Share Purchase Plans (SPP)
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Share Purchase Plan (SPP) – Buy Shares at a Discount
How would you like to buy a share at a discount to the current trading price? You may have been led to believe that this is not possible, because the price quoted today is the price that everyone pays for the share. But wait, there is a way that you can participate and at times buy a share at a discount of 5% – 20% or more below the current trading price. This mechanism is known as a Share Purchase Plan or (SPP).
Rules and Regulations
A SPP allows a company to raise capital from existing shareholders up to a maximum of $15,000 in 12 months for any individual share holder without issuing a prospectus. Consequently it is a cheap way for a company to raise capital as they do not have to incur all the costs of creating a prospectus and lodging this with ASIC. SPP are normally restricted to Australian or New Zealand residents. It is possible for a company to request an exemption from the $15,000 maximum, which may be granted by ASIC.
The SPP is different to a rights issue as all shareholders can participate up to the maximum $15,000 limit even if they own only 1 share! With a rights issue the number of shares that a shareholder can purchase is directly related to the number of shares that the shareholder owns, e.g. a one for ten offer allows the share holder to buy one share for every ten shares they own.
Assessing the Risk
Before you rush out to purchase the share it pays to do a quick risk assessment of owning the share. You will own the share and hold it for a certain period of time, so a discounted purchase price is only of any value if you can sell it at the higher price. If the share price drops sharply you may be left to sell the shares, or continue to own them, at an even lower price. There are a few key risk measures to check before you go any further.
Most importantly check out that the price offered under the SPP is less than the current trading price. This is critical to getting the discount on the shares. Some SPP’s offer shares at a set price and others calculate them at a set discount based on the average price leading up to the issue of the shares. The details of this information will be found in the announcement of the SPP. SPP announcements can be found in Market Analyser. Click on Menu, Fundamentals, Announcements then Select ASX Company Announcements and Type in “Share Purchase Plan” (use the quote marks). You can also search for SPP as the headline may be shortened.
It is vitally important that enough volume trades so that you can easily sell the shares when it comes time to get out. Trading illiquid shares is a recipe for disaster and even a hefty discount can evaporate if enough people try to sell at the same time. As a rule of thumb ensure that the share has a turnover of at least $1 million per day. This can be calculated by multiplying the average volume over the last two weeks by the current price. If it trades less than this it is probably best to avoid this opportunity.
Check out whether the company is profitable, ie is their latest net profit after tax greater than zero. This information can be found in their latest report, either half yearly or annual. Remember you are becoming a shareholder in the company even if you only expect it to be for a short time. You can do further fundamental research on the company if you choose, but at the very least the company should be making money.
And a couple of further considerations to take into account is whether the company is one of the top 200 companies as these companies have a much greater institutional following and are likely to be more stable in price. If the SPP is underwritten this means that an institution has agreed to pick up the additional shares that are not purchased by individual shareholders.
How To Get Started
So now if you are ready to proceed here is the trick. If you own just one share you can participate in a share purchase plan, but in reality you can not go out and buy one share. The smallest marketable parcel is $500, so if you do not already own the share you must buy $500 worth of the share at least 3 trading days before the record date. The record date is the date on which the company determines who is entitled to participate in the SPP, but because it takes three days for ownership to be registered after the trade occurs (T+3) you must buy at least three days before the record date. This is the same process that occurs when determining who is eligible to receive a dividend payment, where an investor must buy three days before the record date, known as the ex dividend date. Unlike with dividends the ex – SPP date is very rarely announced. It is always the record date that is announced so make sure you have purchased the share three days before the record date so you are eligible to participate.
Act Before it is Too Late
If you now own the shares and are eligible to participate in the SPP there are a couple more steps to follow. Keep your eye on the mail box as you will receive the full details of the offer in the mail. This will include the application form and details for making payment for the shares. Take careful note of the closing date for the offer. It is vitally important that the company receives the money on or before the closing date. It is advisable to hold off for as long as you can before posting a cheque or transferring the money via BPay, but it must be in by the closing date.
Before you send in your funds make sure the discount still remains. Make sure the discount is at least 10% before proceeding any further. Lend Lease cancelled their SPP as the share price fell below the offer price before the closing date. A few companies have extended the closing date of the offer as well to allow investors more time to get their funds in, so stay in touch with what is happening. Announcements can be found in Market Analyser, by going to Menu, Fundamentals, Announcements and then type in the company code.
Once the application is posted there is one more date to keep up with and that is the Issue date when the new shares are issued to the shareholders. The shares will be available to trade soon after the issue date. Sometimes the first trading date is included in the SPP information provided by the company; otherwise keep an eye on when these shares appear in your trading account. If the issue is oversubscribed it is possible that the company will reduce the number of shares issued to each investor. But in the current environment most companies will be looking to raise as much capital as they possibly can.
And the last step is to sell your shares and pocket the profit. If you have assessed the SPP well you should receive the shares at a discount and be able to sell them into the market for a higher price. While the return is usually between 5 – 10% this return often occurs in a few days. Do that a few times a year and your portfolio will begin to grow. If you want to pursue this strategy in the same company in the future, sell all but one share and that one share will allow you to be eligible to participate in future offers from the company.
For those of you who do not like to wait and prefer to eliminate the risk of changes in the share price from the closing date to the issue date, you could consider the following strategy. On the day that you decide to subscribe for the SPP you know that there is a certain discount, before you proceed. To lock in this price it is necessary to sell your shares at the current market price, but there is a problem, you do not yet own the shares. If you have a CFD account you can sell the same quantity of CFDs as the number of shares you will own and you have now locked in the sale price. If the share price falls you will sell your shares for a lower price, but will make a gain on the CFDs. If the share price rises you will sell shares at a higher price and make a loss on the CFDs. Your profit is now certain and the cost of doing this is fairly low, CFD brokerage less the interest you get paid while you hold an open short CFD position.
Putting the Theory to Work
So a quick recap on SPP:
- Select the SPP you wish to participate in.
- Buy $500 worth of shares in the company at least 3 days before the record date
- Check the price as the closing date approaches to ensure that the SPP offers at least a 10% discount
- Make sure the company receives payment by the closing date
- Sell the shares (either on the market or using a CFD) to realise the profit once the shares are issued, keeping just 1 share to enable you to participate in future SPP offers
BlueScope Steel SPP Example
The record date for the SPP on BlueScope Steel (BSL) was 9 January. If you bought $500 worth of shares on the 5/1/09 at $3.54 you would own 142 shares. This would ensure that you owned the shares on the record date. You could have bought these shares on any day before this and after the announcement of the SPP was released.
Now wait until one day before the closing date which was the 6th February. On the 5th of February BSL traded above $3.40 which represents a premium of 10% over the offer price of $3.10 and qualifies as an opportunity to proceed with the SPP. Mail your application by Express Post and BPay the funds on this day. You must be on time as late applications will not normally be accepted. $5,000 will buy you 1612 shares.
Now the waiting game begins as you wait for the shares to be issued and available for trading. On 13 February the new shares became available for trading and opened at $3.30 and went up. If you exited during the day at say $3.33 you have made a profit of $336, less brokerage on an investment of $5,500. This equates to a return of 5.5% and most of your capital was tied up for just one week.
Assuming brokerage of $33 for the purchase of the original shares and brokerage on the sale of all the shares the return drops back to 4.9% in approximately one week. Remember there is no brokerage on the purchase of the shares through the SPP. And by holding 1 share when you sell you will not incur brokerage if you participate in future SPP offerings from the same company.
SPP in Hot Demand
In the current market environment a large number of companies wish to raise more capital and the SPP is an attractive and cost effective method for them to do this. Expect to see more of these in the future. You can find them in Market Analyser by searching announcements for SPP or Share Purchase Plan or follow the MDS Financial blog or Trader Dealer blog where we will keep you up to date with the latest offers as they come to market.