Hi All, thank you to everyone who has posted logically and thoughtfully both positively and negatively over the last few days. It is very easy to post emotionally so thanks to those who have been constructive and fought the urge the say 'I told you so'. The standard of posting has improved on AHZ the past year (probably as the price started rising) and there has been less personal jibing at each other which is obviously a good thing. Perhaps that has been replaced with jibes at WP and people are free to vent their opinions if they so wish.
I've tried to break down this CR in terms of its effects on what makes a share price move. We know this is supply and demand so I thought I would dig in to each of those.
Goal: Tilt the scales such that demand for AHZ stock outweighs supply on market and coming to market.
How do we tilt the scales?
- Create Demand
- Restrict Supply
- Creating Demand: (i) To create demand in general you need a good story to tell. This is probably the most debated aspect of AHZ on hotcopper. Do we have a good story to tell and has this CR impacted positively or negatively on that story? My answer here will no doubt create much debate, which is welcomed, but I will simplify 'good story' in to revenue growth and earnings per share growth. Putting aside people's personal opinions of WP and what he said about CR, will this capital positively impact revenue and EPS growth? I believe yes.
(ii) The second part I want to discuss is creating the right sort of demand. By that I mean institutional demand. Why is this so important? Like the recent GPO win for Admedus the buying power of institutions is huge and dwarfs that of retail investors. For reference I'm talking about small and microcap equity fund managers, think BT, Paradice, IFM, etc, there are many others but those are the first that came to mind, you can google many more. For Admedus share price to reach the dizzying heights we all hope it can then like them or loath them these are the people to help it get there.
They
typically have long term horizons (3-5 year outlook). They also do significant due diligence on prospects prior to investing.
They are also (like us) looking for a return on their investment, the difference is they have the ability and power to massage and control the supply/demand curve. What do I mean by that? Let's take a quick example. Suppose you are running a $50m microcap equity fund. Your average weight of each stock in your portfolio is 2% which equates to $1m. $1m is 3.3m Admedus shares at 30c. Now if you know the depth of AHZ you will know that at any given point in time there is only around 1m shares on the offer side so if you're an institution it would take a lot of patience to accumulate a decent position on market, this is not very efficient for them and you run the risk of running the price up thereby increasing your average cost. So instead what you do is engage AHZ management for a CR, buy some in the placement, maybe 75% of your desired position, mop up a few cheap shares on market once trading resumes then once the supply or weak hands stop coming to market you buy a little more to run the price up to 40c for the easiest 30% (unrealised) return of your life. Before you say they will dump the shares at 40c (which they may do) if they like the story mentioned in part (i) they will be in this for the long haul for significantly higher returns than 30%, plus for them to sell they need someone else to buy and to sell down a significant parcel without crashing the price in the process (self sabotage) you need to wait until the mania phase where fomo kicks in and every man and his dog wants a piece of the action.
Couple of important things to remember about the instos and the stock market, they are forward looking and they don't care how much retail holders have been diluted by past CR. Yes they will look at historical earnings and revenue growth but they are forward looking for the most part and have no baggage from prior management missteps.
Sorry for the long winded explanation but that's how the big boys play in the sandpit. I'm not a believer in 'the share price will take care of itself' mantra, I'm cynical and know that every share price is manipulated in some way. Now if we agree that to get AHZ to $2 and beyond we need instos on board, does this recent CR impact positively or negatively in terms of attracting institutional demand? I believe positively
2. Restrict Supply: (i) The obvious thing about the CR is the number of shares on issue has increased. 20m new shares to insto and directors and another 16.6m to existing retail via the SPP. There's a couple of parts to this to look at, short term and long term.
Firstly on the 20m new shares to directors and instos, fingers crossed these 20m shares aren't coming to market and are put in the bottom drawer for long term holding! Obviously there is a chance of some dumping but for the most part lets assume these are long term investors.
Short term some retail holders will be selling a parcel of their existing holding to take up the SPP so there will be some churn as supply comes to market.
There will also be some disgruntled holders who have lost faith in WP and the board who will be selling and that's their perogative.
Lets consider who might be on the other side of those transactions? Some of those will be the instos I mentioned above either lowering their average cost or protecting their initial investment, either way there will be some transfer of shares from weak to the strong hands.
That transfer of shares to the strong hands over time reduces the available free float of shares on market which doesn't necessarily mean the price will go up but it does mean the line of least resistance for the price
should be up. You can see that in a way its a self perpetuating cycle, as demand increases supply decreases, the reverse being true when instos want to sell but that's an entirely different conversation, let's climb the mountain first!
So how does the CR effect supply: initially negatively, but over the medium to long term positively
I hope this helps some of you see the Forest for the Trees. The above is not advice just how I see the world, we all see it differently and I've learnt a great deal from many posters on here with arguments both for and against. Perhaps this perspective will assist those in their decision making at what I understand is a very difficult time. The above is also designed to be broad strokes big picture stuff, you can pick holes in it no doubt but try to take it for the overarching themes not the micro details or assumptions I've made.
Best of luck to all and lets all keep learning from each other.
Chris
