Rolls-Royce rights issue – what to do?
8th October 2020 |
Just a quick update on the Rolls-Royce (LSE:RR) rights issue as per its rights issue booklet issued on 1 October as I’ve had a few people write in asking what they should do.
These things are actually quite annoying. They put you in an almost impossible position. If you do nothing, you’re instantly diluted by those who decide to take it up. And because we’re talking about control resting with large stakeholders, it’s a rights issue that’s almost certainly going to pass.
Hence in order to prevent dilution, they do this to back you into a corner to raise the funds they need. Granted, they weren’t the catalyst of Rolls-Royce’s current troubles. You can blame incompetent governmental responses for that. Crushing the airline industry wasn’t Rolls-Royce’s doing – but it’s the environment it now finds itself in.
From my perspective, typically, things like rights issues or capital raisings I leave the ultimate decision with you. That’s because these sorts of decisions need to of course fall in line with your personal situation, finances, access to additional capital and what fits into your plan.
I maintain our buy/hold/sell advice and buy-up-to limits on the stocks to give you a guide as to what levels I think a stock is worth purchasing at. Should a rights issue or offering fall within these and the stock is still an active buy, then it becomes evident as to what I think you should do, should you have the available capital.
However, sometimes I’m asked for more specific guidance, which in this case, I’ve received enough to suggest a few people really don’t know what to do here.
It’s worth noting that just because the rights issue is 32p and the stock is now trading at 157p, that doesn’t mean when you actually get the new stock (should you participate) you’ll be walking into an immediate 4.9-times return on your new stock.
I would expect the stock price will pull right back to reflect the 391% increase in issued stock should the rights issue be approved and shareholders begin to take it up as the stock trades, “ex-rights”.
Expect it to trade well below current levels and closer to around the rights issue price.
In that sense, in taking up the rights issue the real question should be – do you think you’d buy more Rolls-Royce stock now at its current price, assuming there was no rights issue at all?
Having said that, I still see the long-term value proposition in Rolls-Royce as being strong. And at its current trading price, I still think there’s plenty of value in the company. It’s a great long-term position to take even though it’s some way down from the initial recommended price.
For us, long term, Rolls-Royce continues to be a crucial company to the aerospace and aviation industries. And if you’re entitled to the rights issue, it’s somewhat of a “no-brainer” to vote for it and take it up. That way you’re not diluted and you’ve got a chance to top up your holdings
It has made note you’ll be also likely able to sell part of your rights, or all of your rights. But that’s dependent on the market value of the rights should the offer be approved at the shareholder vote on 27 October.
That’s not something I think you should do.
If you’re a current shareholder and the rights issue is approved, then I think you should take it up in full, depending on your access to capital and your investment plan.
Taking up the offer in full prevents you from being diluted for the time being and it tops up your holdings with the long-term view of a strong recovery of Rolls-Royce as we move through and past the pandemic, the restrictions and lockdowns.
The rights issue is for existing shareholders at a ratio of 10 new shares for every 3 you already own.
For example, if you own 300 shares, you’ll be entitled to buy 1,000 new shares at a purchase price of 32p per share.
You should make sure you’re familiar with the rights issue, reading the information from Rolls-Royce about it, the prospectus for it and the supplementary information before making your final decision on the rights issue or not. You can find it all here.
Action to take: should the rights issue be approved at the shareholder vote on 27 October, take up your rights issue at the 10 new for every 3 existing ratio at 32p per new share.
Regards,
Sam Volkering
Editor, Frontier Tech Investor
