Splitting hairs over share splits, bonus issues

Our glove makers, Top Glove and Supermax, announced their respective bonus issue plans on the basis of two-for-one and one-for-one at the midday break on July 20. The shares traded on an ex-bonus basis on Sept 3 and Sept 4 for Top Glove and Supermax, respectively.

THE Americans do it. The Malaysians do it. Of course, we are talking about companies announcing share splits or bonus issues. From Tesla, Inc to Top Glove Corp Bhd and from Apple Inc to Supermax Corp Bhd, we have seen how these four companies were put to the test following their corporate action announcements.

Our glove makers, Top Glove and Supermax, announced their respective bonus issue plans on the basis of two-for-one and one-for-one at the midday break on July 20. The shares traded on an ex-bonus basis on Sept 3 and Sept 4 for Top Glove and Supermax, respectively.

As for Tesla, the electric car maker announced a share split on the basis of five-for-one on Aug 11, while Apple, the world’s most valuable company with a market capitalisation of close to US$2 trillion, announced a four-for-one stock split on July 30.

Both the shares of Tesla and Apple traded on an ex-split basis on Aug 31.

So what are stock splits and bonus issues?

Not too long ago, listed shares had an assigned par value and this could be either a nominal amount of RM1.00 or 50 sen or even one sen per share. If a company undergoes a share split, it basically cuts the par value of the company shares by half (if the split is on the basis of two for one) or any other denomination based on the split ratio announced. We have seen companies even splitting their shares up to the ratio of 10-for-one, whereby the par values were reduced to RM0.10 per share from RM1.00 per share.

For bonus issues, a company would capitalise reserves available in its shareholders’ funds into share capital. However, as we are now in a no par value regime, nothing really changes, except that the number of shares are increased in proportion to the proposed share split or bonus issues.

Why do companies undertake a share split or a bonus issue?

In essence, as the company’s shareholders’ funds remain unchanged after a share split or bonus issue, nothing is really “created” in the books of the company by this corporate exercise. What happens is simply more shares are issued and the share price of the company is adjusted accordingly.

There are proponents of share splits and bonus issues who argue that these corporate exercises “reward existing shareholders” while at the same time “enhancing a company’s capital base” which indirectly “helps to improve the trading liquidity” of a company’s shares in the market.

Fundamentally speaking, nothing has changed before and after a bonus issue or share split. Hence, where the reward really comes from is rather baffling.

The enhancement of a company’s capital base basically means there are more shares being issued. Leaving everything else constant, the resulting net asset value and earnings per share of the company is now being divided by a larger share base and in proportion to the share split or bonus issue.

Lastly, trading liquidity is not really an issue for these four companies as they are actively traded stocks. In Malaysia, shares trade in the market on the basis of 100 shares per lot and are highly affordable to any serious investor.

In addition, stocks like Top Glove and Supermax have been hogging the total trading value traded on Bursa Malaysia for months now and at times, together with Kossan Rubber Industries Bhd and Hartalega Holdings Bhd, can account for up to half of the daily trading value.

Hence, the argument on trading liquidity is rather shallow too. In effect, whether they are bonus issues or share splits, it is only perceived as a “reward” to shareholders when in actual fact, nothing changes.

Chart 1 also shows the market’s irrational response to the announcements that are made by the four companies with the share prices of all four of them indexed to 100 as starting point to the closing price on Sept 10.

Based on the price action of the four companies from Chart 1, it is obvious that investors perceived that bonus issues and share splits are heaven-sent as prices rallied as high as between 16% and 26% for Supermax and Top Glove, respectively, while that of Tesla and Apple, the price increase was as much as 63% and 32% respectively, post-announcements. On the last day before trading on an ex-bonus or ex-split basis, the four companies’ shares were still higher by between 7% and 61%. Even on the ex-date, all four stocks traded higher than the levels they were trading before the announcement but that premium narrowed to just 2%-3% for Supermax and Top Glove. However, for Tesla and Apple, their respective share prices were even firmer, trading at 81% and 34% prior to the split announcements.

It was only in the past week or so that we see some market sense returning to these four stocks as selling pressure mounted on the back of a tech selloff on Nasdaq, while for our local glove companies, multiple factors impacted sentiment on the sector, namely the news on vaccine as well having more companies jumping into the glove-making bandwagon.

Perhaps the market was also disappointed on lack of further price upgrades coming from brokers as there was lack of evidence to suggest average selling prices (ASPs) are rising even faster than earlier estimates. Hence, few broking reports only reiterated their buy recommendations but without any change in earnings or fair values.

One broker almost halved the target price of Top Glove as it finally found a reason to value the stock at a much lower PER multiple than before based on earnings three years down the road. This perhaps accelerated the selling pressure on not only Top Glove, but the rest of the glove stocks as well.

Going back to bonus issues and splits, there are always two sides to an argument whether a company should embark on these exercises and any argument against such a proposal is clearly articulated in two very well-run companies in the US and Malaysia.

Of course, they are Warren Buffet’s Berkshire Hathaway, which trades at a mind boggling US$327,214 per share and our very own Nestle, which trades at RM140.80 per share. Both of these companies have never announced any split or bonus issues from day one of their respective listings and they remain as widely owned by many investors.

The rationale of share splits or bonus issue are indeed difficult to quantify as in actual fact, whether pre or post-bonus issue or share split, nothing really changes.

In actual fact, we should not be splitting hairs over share splits or bonus issues. In essence, it can be said that based on the price action and movement of the four companies, share splits and bonus issues in effect create greater volatility.

Pankaj C Kumar is a long-time investment analyst. Views expressed here are his own.

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Share split , bonus issue , Top Glove , Supermax , Apple , Tesla ,


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