Monday, 27 August 2018


We think it was a fair assessment that the entire bloody market was caught flat-footed by the announcement by Sapura Energy Bhd (SAPNRG); on a sleepy Friday afternoon, no less. For existing shareholders, the development was not a strictly positive one; the firm announced plans for a massive, highly dilutive, rights issue to raise cash.

This was something that got us all hot and bothered. We very quickly considered the possible scenarios that can come out of this, particularly on how the immediate reaction would be. We are no scholars in SAPNRG's business; we have no special expertise to divine its future fair value or what the stock is fundamentally worth. But we do understand volatility, and this news was a classic trigger.

The stock was trading serenely at 60 sen prior to the midday close; the announcement came during this break. As with many of you, we were looking at the buy-sell queues just before trading resumed at 2:30PM. It looked like the stock was going to reopen slightly lower (which it did), but by that time we've made up our minds already.

 2:29 ;)

Now let's take a step back. We will explain our thought process regarding this news and the extent of our anticipatory powers. 

We didn't have time to crunch the numbers, but our big picture analysis was just enough in supporting our belief that the market will take this news especially terribly. Here's a list of the whys - we try to be logical and not too speculative in our thinking.

1) A RM4bil cash call indicates a crucial need to expedite this collection of funds. The reasoning is simple.

The jump in short term debt obligations : Latest 1Q VS 4Q at preceding year end - Source.

It was also apparent to us that given SAPNRG's sprawling existing borrowing commitments with local banks, it is no easy task to raise this much money from its creditors quickly. So getting it from the public markets is the way to go.

 The whole thing, in case you were that curious.

2) We really did not like the idea of the rights proposal and believe that it is especially punitive to the stock. Dilution hurts value creation, and shareholders are already jittery from the value destruction that came from the fall in the stock's value; if you had been a SAPNRG shareholder since Jan 1, 2018, by 29 Aug you'd have lost 41% in the value of shares you hold.

So what is it that we did not like? Let's use the following examples for some perspective:

a) The current shares outstanding is 5.99 billion. The rights issue will increase the total shares outstanding by a whopping 166%. We're talking an extra 9.99 billion shares - numbers we can't easily comprehend.

b) SAPNRG's market cap alone is RM2.49 billion. The cash call seeks to raise RM4 billion - the equivalent of creating 1.5 times worth of SAPNRG, if we're being super simplistic.

Create a twin to shoulder half of your burden, maybe? Source

c) That RM4 billion figure again. Who foots the bill? The shareholders. And given the recent shareholder related grievances we've read about, this cash call is probably not what you'd call a pleasant surprise. 

d) This exercise will help lighten the debt load, but any value creation (reflected in the net asset value per share) is offset (possibly by a factor of ten) by the dilutive consequence of the rights issue. In plain English, shareholders won't derive much value from this whole thing - not in the short term, anyway.

3) We may not like it, but we fully understood the rationale behind the cash call. Raising cash is a positive and important move for the company. However, it comes at a steep cost for both company and shareholders; serious dilution, and in effect, a negative impact to the stock price and the NAV.

It is with this knowledge that we return to 2:30PM on 24 Aug, 2018. We thought the stock was going to fall, and we were prepared to trade on the short term volatility, a concept we have explained before. We didn't bother to consider trading the warrants; there was no need to. The stock itself is liquid enough for trading considerations, and we can confidently trade in size.

So this happened. Below is the five-minute chart for SAPNRG that day.

The red candles translates to : RM1 billion of market cap lost in ten minutes.

The market's reaction was swift and violent. Tens of millions of shares were sold within minutes and the stock rapidly fell. We thought about entering at the 50 sen mark, but the buy-sell queue indicated that liquidity had temporarily evaporated. The was a deluge of sell orders and only a fraction of willing buyers. There was still further downside in this.

Eventually the stock fell to an all time low of 37 sen - remember that it closed at 59.5 sen the day before. We failed to realise that it was the all time low, given that by this point we had already made our move and were knee deep in SAPNRG shares.

To make serious money as a small fry, retail investor, you need to have a high risk tolerance. This is especially so in 'volatility trades'; hey, it's right there in the name. To give you a flavour of what we endured, note that we first bought in at 2:35PM. In the 10 subsequent minutes, the stock actually fell to 37 sen, leaving us with a temporary paper loss of 13% in our holdings. It's a five figure hit.

However, two things worked in our favour. We knew that there is a high chance of entering the trade at a good price during periods of peak fear; when a stock loses 38% of its value in 10 minutes, this is what we mean. We also knew that anything below 40 sen is close to the previous all time low, market psychology dictates that investors would be keen to snap up shares in anticipation of a 'double bottom rebound', in chartist parlance.

Partial daily chart. Note : we don't give a hoot about technical analysis, but we do care about market psychology.

From the trough of 37 sen, the stock bounced back fairly quickly; this had to happen for us to stay in the stock. We acquired some more SAPNRG shares as it breaks through to 40 sen and beyond. Note that we swung from losses to breakeven to profits in under 20 minutes; this is pure short term volatility trading at its most raw. And if you're familiar with our blog, strategy, and content, note that we weren't clueless in executing this particular trade. We've been in this situation before.

In less than an hour we were out.

In its essence, this whole trade was about processing information and distilling them. We had to figure out the thematic, anticipate the market reaction, knowing what to buy, how to buy, and how much - all in the span of an hour or so (between the time the announcement was made and when trading resumed). The trading window was extremely narrow, but we foresaw an opportunity to execute a potentially highly profitable trade. As it turned out, the payoff is worth the trouble.