The AFR gave the market a good line into the raising that was likely to be conducted by Treasury Group [TRG.AX].
We bought $500.00 of shares @$11.00 across our accounts within 48 hours of this article. On Thursday TRG came good and announced a placement and SPP.
ASX Announcement lets us know that in addition to the placement of $30M, holders will expect $5M SPP at the insto placement price of $10.25. Provides for a potential pre-tax profit of $1,463 per holder.
We have shorted the stock on the announcement to the value of about 35% of our SPP entitlements.
SPP Arbitrage does exist, but in general it is a trade with a better than normal risk / return profile. The devil is in the detail and whilst getting wind of the raising is half the challenge. The second half is assessing the magnitude of profit and residual risk you still need to hold.
We liked TRG trade because:
1. It is shortable, reducing our risk
2. The size of potential raising left us thinking it was likely to use a placement rather than a rights issue.
3. The stock looks attractively valued at the moment providing for upside risk and has is negative correlated to the macro themes like the falling AUD.
The downside. Capping at $5M, there are currently 3000 shareholders according to the most recent annual report – potentially creating $45M of applications. Now, whilst it unlikely we will go close to $45M of new applications the risk of scale back is quite high meaning our short to lock in may leave us exposed, to what appears to be an attractively priced asset. Accordingly we are still running long.