Understanding Rights Issue and Share Consolidation


How some companies recover from Cents to Rands

As a new investor you might ask yourself: what would happen if a company in my portfolio’s share price reaches 1c? 

While share prices may appreciate over time, the opposite can also happen.

When this happens, it doesn't necessarily mean that you've lost your money. Instead, this only means that the share price is trading at its lowest, at times under the bracket of penny stocks - these are shares trading at a low value (say below $5 and R5), with a low market capitalization (at least below $250 billion).

What is market capitalization?

In simple terms, this is the value of the company in the stock market based on the number of shares it has issued and the value the shares are trading at (share price x issued shares).

A company in the above-mentioned bracket may trade at a low share price for an extended period and not delist. And If it does get delisted? An offer is given to investors.

In most cases, companies may put in place actions to raise more capital, and this may help the company avoid the delisting route - this can be through corporate actions such as rights issues and share consolidations.

What are rights issues and share consolidations?

A rights issue enables a company to issue additional shares into the market at a discount to raise capital.

Whereas share consolidation allows a company to decrease its issued shares while increasing the value of each remaining share in the market. This enables it to trade at market-related prices and become more attractive to institutional investors.

Keep in mind that these corporate actions may be associated with high volatility, with the reason behind the corporate action remaining the ultimate key focus on the company's outlook.

In what scenario would a company look into both corporate actions?

In most instances, after a company has issued a rights issue (diluting existing shares), this is usually followed by share consolidation (to reverse the dilution of the shares).

There are various reasons why a company would issue more shares, which may be to raise capital or acquire assets as well. These transactions may be dilutive to existing shareholders and depending on where the share will be trading at, the company may propose a share consolidation.

An example would be the recent Aveng share consolidation that's on the table after the company's shares were highly diluted. With the continuous rights issues being a contributing factor; some of which included a recent follow-up rights issue of 11:100. This meant that shareholders received additional 11 shares, for every 100 they held prior to the last trading date.

This was later followed by a share consolidation of 100:1, which was revised to 500:1 during the first and second quarter of 2021. The ratio meant that 500 shares would be consolidated into one, while the value of each remaining share increases, 500 times the value it was trading at before the consolidation.

More recent examples would be Nutritional holdings with a share consolidation ratio of 25:1, in June 2021. This resulted in a reduction of issued shares, with the share price increasing 25 times the value it was trading at before the share consolidation.

Another recent company proposing a share consolidation is Afristrat which will be consolidating on a 120:1 ratio.

To read up more on the share consolidation of Afristrat, you can click here or use the option below.

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