Some minority shareholders of Cathay Pacific Airways are turning bearish as the value of their rights-issue entitlements was discounted in the marketplace, after a third wave of coronavirus infections dealt another blow to the airline’s outlook.
Nil-paid rights, as the entitlements are called, fetched 73 HK cents on Friday, the first day of trading, representing a 17 per cent discount to their so-called intrinsic value of 88 HK cents. The value is derived from the gap between rights issue at HK$4.68 per share and stock closing price of HK$5.56 on Friday.
As Cathay’s major shareholders have given their undertaking to subscribe for their entitlements in the HK$11.7 billion cash call, it can be assumed that the volume that changed hands on Friday came from shareholders who own about 15 per cent of the carrier. They can ‘detach’ and sell the entitlements if they choose not to support the airline’s capital injection.
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Cathay unveiled a HK$39 billion recapitalisation plan in early June as the viral outbreak slammed the global aviation industry and reduced the carrier’s capacity by more than 90 per cent. The refunding includes a HK$27 billion bailout cash from the Hong Kong government.
“A discount means that investors hold a bearish outlook towards the company, and this keeps a lid on the demand for its nil-paid rights trading on the stock exchange,” said Alvin Cheung, an associate director at Prudential Brokerage.
Nil-paid rights should in theory track closely with the issuer’s stock price after adjusting for the rights subscription price. It is an instrument that enables its holder to participate in a company’s cash call by buying new shares at the rights subscription price if he opts to exercise the rights.
Cathay’s minority shareholders have been issued about 376 million of such entitlements based on their shareholding and the 7-for-11 rights offering terms. Almost 26 million of them changed hands on Friday, according to stock exchange data.
Investors have until August 5 to pay up if they decide to subscribe for their rights shares. The stock has depreciated 5.8 per cent since they traded on ex-rights basis on July 15.
There is a risk that Cathay’s stock price will continue to drop because of rising Covid-19 cases, said Kelvin Lau, head of auto, transport and industrial research at Daiwa Capital Markets.
“But given the stock has dropped by 37 per cent since the recapitalisation package was announced in June, I believe that all the concerns surrounding the rescue plan has been reflected in the current share price,” Lau added.
His team has last week upgraded Cathay Pacific’s rating to “Hold” from “Sell”, but trimmed its price target to HK$6.00 from HK$6.50.
Cathay Pacific has disclosed earlier this month that in the first six months of 2020, the number of passengers it carried dropped by 76 per cent compared to a year ago. The drop in passenger revenue to around just 1 per cent of prior year levels shows it’s bleeding cash of about HK$1.5 billion per month.
“If the aviation sector could turn the corner and recover next year, and Cathay Pacific could continue to put in place measures to control its cash flow, then this would plug its cash burn and help it return to positive cash flow next year,” said Lau.
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