erode so quickly? Seeing how $11b dropped to $7b and then to the equivalent of $4.2b, it's not impossible. My own take is that it is very unlikely that we'll see the share price dropping to $3, but then against we mustn't forget that SIA has lined up an additional $6.2 billion of potential funding from the issuance of Additional MCBs. SIA wouldn't be doing that if it was confident of pulling out of this current situation with just the current $8.8 billion injection, so I would say that we should be prepared for anything, really.
Closing Thoughts
Excess rights can be applied for from 13 May 9 am until 28 May 5 pm, after which allotment will be made until all excess rights are taken up (Temasek is sweeping up everything if the minority shareholders subscribe to less excess rights than the pool available). The shares will then trade beginning 8 June. So long as the share price remains somewhere above $3 on 8 June, there is a potential trading gain to be made if one is allotted excess rights.
My expectation is that the share price won't fall below $3, at least as far as end June, but with one caveat: If SIA dips into the additional $6.2 billion, then I am fairly confident that the market will be spooked because that means that the airline is seeking a total of $15 billion ($5.3 + $3.5 + $8.8) in cash infusion, which is even larger than the airline's entire pre-Covid market cap. If that were to happen, we can probably regard this as an instance of Too Big To Fail, and I have no idea what the impact on share price will be. So my advice for anyone intending to gun for excess rights: get out quickly, and don't be greedy. It will be easy to think that a cost basis of $3 is a steal, but the airline industry is going to take a long time to recover, and let's not forget that in 10 years' time, there is a potential further dilution arising from the mandatory conversion of that $3.5 billion issue of MCBs, which will lead to the introduction of works an additional 1,304,626,600 new shares. Ouch, I don't even want to consider the implications of on shareholders if the $6.2 billion additional issue of MCBs actually happens.
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