In this post, I explain why I think LITCF is hugely undervalued.
First, full disclosure:
- I have bought some LITCF;
- I like seeing my investments go up.
What is LITCF?
For the uninitiated, LITCF is a ‘partly paid’ or ‘contributing’ share. (LIT on the other hand is a fully paid share.)
Anyone holding LITCF can turn them into LIT at any time by paying the difference between the ‘fully paid’ amount and the ‘partly paid’ amount (ie, by paying the ‘unpaid’ amount). LITCF has 4.99c unpaid. So, anyone holding LITCF can turn them into LIT by paying 4.99cps. In this way, they are extremely similar to an option.
There are however a few key differences between partly paid shares and options.
- The most important of those is that LIT has the ability to ask for payment of any of the ‘unpaid’ amount, ie it can make a ‘call’ on the shares. With LITCF, unless LIT trades above 5.5c for 15 consecutive business days, that cannot happen before 11 November 2020. (See https://www.asx.com.au/asxpdf/20200511/pdf/44hqkzx4y31c2b.pdf). And of course, LIT is not compelled to make a call at any time; perhaps LIT won’t actually do so for months or years.
- If LIT does make a call on LITCF, that may be only for part of the ‘unpaid’ amount.Indeed, that is usually what occurs, as it results in more efficient use of capital.
- Unlike options, partly paid shares never expire.
Critically also, if LIT does make a call on LITCF, there is no obligation to pay. LITCF holders can choose to pay or not pay, and if they take the latter option, they have no further liability. In this regard, LITCF mirror options perfectly.
What this means in practice is that by buying LITCF, you can for a fraction of the money secure the same level of exposure as you’d have obtained by buying LIT.And of course it is only the money you put in that’s at risk. You cannot lose more than your initial investment – again, just like options.
The value of LITCF thus approximates whatever 4.99c options would be worth, but with a few twists.As they don’t have an expiry date, you need to pick one, after considering:
- when you think a call might be made; and
- the fact that any call is likely to be for only part of the ‘unpaid’ amount.
With all that in mind, here is where Black Scholes values LITCF using an expiry date of May2021. In my view that is an extremely conservative date choice given the absolute earliest a call can be made is November, and if there is a call it will likely be for a fraction of the unpaid amount, eg 1c.
| 1 | | Underlying Price | | 2 | Underlying Price | $0.0540 |
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.0540
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| 3 | Exercise Price | $0.0499 |
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| 4 | Today's Date | 24/7/2020 |
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| 5 | Expiry Date | 30/5/2021 |
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| 6 | Historical Volatility | 131.00% |
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| 7 | Risk Free Rate | 1.00% |
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| 8 | Dividend Yield | 0.00% |
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| 9 | DTE (Years) | 0.85 |
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| 10 |
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| 11 | d1 | 0.6761 |
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| 12 | Nd1 | 0.3174 |
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| 13 | d2 | -0.5312 |
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| 14 | Nd2 | 0.2976 |
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| 15 |
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| 16 | Call Option | $0.0258 |
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| 17 | Put Option | $0.0213 |
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| 18 | Midpoint: | $0.0235 |
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2.35c is of course vastly higher than LITCF's last trade of 0.6c, its current bid of 0.7c, and its ask of 0.9c.
Comments /criticisms are more than welcome. If you think I'm wrong, please do post, and explain why.
cheers,
FD
(20min delay)