UMS Holdings : Bonus Share 1 to 4 / How Will It Affect?

UMS just announced yesterday that they are proposing to issue out 1 Bonus share for every 4 existing ordinary shares held by shareholders which are subjected to approval.

"The proposed Bonus Shares issue is subject to the in-principal approval of Singapore Exchange Securities Limited (SGX - ST)" - Quoted from the announcement

A quick summary of the important points

1.Based on current issued shares of 343,654,327. Up to 85,938,581 Bonus Shares will be issued out.

2.The Bonus shares will not be issued at any cost and it will rank pari passu with all existing shares.

3."The bonus shares will not be entitled to any dividends, rights, allotments or distributions, the record date of which falls before the date of allotment and issue of such Bonus Shares." (My assumption: Bonus Shares will not be entitled to receive the upcoming dividend of $0.035 dividend)

4. Bonus shares issued to increase share capital base of the company to reflect the growth and expansion of the group's business and to increase trading liquidity and more participations by investors

All these information can be found in full details here : UMS Announcement - Propose Bonus Issue



My Take

Not to worry, bonus shares are deem as a sign that the company is expanding and doing well. It does not dilute the shares because each existing shareholders are getting the bonus shares. It is the increase of share base capital.

For example in UMS Holding's case, If I own 4000 lot. I will be entitled to 1000 lot of bonus share.

Before Bonus shares issued :
(4,000,000 / 343,654,327) x 100% = 1.16%
Means I possess 1.16% ownership of UMS Holdings

After Bonus shares issued:
(5,000,000 / 343,654,327 + 85938581 [Bonus Shares issued] ) x 100% =1.16%
Eventually, I will still end up possessing the same amount of ownership of UMS Holdings

In accounting term, Bonus shares are issued out from either General Reserves or Share Premium of the company (Can be mixture). In General Reserves it is further sub branch out into Retained Profit (Accumulated from the earnings through the years) or Profit for the year.

What effects does Bonus Shares contribute to?

1. Price of shares will reduce accordingly after bonus shares XD.

Eg. Take for example UMS Holdings' case again (If I own 4000 lots of UMS). Let's say UMS Bonus XD on this monday 31/3/2014. Based on last closing price of 0.770, the price will fall accordingly to :

($0.770 x 343,654,327) / (343,654,327 + 85938581 [Bonus Shares Issued] ) = $0.6159

Market Capitalisation remains the same. You can work backwards.

And

You will still have the same amount worth of UMS shares:

4,000,000 x $0.770 = 5,000,000 x $0.6159



2. Net Asset Value and Earnings Per Share will decline due to the increase amount of shares.

Eg. Take for example, UMS issued out Bonus Shares. (Extracting values from the latest report FY2013).

NAV
Current NAV = $0.556

EX-Bonus NAV
= (0.556 x 343,754,327) / (343,654,327 + 85938581 [Bonus Shares issued])= $0.445

EPS
Current EPS = 8.40 Cents

EX-Bonus EPS
= (0.0840 x 343,754,327) / (343,654,327 + 85938581 [Bonus Shares issued]) = 6.72 Cents

Importantly, do take note that there may be a drop in NAV and EPS in following reports of UMS after issuing of Bonus Shares. It will be unkind and injustice to judge UMS performance base on the drop of EPS and NAV, we have to take into account the drop in EPS and NAV due to bonus share issued. The greatest/best case scenerio ever, If UMS maintain a EPS of 8.40 cents in following FY, which translate to a net income increase of ($0.084-0.0672) x 429592908 = $7.2m . I can only dream. But of cause, dreams do exists and it may be possible.

Do take note too that, if profit does not increase, dividend yield will be affected too.

Why do companies issue bonus shares?

1. Increase liquidity for more trading activity because there is an increase of share base and the reduced or cheaper stock price may be more affordable for many other investors.

2. Reward shareholders in the form of shares instead of cash

3. To show that the company is looking forward to expand. Like I said, increase in Bonus Shares will lead to decrease in NAV, EPS and even Dividend yield. So if a company is proposing to issue Bonus shares, it goes to indicate that they are able to handle the bigger share capital base and provide more economical benefits in the future.



Cheers!
Little Boy