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3 Things You Need to Know About Bonus Issue


Dear Members,


Basically, there are 3 things to be discussed on the subject of Bonus Issue. They include:



#1: What is Bonus Issue?


Let us start with the word ‘Issue’. This refers to issuance of new shares of the company. These new shares are issued to existing shareholders which is similar to Rights Issue.


However, here is the difference.


Bonus Shares are issued for free without needing shareholders to fork out extra cash to buy them. Meanwhile, existing shareholders would need to invest more money if they wish to subscribe to buy additional Rights Shares at a discount.



Bonus Issue =
Issuance of New Shares to Existing Shareholders
for Free


#2: Why Stocks Undertake Bonus Issue?


This is best illustrated with Aeon Co. (M) Bhd.


In 2008, Aeon Co. (M) Bhd had undertaken Bonus Issue on the basis of 1 Bonus Shares for every 1 existing shares. The number of shares had increased from 175.5 Million shares to 351.0 Million shares.



1 - Impact on Share Price


Before the Bonus Issue, the share price was RM 9.20 per share. This was in June 2008. After the Bonus Issue, Aeon Co. (M) Bhd’s share price was trading at RM 4.60 per share. It was half the price of RM 9.20 before the Bonus Issue.



2- Impact on Market Capitalization


Often, the impact of Bonus Issue on market capitalization is negligible. This is because the value of the company does not change materially because of a Bonus Issue Exercise.


Before Bonus Issue:


Market Capitalization
= 175.5 Million Shares x RM 9.20 per share
= RM 1.61 Billion


After Bonus Issue:


Market Capitalization
= 351.0 Million Shares x RM 4.60 per Share
= RM 1.61 Billion


This is why Bursaking.com.my would calculate and present the market capitalization of a company. Share price data may not provide an accurate assessment of the stock’s actual performance.


Meanwhile, market capitalization is the market price of the entire shareholdings of the company. It had accounted for adjustments in the company’s undertakings of Rights Issue, Bonus Issue, Share Splits, and Share Consolidations.


For instance, the share price graph of Aeon Co. (M) Bhd for year 2008 would look like:





Meanwhile, if we draw a graph of Aeon Co. (M) Bhd’s market capitalization in 2008, it would look like:




3 - Impact on Trading Volume

 

In Bursa Malaysia, the minimum investment into any public listed company is 1 Lot which is equivalent to 100 shares. Before Bonus Issue, the minimum investment required to buy Aeon Co. (M) Bhd was RM 920.

 

After Bonus Issue, the minimum investment required to buy the same company has dropped to RM 460. Hence, this would invite more retail investors to buy and sell shares of Aeon Co. (M) Bhd as they have become more affordable and liquid.

 

Month

March

April

May

June

July

August

Volume

(‘000)


573.1


312.3


1,578.8


1,324.8


910.0


2,453.6

Source: Annual Report 2008 of Aeon Co. (M) Bhd



4 - Impact on EPS

 

In 2008, Aeon Co. (M) Bhd had made RM 120.6 Million in shareholders’ earnings. Thus, the calculation of Earnings per Share (EPS) would be adjusted accordingly. This is fairly easy.



Without Bonus Issue:

 

EPS 2008
= RM 120.6 Million / 175.5 Million shares
= RM 0.687



With Bonus Issue:

 

EPS 2008
= RM 120.6 Million / 351 Million shares
= RM 0.344



5 - Impact on Existing Shareholders

 

Let us assume you own 1,000 shares of Aeon Co. (M) Bhd before the Bonus Issue. The total value of your shareholdings would be RM 9,200.

 

Investment Value
(Before Bonus Issue)
= 1,000 Shares x RM 9.20
= RM 9,200



After the Bonus Issue, the total value of your investment would not change materially. In this case, it would still be RM 9,200.

 

Investment Value
(After Bonus Issue)
= 2,000 Shares x RM 4.60
= RM 9,200



#3: Why Bonus Issue is More Welcomed than Rights Issue?

 

Often, retail investors would welcome Bonus Issue over Rights Issue. There are a few reasons for it. They include:



1 - They are Free

 

This is obvious. As mentioned, Bonus Shares are issued to shareholders for free. Meanwhile, Right Shares are issued to existing shareholders who are willing to fork out ‘additional capital’ to buy them. Of course, Right Shares are priced at a discount to its current market price.

 

2 - No Direct Change in Wealth

 

Shareholders may stand to lose the value of their investment in a company if they choose to forfeit their ‘Rights’ to buy additional shares at a discount. Hence, the investment value dilution is kind of a drawback as compared to Bonus Issue.



3 - A Sign of Confidence

 

Often, they are stocks that offer Rights Issue because they are financially in trouble. This is especially if their reason for issuing is to pay off their existing debt and to finance their working capital. That is why it is important to do fundamental analysis before pursuing Rights Shares.

 

Meanwhile, stocks that offer Bonus Issue are often fundamental strong. While there is no direct change in wealth of existing shareholders, share prices may increase due to higher level of participation (Demand) from retail investors to trade and invest as prices are more affordable. Hence, retail investors often treat ‘Bonus Issues’ as a welcoming sign.



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Ian Tai

Creator of Bursaking.com.my

The No.1 Stock Data Fanatic in Malaysia

 

Disclaimer:

The strategies outlined in this article / report / written material is intended for education & illustration purposes. It is strictly not intended to be an investment advice & must not be relied upon as personal financial advice. If you need specific investment advices, please consult the relevant professional investment advisors. No warranty is made with respect to the accuracy, adequacy, reliability, suitability, applicability, or completeness of the information contained. The author disclaims any reward or responsibility for any gains or losses arising from direct and indirect use & application of any contents of the article / report / written material.