What happens on a rights issue depends on 2 things: 1 the maths and 2 any change in sentiment
The maths bit: Eg pfd currently have 240m shares at eg 1.25 ie a market cap of £300m and a p/e of 4.5x They issue 500m shares at eg 88p and raise £440m (assuming no costs) They are now worth £740m and have 740m shares in issue so the shares should be worth £1. But you also need to add a bit for the interest saving of say 8% on £440m, but post tax that is c£27m. Citigroup are forecasting £66m of net profit this year so post rights net profit increases to £91m which at £1 a share equates to a p/e of 8.1x
This is then where the sentiment bit kicks in. Clearly Premiers current p/e of 4.5 points to the markets continued expectation of distress. If the rights issue removes that discount, what should the p/e move to? Higher than 8.1x and the share price should move up, lower and it should move down. If the markets don't think the RI removes the problem (what if they can't actually raise £440m and can only get say £200m) then you won't remove the distress element, you won't get to a normalised p/e and you are throwing good money after bad. Go to jail, do not pass go, do not collect £200.
OMG - share advice from Fernie! 3 golden rules? Only one really - don't follow a clown! He had PFD at £2.80 and sold for 15p! Ramped AMA at 32p - now 12p! A Walter Mitty character who has a large ego in defiance of facts!! Beware!
From my experience of RI's, the SP has dropped on some and gone up on others. I remember being in 3i a few years ago, and on the announcement of a heavily discounted RI the SP shot up. I was under the impression that PFD was rising (the last rise from 60p - 180p) because of a RI prending, so therefore it is/ was being regarded as a positive thing. Anything that shows that the debt is being tackled will increase the SP because that is the only problem that PFD has. Can I just say also that when the SP starts to drop, the hovering vultures on here don't half disgrace themselves.
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