Current Price – $0.40
Intrinsic Value – $0.55
Upside – 37%
Expiration Date – July 18, 2018
This opportunity was suggested by Greg.
NTG transferable rights allow to purchase 1/3 of NTG share at 90% of the average closing price of NTG for the 5 consecutive days including and ending on July 18.
NTG is currently trading at $16.86 and will payout $0.42 dividend to the 3rd of July record holders. Excluding dividend NTG trades at $16.44. In turn the rights have intrinsic value of $0.55 ($16.44 * 10% divided by 3) and are trading at $0.4, reflecting an upside potential of 37% in 3 weeks.
- This Rights offering is dilutive to NAV as new shares will be issued at c. 14% discount to NAV (taking into account issuance fees and assuming shares trade at or below NAV at the time of offering). Thus following the offering NAV will decline by 3.5%.
- Also worth keeping in mind that significantly larger amount of funds will be required to exercise rights. For every $1,000 invested in rights, investors will need $14,000 to actually exercise those rights. This will not be necessary if market price of rights approaches intrinsic value before the expiration.
- Drop in NTG market price from the time the rights are exercised (18th of July) till the time new shares are issued and distributed to investors. 10% decline in NTG share price during this period would completely eliminate any upside from the transaction. NTG price is mostly driven by its NAV, which has shown more than 10% volatility over the recent months. On IB there is no borrow to hedge this trade.
- Another risk factor is the caveat that stock purchase price using rights cannot be less than 90% of NAV. NTG currently trades at 3% premium so this is currently not an issue. However, if the stock starts trading below NAV during the measurement period the full 10% rights discount will not be realized. Historically there have been periods where NTG traded slightly below NAV (Oct-17 - Jan-18).