Internal capitalisation changes are those capitalisation changes which affect the number of shares held by the pre-existing shareholders (i.e. bonus, rights, splits, etc.).
Shares issued to outsiders in the case of share swaps, special issues, etc., do not affect the number of shares held by the pre-existing shareholders.
SPG does not believe that bonuses increase the value of shares, and advise investors not to pay much attention to the past number of bonus issues.
We look at rights in another light, however, as we are not in favour of rights issues unless the company has been an exceptionally fast growing ones (i.e. growth in excess of 20% per year). In other cases, a company which has issued more than one rights in the past decade ought to be viewed with caution.
It is perhaps worth pointing out that a company which has many capitalisation changes all bunched together during a short space of time without a concomitant increase in earnings could be trying to impress its sharehodlers and the stockmarket. Historically, such companies usually performed poorly after such capitalisation changes were over.
Any existing issues which will lead to future dilution should be noted. Dilution means the creation of extra number of shares which will cause the per share earnings and dividend to decline. Normally, dilutive issues include warrants (TSR) and convertibles. By comparing the number of new shares which will be issued with the existing number of shares, the user would have an idea of the potential dilution.
For example, if a total of 100 million new shares will be issued and the exisitng number of shares is 300 million; the potential earnings dilution would be 25% without taking into consideration the notional interest saving. That is the EPS will decline, say, from 10 sen per share to 7.5 sen.
Fixed income securities (i.e. bonds etc) issued by the company should be considered too.
Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.
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