2nd Chance Properties

[CityFarmer]

i was thinking. As a sharehodler taking cash dividends, I get diluted the more he takes scrip and converts warrants. he bascially leaves his money in there.

why not take it private? since he owns such a large chunk of the company.

The warrants was distributed to shareholder in pro-rata basic. Mr Salleh did not buy more from open market IIRC, his stake in % remain assuming all the warrants been converted. Any long-term shareholders who retained the warrants and converted it will not get diluted.

[Nick]

The scrip dividend is the kicker here. It allows the Company to declare large dividends knowing full well that the cash out-flow is minimal since the controlling shareholder opts for scrip. This raises the share price since retailers who opt for cash gets a real cash yield. What do you think ?

[CityFarmer]

The controlling shareholder opts for scrip dividend is always a good sign. It is a strong vote of confidence on future prospect of the company. The same applies to second chance

It also consistent with long term strategy of the company.

[Nick]

I wouldn't say it is always a good sign - Qingmei shareholders will beg to defer - though not entirely applicable here with the stellar Second Chance business and its very transparent corporate governance.

I am suggesting that if a majority shareholder consistently opts to take scrip, it gives the Company leeway to declare additional dividend per share since the cash out-flow is minimal. I believe scrip dividends / bonus shares doesn't have any tangible change to the company besides the transfer of retained earnings to the share capital. The only tangible change results when dividends are paid in cash since there is an actual transfer of assets from the company to external entities ie shareholders.

Let's assume we have a Company that generates EPS of 15 cents and FCF of 5 cents. If it declares only cash dividend, it is legislatively bound to declare a dividend of 10 cents maximum though it might be prudent to merely declare a dividend of 2.5 cents (half of FCF). However, if it chooses to declare a scrip dividend in which a controlling shareholder with 80% stake chooses to take scrip, it could easily declare 10 cents dividend knowing full well that the cash-outflow is only 2.0 cents. This will be attractive for both the Company and the minority shareholders. Of course, if a company declares 100% scrip dividend ie bonus issue, there is really no change and the market readjust the share price to maintain the market cap ideally. But in the above scenario, there is actual cash coming out for those who opt for the 10 cents cash dividend. At 10 cents, the company could easily trade at $1.00 since those who opt for cash get a real 10% yield. This wouldn't be possible if the Company had declared only 2 cents dividend resulting in 2% yield despite having similar cash out-flow as the previous model. This will only work if the controlling shareholder consistently takes up scrip and has long decided that it is more profitable to forgo the dividends for larger share price and incremental stake in the company. What do you think or am I missing out on something ?

(Not Vested)

[Drizzt]

somehow i felt that this is some form of financial engineering. i sent a query last time and Mr Salleh answered they have the profits to cover the dividends in totality. But somehow the cash flow do not add up. Cash flow last i see (not recently) wasn't able to cover that.

the advantage i see is that it gives shareholders the great option of taking dividends or choosing to partake in growth.

as one having a small amount of shares and not taking scrip, i am slowly being diluted even though i would take scrip if given the choice. that does not sound too good.

just to help my understanding, these warrants do look like a future rights issue isn't it?

[camelking]

The scrip dividend is the kicker here. It allows the Company to declare large dividends knowing full well that the cash out-flow is minimal since the controlling shareholder opts for scrip. This raises the share price since retailers who opt for cash gets a real cash yield. What do you think ?

perhaps it is what the company wants ie to increase the share price via ever increasing dividend payout. With the increasing share price, warrants get exercised which will help in supporting dividend payout (retained earnining permitting of course) and future business growth.

If so, the next consideration will be the substainability of such move. If it is substainable, then perhaps it is time to jump into the wagon? No?
And if it not, then it is time to move on.


vested

[Drizzt]

hi camelking, can you clarify how the warrants can support dividend payout? sounds to me like pump in money but they give back part of your money. Unless they use it to earn a ROA and increase payout.

[CityFarmer]

I wouldn't say it is always a good sign - Qingmei shareholders will beg to defer - though not entirely applicable here with the stellar Second Chance business and its very transparent corporate governance.

I am suggesting that if a majority shareholder consistently opts to take scrip, it gives the Company leeway to declare additional dividend per share since the cash out-flow is minimal. I believe scrip dividends / bonus shares doesn't have any tangible change to the company besides the transfer of retained earnings to the share capital. The only tangible change results when dividends are paid in cash since there is an actual transfer of assets from the company to external entities ie shareholders.

Let's assume we have a Company that generates EPS of 15 cents and FCF of 5 cents. If it declares only cash dividend, it is legislatively bound to declare a dividend of 10 cents maximum though it might be prudent to merely declare a dividend of 2.5 cents (half of FCF). However, if it chooses to declare a scrip dividend in which a controlling shareholder with 80% stake chooses to take scrip, it could easily declare 10 cents dividend knowing full well that the cash-outflow is only 2.0 cents. This will be attractive for both the Company and the minority shareholders. Of course, if a company declares 100% scrip dividend ie bonus issue, there is really no change and the market readjust the share price to maintain the market cap ideally. But in the above scenario, there is actual cash coming out for those who opt for the 10 cents cash dividend. At 10 cents, the company could easily trade at $1.00 since those who opt for cash get a real 10% yield. This wouldn't be possible if the Company had declared only 2 cents dividend resulting in 2% yield despite having similar cash out-flow as the previous model. This will only work if the controlling shareholder consistently takes up scrip and has long decided that it is more profitable to forgo the dividends for larger share price and incremental stake in the company. What do you think or am I missing out on something ?

(Not Vested)

I will not deny the logic behind your comment, but it may not be the intention of the management, or at least not the primary intention IMO

FYI, the most recent dividend is solely on cash, no scrip option. In term of cash outflow, this is the the largest among all years with most warrants been converted.

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as one having a small amount of shares and not taking scrip, i am slowly being diluted even though i would take scrip if given the choice. that does not sound too good.

just to help my understanding, these warrants do look like a future rights issue isn't it?

These warrant works like a 5 year renounce-able right issue IMO

For those shareholders opt for cash dividend, the subsequent dividend is increasing in absolute amount (DPS). It means the dividend/earning managed to catch-up the dilution.

For those opted for scrip, the reward is more which is fair.

[camelking]

hi camelking, can you clarify how the warrants can support dividend payout? sounds to me like pump in money but they give back part of your money. Unless they use it to earn a ROA and increase payout.

The money from warrant exercised flows into the company as additional cashflow (non-operating of course) and IF the company is profitable every year, the dividend can continue to be paid from retained earning (company law) even if there is negative cash flow from operating as the cash can come from warrant exercised.

Well, nobody forces you to put in money via warrant exercise, remember? There is more than one way to grow a business i believe.
It seems to me that second chance properties is using a combination of sound business model with shrewd corporate actions (warrants cum high script dividend payout) to grow the company.
Of course, ultra low interest environment helps too.

Come to think of it, I am tempted to add some more now....

[Drizzt]

for a company dealing with non orderbook, there should not be a cash flow issue that they cannot pay out of cash flow. for that it is strange to say that cash generated from warrants should be use to pay for dividends and it is considered sound.