What strategy do you adopt when companies make heavily discounted share issues as happened with Alinta (ALN) recently?

There is no general strategy. Every situation has to be considered on its merits. However, as far as taking action based on the chart is concerned, it is most important that the chart be properly adjusted for the share issue. I discussed the general issue of adjusting the chart for various events in Newsletter 31, which is available on my free access web site www.bwts.com.au.

The Alinta situation was quite complex to unravel. There were four important events that took place:

1. A trading halt on 15 and 16 March, while a major acquisition and its funding was announced.

2. Alinta went ex a 21c dividend on 16 March (during the trading halt).

3. Alinta placed 29 million shares with institutions at \$6.75 during the trading halt.

4. Alinta announced a 3 for 7 rights issue at \$5.50 effective 19 March, two days after the trading halt.

All of this information is readily available on www.asx.com.au.

Working out what the Alinta price ought to be following these events is a simple exercise in logic:

Alinta last traded on Friday 12 March at \$7.66.

The theoretical effect of the placement is calculated by taking the capitalisation before the placement, adding the funds from the placement and dividing by the new number of shares. In this case, the calculation is: ((168 x 7.66) + (29 x 6.75))/(168 + 29) = 7.53. In longhand: 168 million shares times market price of \$7.66 plus 29 million new shares times their issue price of \$6.75 all divided by the number of shares after the placement.

So, Alinta should have traded at \$7.53 after the placement. This is a very small change and well within normal market fluctuation. Generally, a chartist would not have adjusted their chart for this.

However, before Alinta could trade after the placement, it also went ex a dividend. So, the price Alinta could be expected to trade after the trading halt was \$7.53 - 0.21 = \$7.32. Some chartists adjust their charts for dividends. However, most do not. Nevertheless, the payment of a dividend is something a chart user should always be aware of. The information is readily available on www.asx.com.au and most broker websites and elsewhere, like the Australian Financial Review on a Monday.

In fact, Alinta can back on the market on 17 March at \$6.89. This suggests that the market had repriced the expanded Alinta as well as simply adjusting the price. This repricing should be dealt with the same way as any other news event that affects a share - if it triggers a stop-loss situation, you should act on it.

The rights issue was quite straight forward and the market made that adjustment quite efficiently, leaving very little gap on the adjusted chart. The method of calculating the theoretical price after the rights issue was dealt with in Newsletter No 31. Most charting software should have made this adjustment for you.

In conclusion, it seems to me that the Alinta situation was complex, but easy enough to work through. The market acted adversely to the acquisition. The \d\r\o\p in price after the trading halt, which was well in excess of what was warranted by the dilution caused by the placement made at a discount and the payment of the dividend suggests that the market believed that the expanded Alinta would not earn as well as the old Alinta. Such an announcement is really no different to a profit downgrade and would be treated the same way. That is, if it took the price below the failure point for your trading or investment strategy, you should cut losses immediately.

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