Model portfolios: Templeton Global Growth and Troy Resources share offers

The share placement fiesta continues, with new offers from Templeton Global Growth Fund (ASX Code: TGG) and Troy Resources (ASX Code: TRY). With our LIC issues more shares in the name of pursuing ‘value opportunities’ you have to ask who’s benefiting?

By our calculations, the original shareholders gave up $4.5m in value on the placement (21c per share discount multipled by 21.5m shares) for the benefit of raising funds under management. And if we didn’t take up our entitlements, we’d sacrifice 4 cents per share for the pleasure of raising more.

[Ed: Note to ASIC: As you’re not too busy prosecuting major insider trading cases perhaps you could take a look at the issue of discounted share placements?]

Gripes aside (and this is an issue far wider than Templeton), we’re presented with the maths set out in Table 1. At the current share price ($1.29), the $200 of ‘value’ we pick up is enough to cover our time and effort (since we can’t be scaled back and we’re not selling – see below).

Things could change between now and the offer close date (28 March) but the equation’s pretty simple. If the share price remains above $1.25 we’ll pick up the additional shares and if it’s $1.25 or below, we won’t. In practice, you might not bother if it was just above $1.25, but it’s a question of how much you’re investing. These days applications are made by a simple BPay payment, so a fixed entitlement offer doesn't take much effort.

Subscribing will add 2,000 shares to the Moderate Portfolio and 3,000 shares to the Aggressive. Our allocation to international shares has increased again but we’ll hang on to the new shares. The amounts aren’t large and, in practice, we’d have to pay brokerage to sell them.

Troy Resources (ASX Code: TRY)

Discounted share placements by corporates – that is, whether they’re good for existing shareholders – are more of a case-by-case proposition. Sometimes, as with the recent share offer by Northern Star Resources, they’re used for buying opportunities, or de-risking the company by paying down debt. This benefits all shareholders, old and new.

Companies may actually need the money – sellers, for instance, have a nasty habit of suing buyers who don’t pay. So there’s a tension between setting the price too low – giving away shareholder value – and setting it too high, keeping institutions on the sidelines and running the risk a share price fall sends retail investors scurrying.

TRY, which needs capital to develop the West Omai project in Guyana, highlights the point. After raising capital from institutions at $1.25 per share, it’s launched a share placement plan (SPP), allowing shareholders to apply for up to 12,000 shares (minimum application is 2,000) at the same price (a 5.7% discount to the share price at the time).

Since then, TRY’s share price has traded as low as $1.16 (it last closed at $1.32), making the decision a day-to-day proposition. Fortunately, the original share placement delivered most of the cash.

At a share price much below $1.30, we’d probably pass. Our Aggressive Portfolio currently holds 1,750 shares in TRY – a stake we’re not keen to increase much – so we’d be forced to sell down and again, in practice, brokerage would rear its ugly head.

Let’s say (after the likely scale back) we pick up 6,000 shares and sell them at $1.27 – producing a profit of $100 (after $20 brokerage). But that would entail sending in cash not knowing how many shares we’ll get. Plus we’d have to process the likely refund cheque and take on the risk of the share price dropping below $1.25 before we’re out. It's a lot of work and risk without much reward.

Plus, there’s a conundrum with these deals: the more attractive they are, the more likely applications will get scaled back. If the potential profit rises to 10c per share we might get just 2,000 shares.

TRY is a volatile stock and the share price is likely to bounce around until the close date (24 March). We’ll continue to monitor it and make our decision closer to that date.