On Thursday, 18 August 2016, Port of Tauranga Limited (POT) announced that they will undergo a capital increase of shares - a share split.
Shareholders will receive five POT ordinary shares for every one POT ordinary share held at 5 pm on the record date of 17 October 2016.
If you own 500 POT shares on the 18 October on the 19 October you'll own 2,500 shares. You don't have to do anything except own the shares - it will just happen.
POT shares are currently trading at about $20.00 so 500 shares are currently worth about $10,000.
Before the split POT has a little over 136 million shares, at $20.00 per share the market is valuing the company at about $2.7 billion dollars.
A share split doesn't increase a companies profits or increase it's assets. Applying financial logic and fundamental analysis formulae a share split doesn't increase a companies value. After the split there are five times as many shares, and each share is just that, a share of the company. After the split there will be about 680 million shares, five times as many as there are now. As the company's fundamental value doesn't change the shares should be worth one fifth of what they were or $4.00 each.
Applying financial formulae to the situation, after the split the share price should be $4.00 and so 2,500 should still be worth $10,000. But some believe it will be higher, and we think they are probably right.
People often confuse price and value
Investors are people and people don't necessarily apply financial logic to investing. People often confuse price and value. Currently POT is perceived by some investors as being "expensive" because it costs $20.00 a share. Currently an investor with $10,000 can buy about 500 Port of Tauranga shares but they can buy nearly 1,500 Auckland International Airport, they get three times as many. Rightly or wrongly some will go for the share with the lower price because they get more shares. It doesn't make financial sense but it's a fact that some people think that way.
Companies split their shares to reduce the share price, in order to appear more attractive to unsophisticated investors, so the price will go up. On the 18 October 2016 Port of Tauranga shares will definitely be priced less than the day before. But, if this psychological effect comes into play, it wont fall to the theoretical price. The company will be valued by the market more than it was the day before. The company wont have changed, no more ships will berth, their costs wont reduce, profits wont increase. But the company will probably be valued higher by the market because the shares are perceived to be "cheaper". How is that for circular logic!
It will be interesting to see whether this plays out or not. There are always a number of factors operating on people's perceptions and anything might happen to the share price of Port of Tauranga. But what we do know is that some people are buying Port of Tauranga shares now for precisely for this reason.
If you are considering buying Port of Tauranga shares it might pay you to get in now, before the split. They might actually be more expensive after! The converse is of course also true, maybe hold of selling till after the split.
And while on this topic there is a price point at which the opposite thinking starts coming into play, if a share price is is too low, perhaps below 50c in New Zealand, a company starts being regarded poorly because the shares are "too cheap". The term "penny dreadful" starts being bandied around. If this situation occurs a company might do a consolidation, investors end up with less shares, worth more.
The experts that have advised Port of Tauranga obviously decided that a price around $4.00 is a nice respectable share price for POT. It leaves plenty of room to grow before they get to $20.00 and have to consider splitting again.
People make markets, people aren't necessarily rational or logical, it's one of the things that makes investing in the share market interesting and at times incredibly frustrating.
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