How to Profit from the Foshini Group Rights Issue
Last week our TFG short was closed out for a 133% geared gain, it has since rallied to above R69.00 on optimism around the JET acquisition news.
However, Foshini also announce they are raising about R4bn in a deeply discounted rights issue. Today (21 July) is the last day to trade in the shares to be awarded the rights at a take-up price of R41.90 per share.
What is a rights issue, you may be thinking?
Rights are additional shares the company makes available to existing shareholders to raise cash. These are issued to shareholders, and listed on the JSE, so they can be traded, like normal shares. Rights are denoted with a N following the company ticker. So TFG's rights will be traded with the ticker of TFGN. And these will be allocated to portfolios (at most brokers) this Monday.
One of the biggest reasons for the deep discount is TFG needs the R4 billion they will raise. To guarantee all rights are taken up, they approached potential investors to underwrite the rights issue. RMB, ABSA and Standard Bank have undertaken to buy all rights not taken up by investors. And to reduce their risk significantly, a deep discount was agreed on.
Following rights at a deep discount might sound like a certain winner, but let's look at how the rights issue could affect your average price and where the shares are likely to trade.
The TFG's rights (TFGN) will have a value, being the difference between the price of TFG and the rights take up price. So, if TFG closes tonight at R69.50 then these rights will have an indicative value before the open tomorrow morning of R27.60. But, you must account for the dilution. Remember the company is issuing each shareholder with an entitlement of almost 40% new shares at 41.90. The dilutionary impact on the TFG price, should make it fall 11.38%, Wednesday morning.
Here’s how we intend to profit from TFG’s rights issue…
Now, most rights issues tend to drift towards the rights issue price, as explained above TFG should adjust quickly to R61.61. Then most rights issues drift to the issue price, in this case R41.90.
It is highly likely that you will be able to buy TFG shares below R55.00 a share in the near term. And there is reasonable chance you could sell (Short) TFG above R64.00 on the 22 July, not before.
If you still have shorts on TFG initiated above R70, close them today, to avoid the dilution of the rights issue and look to open a short again tomorrow with an ideal entry above R64.00. This is because your short will be diluted by the “profit” in the rights!!.
Traders are forced to follow the rights when using futures and CFDs. And so, your average entry price will be reduced down, (which is bad for shorts!).
Investor sentiment is still low, consumer spending is subdued, and TFGs share price should drift lower. We will implement a trailing stop loss of 5% as it moves in our favour with an initial target price of R 55.00.
Recent Ideas Update
Bidcorp making lower highs – sellers still not in charge…
We’ve been short Bidcorp for a while now. It has remained stubbornly above R280.00. All dips below see buyers push it back above. With lower highs being printed, we should see sellers take charge, but I don’t want to risk a breakout and strong rally if sellers lose patience.
Close your BID below R281.50 to lock in 20% gross gain on Margin.
Longer term value opportunities
Our recent buys in EOH, BLU and DGH are still at below the entry levels suggested last week. We see these as good longer-term value plays for a portfolio.
Here’s the entry levels…
• Buy Blue Label below R3
• Buy EOH below R5.50
• Buy Distell below R77.50
See you next week.
Contributing Editor, Money Morning