The Megaworld Boo-boo!
I was surprised by the announcement of Megaworld (MEG – P2.10) that it will undertake a 1:2 rights offering. Based on the figures released by the company, Megaworld is looking to raise P12-P15bn from its existing shareholders. The move cheapens the equity and I will not be surprise if its share price corrects back to the P1.60 levels.
I guess the company should come clean and explain clearly the purpose of the rights offering. There is absolutely no reason to issue equity at this stage. Here are my arguments:
1.) Equity is expensive vis-à-vis debt. Amidst the declining interest rate environment and surging stock market, Megaworld could have issued debt. I don’t think Megaworld will pay more than 10% coupon on its debt. Conversely, issuing new equity will have an implied (equity) cost of at least 13-15%. The close to 20% plunge in the share price of Megaworld should send a clear signal to Andrew Tan that investors don’t buy the idea.
2.) Balance sheet has zero gearing. Based on its 09/06 F.S., Megaworld has a net cash position of P5.0bn. So obviously the company can add debt to its balance sheet. Besides, interest cost is a perfectly legal way to manage income tax payments.
Last August, Megaworld successfully raised US$100m from its bond offering. According to the company, the issue is 10x oversubscribed. So, there is no reason why Megaworld cannot tap the debt market again.
3.) Capital call is “contra” the rosy scenario pictured by the company. If indeed, the company is doing (very) well, why would it need to raise funds from existing investors? A more logical scenario is for the company to issue dividends.
4.) Mixed signals. Last summer, Empire East announced a P2.0bn stock re-purchase program. So, if Megaworld needs additional funds to pursue its expansion, then Empire East should have earmarked the P2.0bn as cash dividend.
Until these issues are cleared, I think Megaworld will be a “dog” stock. I do hope that the company can clearly defend and define the rationale behind the move. For now, the minority stockholders are crying foul.
P.S. I do not have any holdings in Megaworld.
I guess the company should come clean and explain clearly the purpose of the rights offering. There is absolutely no reason to issue equity at this stage. Here are my arguments:
1.) Equity is expensive vis-à-vis debt. Amidst the declining interest rate environment and surging stock market, Megaworld could have issued debt. I don’t think Megaworld will pay more than 10% coupon on its debt. Conversely, issuing new equity will have an implied (equity) cost of at least 13-15%. The close to 20% plunge in the share price of Megaworld should send a clear signal to Andrew Tan that investors don’t buy the idea.
2.) Balance sheet has zero gearing. Based on its 09/06 F.S., Megaworld has a net cash position of P5.0bn. So obviously the company can add debt to its balance sheet. Besides, interest cost is a perfectly legal way to manage income tax payments.
Last August, Megaworld successfully raised US$100m from its bond offering. According to the company, the issue is 10x oversubscribed. So, there is no reason why Megaworld cannot tap the debt market again.
3.) Capital call is “contra” the rosy scenario pictured by the company. If indeed, the company is doing (very) well, why would it need to raise funds from existing investors? A more logical scenario is for the company to issue dividends.
4.) Mixed signals. Last summer, Empire East announced a P2.0bn stock re-purchase program. So, if Megaworld needs additional funds to pursue its expansion, then Empire East should have earmarked the P2.0bn as cash dividend.
Until these issues are cleared, I think Megaworld will be a “dog” stock. I do hope that the company can clearly defend and define the rationale behind the move. For now, the minority stockholders are crying foul.
P.S. I do not have any holdings in Megaworld.
posted by jack galt at
11:43 PM
3 Comments:
i had thought somebody wanted to bring the price down. stock was selling before prevailing tickers until a certain volume was reached by 11 am.. that was when stocks at P1.98, P2.00 was wiped out in big blocks... what do you think?
By
Anonymous, at 4:47 AM
Well, you may be right in thinking that someone is trying to bring down the stock so that he can buy back at lower levels.
However, at this stage, I would not want to go against the fundamentals. It just does not add up at all. I prefer to be out .. than in. There are other stocks with better fundamentals that is worth our money.
The more I look at the situation, the more questions come to my mind. Now, I am wondering how the majority shareholders can pay for their rights. Will they be borrowing against their holdings to subscribe to their portion? Note that the majority group will have to come up with at least P10bn or roughly US$200m to pay for their rights.
By
jack galt, at 4:06 PM
i also noticed three things: one, the big buyers who were mopping up the stocks at P2.00, P2.02, P2.04 upwards were coursed through foreign brokers who ensured that the price remain at P2.06 to P2.10 (otherwise the stock would be too cheap); two, the company submitted a disclosure that all unsubscribed shares not taken in the stock rights will be bought by the their own stockmajority (or company), and three, legally, the majority can pay for rights offering by declaring cash dividends after the fact, and still have the cash you mention...
of course if these had been planned all along it would violate the fiduciary obligations of the directors and officers... and here i would have to agree with your observations about the questionable nature of the stock rights offering...
but then again, any property developer would like to have cash to exploit the uncertain situation during elections and possible after in an adverse scenario since they plan to enter into horizontal residential projects... i would not know the figures needed for this however... perhaps you do. and its vice chair is george yang of macdonalds franchise... would he risk adverse publicity?
P.S. i enjoy reading your blogs. and i lament that megaworld failed to explain investor's concerns as they should have...
By
Anonymous, at 8:50 AM
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