THE BOOM OF CORPORATE ACTIONS AND THEIR IMPACT ON THE VALUE OF STOCKS

The financial industry in Ghana has come of age and we find ourselves in the era of Corporate Actions like Rights Issues, Mergers and Acquisitions as the Bank of Ghana sets new minimum capital requirements for the Commercial Banks, Rural banks and all the players, in accordance to the BASEL 111 standards.

As the Ghana Stock Exchange sees more interest and the general capital market records higher levels activities amid the booming bond market in Africa, it is smart for us, investors, to learn about the impact of corporate actions on the value and price movements of listed companies, and the general market psychology during corporate actions.

So then, what is a corporate action in the first place?

Corporate Action is any event that brings materials change to a company and affects its stakeholders, including shareholders, both common and preferred, as well as bondholders. These actions are mainly approved by a company’s Board of Directors and in some instances by the shareholders. For instance, rights issues, dividend payments, bonus Issues, mergers and acquisitions or delisting from the exchange and so forth.

With the impending rights issue of HFC Bank Ghana and others in the pipeline, let me focus on Right Issues.

Rights Issues as a Corporate Action and Impact on value of stock or price movement

A rights issue regularly takes place in the form of a stock split, and can indicate that existing shareholders are being offered a chance to take advantage of a promising new development. Theoretically, with rights issues, existing shareholders get diluted if they do not take up the rights. Prices fall. (If rights are issued at a discount).

There are 4 practical options available to shareholders:

1.       Take up the rights – Value of your stock remains the same.

2.       Sell your rights – No Value will be lost if right is sold at the appropriate price.

3.       Subscribe for additional rightsA shareholder could make profit if s/he succeeds to buy rights less than a particular price based on the terms of the right issue.

4.       No action – The Value of your holdings decrease due to new price.

So with HFC rights issue – Should you exercise or not?

My decision will be, YES, exercise your rights or sell your rights at the appropriate value if the rights are tradable.

Argument:

The decision to exercise rights in the Right Issue of HFC Bank is based on three reasons which should not be neglected.

1.       Dilution Of Shares / Lost In Value By The Percentage Of Rights Issue If Not Exercised:

As indicated above, theoretically, with rights issues, existing shareholders get diluted if they do not take up the rights especially when it is issued at a discount. Prices will fall (or be readjusted) by the percentage of rights issued. This fall in price will affect the portfolio if no action is taken and reduce value of shares after price readjustment.

 

2.       Market Psychology and Historical Performance of Rights Issues in Ghana:

Remember that, a rights issue regularly takes place in the form of stock splits, and can indicate that existing shareholders are being offered a chance to take advantage of a promising new development. This perception and the perception that prices are cheaper turn to attract interest in the stock. History in Ghana has shown that prices of stocks rise slightly (at least to the original price) after the right issue.

3.       Future Prospects of HFC Bank due to expected influx  of capital:

HFC Bank ltd being a major subsidiary of Republic Bank Holdings ltd now has stronger roots and is expected to meet the minimum capital of GHS400 million. This anticipation in meeting minimum capitalization requirement is going to increase demand for HFC shares and hence reflect in price hikes. Considering the fundamentals, HFC recorded a 15.64% revenue increase year on year in the 3rd Quarter and is expected to follow that trend by close of year. Operating Profit for the 3rd quarter of 2017 increased by 27.87% compared to 2016 and also Profit after tax saw a big hike by 221.39% year on year. Meanwhile Shareholders Fund decreased by 0.53% year on year in Q3 2017. Return on Assets rose from -1.12% in 2016 to 1.28% in 2017. HFC recorded a 14.34% Return on Equity in 2017 compared to -11.75% recorded in the previous year.  Net profit however gained momentum to record a 10.44% significantly higher than the previous of -9.94% in 2016.

Invest wisely and Keep investment.

Data source: GSE, CSD, HFC Bank Financials 

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