Analysis of DEMCO's valuation per share, to an investor which subscribes to the rights offering at 10 Baht per share, for each 5 shares he now owns and gets the free warrants attached.
Lets take the example of a member here which owns 100,000 DEMCO shares before the stock went X-rights. He so now is entidelt to 20,000 new shares at 10 Baht. (5 old for 1 new), so that is 200,000 Baht new investment, he has to pay now at which point he will own a total of 120,000 DEMCO shares. Note, in this example it does not matter what he paid for his original 100,000 shares. We here are interested in establishing/guestimating what the value of the new shares are like to average out to be.
Realize to this rights offering subscriber with his new 20,000 shares, he will also get:
1) 12,500 new Warrants #5, convertable at 12 Baht.
2) and 12,500 new Warrants #6, convertable at 15 Baht.
(For every 1.6 new share he got, he gets one of each new warrant for free, as Demco states and here reviewed many times).
What some members might be missing is that while these warrants are currently not in-the-money, as the stock is trading only at 9.65 per share, they surely are not worthless!
As they give this investor the right, but never the obligation to convert these into new shares at regular intervals and before the expiry date (1.5 to 2.5 years, for W#5 and W#6) this at the pre-determined guaranteed conversion prices. (see below)
Surely this is worth something as most of us think DEMCO's stock price should/could at some point be much higher down the road. Think of it like this, assume this stock rocks back up to 15 per share, by say the 3th Q. of 2013, and say this investor wants so then to excersise the W#5. Surely he can sell enough old shares at 15 at that point, so to buy the new shares at 12 (the guaranteed conversion price for W#5). 12,500 times 3 Baht profit, so he just realized a 37,500 Baht gain, without any new out of pocket investment.
You can so see that an option to acquire new shares at some future date has some value, even while today it may seem it does not. This is called time premium.
You also see that just tabulating each conversion price as one member did to come to an average overall current price, is not the full picture either.
We can through a finance theoretical models (for example Giguere's method or Kassouf's method) calculate what these warrants might be worth when the list on the SET, but that is all academic as the SET is rarely rationally valued. (Members last year will remember when the warrants #4 traded at 1 to 2.80 Baht as I recall, evenwhile they were out of the money and only had a few months to go). I would professionaly guestimate the W#5 will be worth around 1 Baht when they trade and the W#6 about 0.50 Baht, as they have a higher excercise price of 15, but have much longer to go before expriry.
I think this is realistic especially if you assume DEMCO's stock is now at an important bottoming price as I do.
Hence 12,500 x 1 Baht and 12,500 x 0.60 Baht = could so reasaonably valued at a total 20,000 Baht for the warrants package (for both warrants #5 and W #6 when they trade by say early late July/early August. All for this same example of 100,000 original shares and subscribing to all the rights.
Hence you can take the 20,000 new shares at a cost of 10 Baht which is 200,000 Baht but then, deduct the/my estimated value of the free warrants on the first trading day, so your net cost could well be 180,000 Baht for these new shares. Then divided this cost by new 20,000 new shares you got, so the true cost per share is only 9 Baht. Hence at the current price of 9.65, it does look like one should subscribe, especially if you are DEMCO bullish which I am and remain!
If this stock rocks up before the warrrants trade they will be worth more, if the stock languishes by then they will be worth less, so of course you take some market risk, as always. Its not likley this stock will laguish unless the SET goes much lower! Also we reasonable know from DEMCO that it will report a strong 3 Q. earnings of around 90-100 mill. Baht.
Hence I conclude again, one should subscribe and get the new shares along with the free warrants! As even if the warrants are worth half of what I here just guestimated, you still would only pay 9.50 per new share, adjusted for the free warrant package which has some value, even while they are out of the money.
All comments & critique/correction welcome as always,
Best Regards,
Paul A. Renaud.
www.thaistocks.com
