The ordinary rights of MTOUCHE Technology Berhad (MTOUCHE-OR) started trading on Bursa Malaysia today.  MTOUCHE rights issue involves the issuance of up to 181.5 million rights share on the basis of one rights share for every one existing share held. For every 5 rights share subscribe at an issue price of 10 sen, the subscriber will receive 2 free warrants.  At the time of writing, MTOUCHE share is trading at 20 sen while MTOUCHE-OR is trading at 10.5 sen.

According to announcements to Bursa, MTOUCHE has been buying back its own share at prices between 18 sen to 20 sen the last two days.  It is not surprising for the company to do so since it disposed more than 8 million treasury shares at above 40 sen in January 2010.

With the mother share at 20 sen, MTOUCHE-OR at 10.5 sen looks attractive from a theoretical point of view.  If an investor purchase 50,000 MTOUCHE-OR, he will come up with RM5,250.  He will then pay RM5,000 to subscribe for 50,000 MTOUCHE rights share at 10 sen each.  

For a total outlay of RM10,250, he receives 50,000 MTOUCHE shares and 20,000 MTOUCHE-WB.  MTOUCHE has an existing MTOUCHE-WA which is trading at a price of 7.5 sen.  As MTOUCHE-WB has a much lower exercise price of 27 sen (as against adjusted exercise price of 63 sen for MTOUCHE-WA), it is expected to trade at a higher price than 7.5 sen.  Assuming MTOUCHE-WB is worth at least 7.5 sen, the 20,000 MTOUCHE-WB investor gets from subscribing the rights share will be worth RM1,500.

In the example above, the investor who purchased MTOUCHE-OR at 10.5 sen and go through the subscription process will end up with 50,000 MTOUCHE shares and 20,000 MTOUCHE-WB.  If MTOCUHE share price stays at 20 sen and MTOUCHE-WB price is worth at least 7.5 sen from the above assumption, the investor package is worth RM 11,500.  If one holds MTOUCHE shares now, it may be better to sell the shares at 20 sen now and switch to MTOUCHE-OR while the company is supporting the price via share buyback.

 

Alan Voon
Warrants Specialist