IN THE current 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? 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 straight 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 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 fell 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 due to low returns. But Qantas has proven a great trading stock over the years. It 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 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. Management is slashing costs and selling assets but it would soothe 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.
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 around $70 million. If it decides to pay all of this back there will be approximately $120 million of cash on the balance sheet. One possibility is the company uses its franking and pays around a 25? dividend to shareholders, eating up about $70 million, leaving the group with about $50 million of 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 in the vicinity of $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.
Former fund manager Matthew Kidman is a director of WAM Capital. matthewjkidman@gmail.com
The Age takes no responsibility for stock tips.
Frequently Asked Questions about this Article…
What trading opportunity did Ten Network's three-for-eight rights issue create for investors?
Ten Network (TEN) announced a three-for-eight rights issue on June 6 to raise about $200 million at 51¢ a share. Rights issues often push the existing share price down as holders sell to fund the take-up, which can create short-term trading opportunities for non-holders to buy at depressed levels. In Ten’s case the shares fell below the theoretical ex-rights level and the issue price, but with larger shareholders taking up much of the capital and the retail offer still concluding, the stock could climb back toward its theoretical ex-rights price (about 60¢) as the raising completes.
How is the theoretical ex-rights price calculated and how did it apply to Ten Network?
The theoretical ex-rights price is the weighted average of the old shares and the new shares issued in a rights offering. For Ten, the stock traded around 64¢ before the issue; a three-for-eight issue at 51¢ gives a theoretical ex-rights price near 60¢. Stocks rarely trade exactly at that level because investors often sell to fund the new shares, which is what pushed Ten below both the theoretical price and the issue price in practice.
Should I buy a stock like Qantas immediately after it announces an earnings downgrade?
The article’s rule of thumb is to avoid buying a stock that has just downgraded its earnings. Large one‑day falls tend to warn of further downside — Qantas (QAN) slumped about 20% on day one of its downgrade and then fell another 20% the following week. While big downgrades can create short-term trading bounces, they also signal material business stress and require clear catalysts before being considered a safe buy.
What catalysts could drive a recovery in Qantas shares?
According to the article, Qantas would need positive catalysts to sustain a recovery. Potential drivers include the airline raising capital to repair its balance sheet, a higher Australian dollar, lower oil prices, a pick-up in European and US economies, or reduced competition. The company burned more than $500 million of cash in the December half and is cutting costs and selling assets, so external improvements or a capital raise would soothe the market and might push the shares higher.
What are the key details of CSG’s sale to NEC Australia and how might shareholders benefit?
CSG (CSV) agreed to sell its technology solutions business to NEC Australia for $227.5 million, with a potential extra $32.5 million if earnings targets are met by June 30. Without the extra payment, CSG would net about $190 million after costs and taxes. With roughly $70 million of net bank debt, the business could end up with around $120 million of cash on the balance sheet. Management said it intends to distribute excess capital efficiently, opening possibilities such as a franked dividend and other returns to shareholders.
How can investors trade around a potential franked dividend from CSG?
If CSG pays a franked dividend, two trading opportunities highlighted in the article are: 1) buy well before the August end-of-year result to satisfy the 45-day franking rule and capture the franking credits, and 2) buy the stock as it becomes ‘pregnant’ with the dividend and sell after the payment if you’re targeting the dividend-driven price move. Both approaches rely on timing the register and dividend timetable carefully.
Is Ten Network likely to go broke after the rights issue?
The article suggests Ten is unlikely to go broke because major wealthy shareholders took up the bulk of the $200 million raising. That backing reduces the immediate bankruptcy risk, though the piece also cautions long-term investors to be sceptical about the structural prospects of free-to-air TV as an industry.
What general investing approach does the article recommend in the current choppy market?
The article advises that in a choppy market there’s little to be gained from simply picking and sticking with stocks. A more prudent approach is to identify specific trading opportunities—for example around rights issues (Ten), earnings downgrades and subsequent bounces (Qantas), or corporate-sale proceeds and franked dividends (CSG)—and to be mindful of the timing and risks involved.
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