Firstly, a colleague requested I post this to see the opinions of others so I will try to explain my view on the capital raising. Secondly, I understand that ABDM has been moderated and part of this post forms a response to his earlier post.
Personally I cannot subscribe to the thought that a capital raising will benefit long term share holders. 1) because a capital raising is designed to raise capital to maintain the day to day operations of the company and 2) because the shares that are taken up by shareholders do not increase their percentage in the company. Rather, their percentage holding stays the same. Here is an example:
Investor owns 500,000 shares in OBJ. OBJ announce a capital raising in which for every 5 shares the investor owns, they will receive one new OBJ share, for the price of $0.015 (let's forget about the options for simplicity). In this case, the investor is eligible to receive 100,000 new OBJ shares, and takes up the offer (taking their total share holding to 600,000).
Percentage holding in company prior to issue
= Share holding/shares in company = 500,000/1,175,497,250 = 0.00042535
Percentage holding in company post issue
= Total new holding/total new number of shares = 600,000/1,410,596,700 = 0.00042535
Therefore, the owner has more shares in the company, but they maintain the same percentage as previous. What of the options? The options sound great in theory, but they simply further aid to the dilution of your share holdings. Once again, it will still result in you maintaining the same percentage exposure.
How does this result in the directors rewarding themselves??? Quite simply it doesn't in this way. The only way a director would be able to properly benefit from this capital raising is if they were to receive any shortfall of shares. This means they would need to pick up their entitlement, plus the entitlement of shareholders who didn't participate in the capital raising. Is this possible? Perhaps, though I find it to be unlikely (we will know who will receive any shortfall in shares when the prospectus is released).
Why is it that owning more shares won't necessarily result in me gaining more if the price goes up? I will try to provide some guidance as to why it is our percentage holding that is important, rather than the number of shares we own. Scenario 1 - A positive result
Let's assume that OBJ does sign a deal and receives regular royalties. For simplicity, let us say that the royalties amount to $50,000,000 per annum. Let us assume that the market provides us with a P/E ratio that is similar to other stocks in our sector - 16.
Based on a holding of 500,000 as per in the example above, the following would be the end share price:
Price= (annual revenue x P/E ratio) / shares on issue Price= ($50,000,000 x 16) / 1,175,497,250 Price= 68.05 cents per share
The total portfolio value of the share holding would be 500,000 x 68.05c = $340,250
With our new capital structure, the following could be said:
Price= (annual revenue x P/E ratio) / shares on issue Price= ($50,000,000 x 16 / 1,410,596,700) Price= 56.7083 cents per share
The total portfolio value of the share holding would be 500,000 x 68.05c = $340,250
Therefore, same company, same revenue, proposed capital structure, same portfolio value.
The directors, as per above, won't benefit (unless, once again, they take any shortfall of shares) Please note the above are for example only and cannot be relied on…
For balance, what happens if the market responds poorly and sends the stock to year lows.
Scenario 2 - A negative result
The price of the company when it reached its year low was $0.011. Therefore the market cap was:
Market cap = shares on issue x price Market cap = 1,175,497,250 x $0.011 Market cap = $12,930,469
Therefore, if we were shrink to the same market cap the corresponding price of the share, based on the new holdings would be…
Why should this be of any concern… This is below the exercise price of the current and new options, meaning they would not be "in the money." I wouldn't suggest that any major player has backed out but even if we have more extended periods without any news, this would be enough to potentially send us back to our year lows. I have sold some of my portfolio since this capital raising, hence my sentiment.
While I can see the value of the company and the technologies that it holds, I have not been able to look past this change in structure. I feel the company remains a long term buy, but I have not seen reason to suggest we are close to the game changing deal some may be expecting. Based on my personal calculations I can't see how this would serve to benefit any shareholder, short term, long term or director unless they allow us to subscribe to any shortfall in shares.
In summary, even though there is potential in this company (remembering the big players they are dealing with appear to be ongoing) I feel that this capital raising is bad news, particularly due to the massive dilution others on here have alluded to. Happy to hear any other views, points or thoughts where I may have missed something.
As always, DYOR.
Cheers,
Smallz
OBJ Price at posting:
1.7¢ Sentiment: ST Sell Disclosure: Held
(20min delay)