Monday 26 October 2009

Placements: name-dropping for lift-off

Share placements this year have confirmed a slight variation of the trite adage - it is not what you know, but rather who you know is buying into the company.

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Guanyu said...

Placements: name-dropping for lift-off

The large-fund factor has caused share prices to rise despite dilution concerns

By JOYCE HOOI
26 October 2009

(SINGAPORE) Share placements this year have confirmed a slight variation of the trite adage - it is not what you know, but rather who you know is buying into the company.

Locally listed firms have tapped investors for almost $4 billion in 45 placements of new shares so far this year, making the market that raised $600 million in 2008 look like a mausoleum in comparison.

While the share prices of firms tend to slump after a placement announcement due to earnings dilution concerns, heavyweight involvement with companies such as Noble Group, Olam International and China Animal Healthcare has caused the counters’ prices to surge in blithe disregard for the dilution effect.

Even as the Straits Times Index fell 1.16 per cent in the 30 days after Olam International announced Temasek’s $437.5 million buy-in, Olam’s counter shot up by 12 per cent.

On a longer-term basis, 90 days after Legg Mason bought 89.3 million China Animal Healthcare shares through placement and the open market in May, the poultry and livestock S-chip outperformed the STI by 14 per cent to record a 32 per cent gain.

A more remarkable example of this phenomenon is the sale of Noble vendor shares that has accompanied its two new share placements this year.

Noble Temple Trading Inc - in which Noble’s chief executive Richard Elman is deemed to have an interest through his children - sold 135 million shares and 36.3 million shares in September and May, respectively.

Typically, the sale of vendor shares by management signals to the market that the shares are overvalued.

The market, however, pooh-poohed conventional wisdom in both cases, driving Noble’s share price up 20 per cent in the 30-day period after its May placement, and up 27 per cent barely four weeks after learning about China Investment Corporation’s plan to plough US$850 million into Noble last month.

In trying to determine which placement horse would be worthwhile backing despite the dilution risk, the only factor that analysts have been able to agree upon has been the large-fund factor.

‘It could be a placement to good investors or funds, which may make further purchases in the market after the placement. This makes the initial discount or dilution worth it,’ said Ding Hock Chai, co-head of corporate finance at Kim Eng Capital.

Lacking crystal balls and familiarity with financial calculators, investors are now counting on the institutional buyers knowing something that they themselves do not.

‘It makes a difference psychologically when a large fund is involved. It signals that the fund believes in the company. If the placement is shown to everybody, the confidence level might not be as high,’ said Carey Wong, OCBC Investment Research’s research manager.

Overshadowed by flashier placements, Swing Media Technologies on the other hand has remained undervalued since it made a $1.8 million placement in June that was devoid of large institutional investors. This, despite a ‘buy’ rating from DMG & Partners Securities last week, citing an attractive P/BV ratio and robust earnings potential.

Filling the void left by the drying up of credit, some of the big boys have found other ways to get themselves a slice of promising firms in Singapore.

Earlier this month, US-based investment managers Yorkville Advisors invested $10 million in Advanced Integrated Manufacturing Corp Ltd (AIM) in the form of an equity line facility in return for issuing ordinary shares to Yorkville in tranches during a 36-month period.

Guanyu said...

‘We consider ourselves long-term partners with the companies, providing the capital to them in a disciplined way. We’ve structured the equity commitments over a period of time, so that firms can tap them when they need it,’ said Anthony Chan, Yorkville’s head of Asia.

It remains to be seen, however, how the market views this form of fund raising alongside the more conventional rights issues and placements. Since the announcement of Yorkville’s investment, AIM’s stock price has largely trended sideways.

In such cases, it might take more than who you know is buying into a stock - rather who you think everyone else knows.