In today's choppy market, there is little to be gained by picking and sticking with stocks. A prudent approach would be to identify trading opportunities.
TEN NETWORK HOLDINGS (TEN)
A company raising fresh equity through a rights issue can create a neat trading opportunity for those who don't own the stock.
Free-to-air TV operator Ten Network could be one of those examples. Ten announced a three for eight rights issue on June 6 at 51 cents a share to raise $200 million. The stock was trading at 64? before the issue. In theory, the stock should have traded at 60? after the issue. This price represents the weighted average of the eight shares before the issue and the three new shares.
Rarely does a stock trade at a theoretical-rights price, though. Most investors rapidly sell their existing stock to fund the new issue, driving the price towards the issue price. In Ten's case, its shares plunged through 60? and went down past the issue price of 51?. Given the bulk of the $200 million taken up by the bigger shareholders, the stock should start to climb higher again. Yesterday it was trading at 50? and as the retail offer concludes later this month, Ten's shares could even get up to the theoretical ex-rights price of 60?.
One thing is for certain: with so many billionaires on the register, there is very little chance Ten will ever go broke. Long-term investors would be much more sceptical about the prospects for free-to-air TV.
QANTAS (QAN) As a rule, you should never try to buy a stock that has just downgraded its earnings. It is always a tempting prospect because the stock price tumbles and can look so much cheaper from one day to the next.
Surprisingly, the bigger the fall in the share price on day one of the earnings downgrade the further you should run.
Qantas blind-sided the market with a massive earnings downgrade last week. The stock slumped 20 per cent on day one and then proceeded to fall another 20 per cent over the next week.
Do we buy Qantas now? On a pure financial basis, you should never buy airlines because they destroy capital because of low returns. However, Qantas has proven to be a great trading stock over the years. The stock has started to bounce and could move to between $1.20 and $1.30 before the rebound runs out of steam and the stock heads lower towards $1 again.
Following this, Qantas needs a catalyst to move higher. The company burnt more than $500 million of cash in the December half and conditions have worsened since then. Management is slashing costs and selling assets, but it would sooth the market if the company also raised capital to repair a haemorrhaging balance sheet.
Beyond this, most of the key catalysts are external factors, including a higher Australian dollar, a lower oil price, a pick-up in European and US economies and a drop-off in competition.
If any of these take place, Qantas could be a fantastic leverage play with the share price shooting higher and closer to its book value of more than $2 a share. If none of these events prevail, stay well clear of the national airline.
CSG (CSV)
Two weeks ago, CSG Limited said it was selling its technology-solutions business to NEC Australia for $227.5 million, with the possibility of an extra $32.5 million if the company meets certain earnings targets by June 30. Without the extra payment, the company will net $190 million after costs and taxes.
The company said it "intended to distribute excess capital to shareholders in the most efficient manner", once all taxes and restructuring costs are allocated. CSG has net bank debt of about $70 million. If it decides to pay all of this back, there will be about $120 million of cash on the balance sheet. One possibility is the company uses its franking and pays about a 25? dividend to shareholders, eating up about $70 million of the cash, leaving the group with about $50 million in cash. This may be used by restructuring its printing division and/or returned in capital.
Under this scenario, the business would have a market value of less than $100 million and EBITDA of about $30 million.
Sounds cheap, but many professional investors are not enamoured with the printing business. If a franked dividend is paid, two trading opportunities arise. People looking for franking should buy into the stock well before the August end-of-year result to qualify for the 45-day franking rule. Others may want to buy the stock and sell as it gets pregnant with the dividend. It will be interesting to see what the company can deliver for shareholders.
matthewjkidman@gmail.com
The Herald takes no responsibility for stock tips. Readers are advised to consult a professional adviser.
Frequently Asked Questions about this Article…
What trading opportunity did Ten Network Holdings' rights issue create for investors?
Ten Network (TEN) announced a three-for-eight rights issue on June 6 at 51¢ per share to raise $200 million. That creates a short-term trading opportunity because the theoretical ex-rights price is about 60¢, yet the stock initially plunged below the issue price as existing holders sold to fund the entitlement. As the retail offer closes and big shareholders have taken up most of the issue, the share price could recover toward the theoretical ex-rights level.
How does a rights issue affect a company's share price and what is a theoretical ex-rights price?
A rights issue increases the number of shares by offering new stock to existing shareholders, which dilutes the price. The theoretical ex-rights price is the weighted average of the pre-issue shares and the new shares (in Ten’s case, roughly 60¢). In practice stocks rarely trade exactly at that theoretical price because many investors sell existing shares to fund the new issue, pushing the market price around the issue price.
Should everyday investors buy Qantas (QAN) after its recent earnings downgrade?
The article cautions against buying a stock immediately after an earnings downgrade. Qantas shocked the market with a large downgrade, dropping about 20% on day one and around another 20% the following week. While it could stage a short-term bounce (the article suggests $1.20–$1.30 as a possible range), airlines typically have low returns and can destroy capital, so buying after a downgrade is risky unless clear catalysts materialise.
What catalysts could make Qantas shares move higher?
Key external catalysts mentioned are a stronger Australian dollar, a lower oil price, better economic conditions in Europe and the US, and reduced competition. Internally, raising capital to repair a weakened balance sheet would also soothe the market. Without one or more of these developments, the article advises staying clear of Qantas.
What are the details and shareholder implications of CSG Limited’s sale to NEC Australia?
CSG (CSV) agreed to sell its technology-solutions business to NEC Australia for $227.5 million, with a possible extra $32.5 million if earnings targets are met by June 30. Without the earn-out the company expects to net about $190 million after costs and taxes. With net bank debt around $70 million, that could leave roughly $120 million of cash to allocate to shareholders or restructuring.
How could CSG’s cash from the NEC sale create trading or dividend opportunities for investors?
If CSG chooses to return capital, one scenario is using franking credits to pay a partially franked dividend (the article gives an example of about a 25% franked payout consuming roughly $70 million of cash). That creates two trading plays: buy the stock well before the payment to qualify under the 45‑day franking rule to collect credits, or buy and then sell as the stock becomes ‘pregnant’ with the upcoming dividend.
Is free-to-air TV (like Ten Network) a good long-term investment according to the article?
The article suggests skepticism about the long-term prospects of free-to-air TV. While Ten’s billionaire shareholders make it unlikely the company will go broke, the piece notes long-term investors should be cautious about the sector’s prospects. Instead, Ten’s rights issue may be more of a short-term trading opportunity than a long-term buy thesis.
What general trading advice does the article offer for everyday investors in a choppy market?
In a choppy market the article recommends identifying specific trading opportunities rather than simply picking and sticking with stocks. Examples include exploiting distortions from rights issues, avoiding buying immediately after earnings downgrades, and watching for special situations (like asset sales and franked dividends) that can create short-term trading plays.
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