DBS announced today that it will be issuing rights to raise net proceeds of approximately SGD4 billion. Pursuant to the Rights Issue, 760,480,229 Rights Shares will be offered at SGD5.42 per Rights Share on the basis of one Rights Share for every two Shares held. At this moment, there are 2 burning questions on the investors' minds. Why the need to raise capital? Why now?
After reading all the chest-beating statements in the announcement, i remain unconvinced. The signal i am getting from DBS is this: I NEED CASH BADLY. So they dont need the cash for M&A. But i believe they need the cash because their core business has slowed down tremendously and the cash flow is expected to be poor. NPL are on the rise and they know that they need to take huge write-offs in the near future. If not, why would anyone want to raise capital in this uncertain and turbulent time. Also, the rights are being placed at such a huge discount to attract investors to take them up, which indicates a red flag.
Current shareholders who choose not to take up this rights issue may potentially see their stake decrease by up to 33.3%. Before the announcement, DBS was trading at $9.85. So logically, upon the successful closing of this rights issue, the ex-rights price should also go down by 15% to $8.37 (assuming all rights are exercised). As such, in the near future, we may see DBS price moving rangebound around $8. However, we need to be aware that the future EPS, book value & dividend will be shared among a larger number of outstanding shares.
One last thing i would like to mention is the dividend. In the announcement, DBS stated that it intends to declare and pay a final dividend for the quarter ending 31 December 2008 the same absolute cash amount as it would have done had there been no Rights Issue. In light of the weak business conditions, I expected this year-end dividend amount to decrease as compared to the same period last year. I would really be afraid if DBS payout the same amount of dividend because it does not make sense to give out the same dividend amount using capital raised from the rights issue (Its a big no brainer red flag).
Have a merry christmas. Cheers!
2 comments:
Hi,
what do you think are some of the potential problems that DBS might be facing? More bad loans? Compensation to people who invested in the Lehman notes?
The reasons behind this rights issue include the potential write-off of bad loans, impairment charges on assets and compensation to Lehman notes investors.
Cheers!
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