Supermarket retailer Sheng Siong Group Ltd (SGX: OV8) has fallen by as much as 5.6% to S$0.67 earlier in the morning. What has happened?
As it turns out, Sheng Siong had proposed a private placement at 2.21 am in the morning. Under the placement deal, Sheng Siong would be issuing 120 million new shares of itself at S$0.67 each through its placement agent, J.P. Morgan (SEA) Limited. The announcement likely came as a shock for the market there were no announcements made in the past few months which indicated that Sheng Siong might need to raise capital.
The current status
In fact, based on the company’s latest financials for the first half of 2014, the company is still in a net cash position (total cash minus total borrowings) of S$95.6 million as of 30 June 2014. The company had also just paid out a dividend of 1.5 Singapore cents per share to its shareholders on 29 August 2014. That equates to a capital outlay of roughly S$20 million.
What is happening with the private placement?
The company will raise a total of S$80.4 million from the exercise. The 120 million new shares represent about 8.7% of the company’s current share count of 1.38 billion. Management explained that the company will be using most of the proceeds to finance future expansion of its retail activities in Singapore.
Is the market right in disliking the deal?
From the drop in Sheng Siong’s share price today, it can be deduced that the market isn’t too enamoured with the deal. There are good reasons for the cynicism: The placement will reduce the net asset value per share of the company by 8% to 9.96 Singapore cents and at the same time, decrease its earnings per share by 7.8% to 2.59 Singapore cents. Current shareholders are left with a smaller slice of the economic benefits which accrue to the company over time.
From a capital allocation perspective, there are also kinks in Sheng Siong’s logic for issuing new shares. The company’s in a net-cash position, meaning it has substantial financial resources at its disposal – in such an instance, raising equity seems to be a much more expensive option as compared to debt, bearing in mind that we’re still currently in a low interest rate environment.
In addition, why did the company not reduce its dividend to shareholders if it’s need of capital? If we extrapolate from its dividend of 1.5 Singapore cents per share for the first half of 2014, the company would pay out roughly S$40 million in dividends for the whole of 2014. That’s almost half the proceeds from the private placement.
There’s a possible justification for wanting to issue new shares though. And, that is when a company’s management thinks that shares of the company are priced expensively in relation to its real underlying economic value.
With the new money coming in, Sheng Siong would need to find high-return projects that can reward shareholders well. Until then, the market may be right in its dislike of the deal.
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