UK Edition
Questor: Capita shares fell by 36pc last Thursday. This is why shareholders needn’t worry
On Thursday last week the price of Capita shares, which Questor has tipped as a “hold” several times recently, collapsed from 200.2p to 128.55p, a fall of 35.8pc. But shareholders should not be concerned. Why?
The answer is that such a share price fall is an automatic consequence of a rights issue such as the one that Capita is in the process of completing. And, strange as it may sound, shareholders will not end up worse off as a result, despite the drastic fall in the share price.
The reason, briefly, is that under the rights issue, investors who choose to take part will receive extra shares for which they will pay just 70p.
The current share price (130.1p last night) therefore represents a gain in respect of those cheaply acquired new shares – and that gain is enough to compensate for the loss of value of the original holding.
Let’s look at how the numbers actually work. Imagine that you originally owned 200 shares in Capita. The rights issue gives you the right (but not the obligation – we’ll say more on that later) to buy three new shares at 70p for every two previously held. So you can buy 300 new shares.
At a price of 128.55p at last Thursday’s close, your new 70p shares had made a paper gain of 58.55p each (or 83.6pc) on the day. As you will have 300 such shares, your total gain is £175.65. The loss on your original 200 shares, meanwhile, was 71.65p per share, or a total of £143.30.
Put another way, your 200 shares were worth a total of £400.40 at 200.2p, before the issue of the new shares. You then decided to spend £210 (300 x 70p) on the new shares. At last Thursday’s close, your new holding of 500 shares in all was worth £642.75.
So, far from making a loss when the share price fell, you gained £32.35. This can be put down to the shares undergoing a rise of about 5pc on an “underlying” basis, stripping out the effects of the rights issue, last Thursday.
So far, we have assumed you decided to take up your rights and buy new shares at 70p (and, in fact, the gains we have referred to will not technically be yours until you have paid for your new shares on May 24). But shareholders do have other options, although they must make their choice known to the company by 11am on Friday.
Those options are to sell all your rights (they have a value because they entitle their holder to buy shares at below the market price), or to sell some of your rights and use the money generated to take up your remaining rights. This latter course means that no money changes hands.
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Broadly speaking, whichever course you take should leave you, in the short term, no worse or better off than before, assuming no drastic change in the share price before the process completes. Our advice on April 25 was to take up your rights in full.
If you do nothing, your rights will be sold on your behalf and the proceeds sent to you. Not taking up all your rights does mean that your holding in the company is diluted.
Update: RWS Holdings
On April 24 RWS, the patent translation service regularly tipped here, issued a trading update that sent the shares falling by about 15pc.
The group said recent weakness in the dollar, in which it earns much of its revenue, would hit profits.
We asked two fund managers who hold the stock for their reaction.
Keith Ashworth-Lord, of the SDL UK Buffettology fund, said: “It is always worrying to get a profit warning – albeit a minor one – in the wake of the volume of acquisition activity that RWS has pursued lately.
“I had been watching the appropriate financial ratios for any sign that the earlier two big purchases, CTi and Luz, were not firing. I have not yet seen such a deterioration. I am further reassured by having Andrew Brode at the helm. He is a consummate manager and will be fixated on making sure that matters do not get worse. The free cash flow yield is 4.5pc, the return on equity is high teens and the balance sheet relatively strong. With this in mind, we have bought more shares at 385p.”
Anthony Cross and Julian Fosh, of Liontrust’s UK Smaller Companies fund, said: “We view this setback as a short-term hiccup and have taken the opportunity to buy into share price weakness. The effect of currency trends on profitability is very much a case of swings and roundabouts, and has no impact on the attractions we have identified in RWS.” Buy.