Some Thought About ESOS, BONUS Share, Share Split and Share Price

As I’m join stock market, there’s many term need to learn. ESOS, Bonus Share, Share Split and Share Price is term that being mentioned in the news for the stock.
What that term means? I just found the article that useful.. Let’s learn together

1. ESOS (EMPLOYEE SHARE OPTION SCHEME)

ESOS is a scheme whereby the employee will be granted the right to subscribe the share option which enable them to buy the shares of the listed company at price far lower than its current market price.

From the view of a business owner, issuing ESOS is one of many ways for an employer to reward its employee. The unique thing about this scheme is that it enables its subscribers to own a fraction of the company they work for. In optimal situation, the option subscriber will work harder for that company that he/she also a fraction of it. Symbiosis for short.

Situation in Malaysia:

Warren Buffett: honesty is an expensive gift, don’t expect it from cheap people.

Real situation here is whereby rather than concern about the benefits of shareholders (who is also owner of the company), the directors in the some companies care about themself more. One of the infamous thing that board of directors like to do is issue a large amount of ESOS and when they reach the limit of ESOS, they enlarge the limit. (No limit on irrationality either)

(A recent example would be VS, increasing its ESOS from 10% to 15% of total shares issued; I don’t own shares of VS, i don’t know what is its business, just giving an example)

The board of directors will eloquentlly argued that the issuing ESOS is to make sure all its outstanding employees contribute more to the company by increasing it ownership feeling and increase the willingness to retent in the company.

HOWEVER, THINK TWICE. Look into the ESOS scheme (another company that voraciously issue ESOS is Favelle Favco, IOI corp and IOI property). WHO GET MOST OF THE ESOS? The CEO/ directors of the board who are ALSO ALREADY THE LARGEST SHAREHOLDER. Meanwhile, the employees will get the smallest slices of the cake (ESOS subscription right). Directors who use the fund of the shareholders to fatten their own wallet is not a honest-to-god act.

ESOS will dilute the EPS, ROE and DY (anything else good missed?). Using the money and trust from the shareholders to voraciously enlarge their already biggest shareholding via ESOS, well can be viewed as a warning sign of no integrity in the management board. Furthermore, you will notice that the one who will rubberstamps the ESOS will be the largest shareholders as well. More viciously, they enlarge it when it limit of ESOS is reached. If such a company also “coincidentally” pays a lot of salary to its CEO, these combinations mean no good to your own wallet.

ESOS is not all bad, it is a good strategy, if used prudently. However if it turn sour, don’t forget Warren Buffett’s first and second rule of investing (don’t loose; sounds don’t buy their stock to me). Becareful when you see someone put too much source in your plate, like chilli sos, ketchup sos, soy bean sos etc, especially ESOS. It sucks.

Warren Buffett:

“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.”

2. Bonus share — more correctly is Distrubution of treasury share or share dividend

The company fork out the its treasury shares (shares that the company buy back from the stock market) and distribute them to its shareholders by proportion of shares owned.

Regarding this, please read the Warren Buffett’s letter to shareholders, the logic is all there. Thank you Warren.

Thinking back in Malaysia, although the shares buy back can be violated but the largest shareholders also receive collateral damage. Not as abusive as voracious ESOS.

3. SHARE SPLIT

A TOTALLY LESS USEFUL THING THAN IT PROPOSED and sometimes awful.

A simple arithmetic :

1 share of RM 10 = 2 shares of RM 5

An unusual phenomenon that yet keep happening in KLSE is that the share price of a stock will rise (without intelligent reason) after the share split. The board of directors will proudly say that the reason for share plit is to increase the availability/liquidity of the share. However I would say the unusual share price surge is the main factor that propels the directors to make such split.

The truth is:

1 share of RM 10 = 2 shares of RM 5 ? 2 share of RM 10

In fact what you need to sacrifice to get the “availability/liquidity”

a. lower EPS

b. lower DY

c. lower ROE

(again anything good not ruined?)

Some argued that share split will “release” the value of the company. Well what is its effect to EPS, DY and ROE?

Share split certainly have it purpose. But if you see a stock that have decent daily trading volume being proposed by its directors to do 1 to 1/2/3/4/5 split, after harness the unreasonable price hike, try to look for an exist mechanism when the risk outweight the profit.

4. SHARE PRICE

There is an unusual psychological misjudgment that happens to certain investors.

Stock price of RM 1 with PE 15 is more “buyable” than stock priced RM 10 but PE of 5.

Every often, some of my friends will tell me this stock is not suit for them because the price is over RM 10 so it is expensive.

This psychological misjudgment unfortunately is quite common. Again let’s see what simple arithmetic will reveal:

Same share: 1 share of RM 10 = 2 shares of RM 5 = 4 shares of RM 2.5 = 8 shares of RM 1.25 = 16 shares of RM 0.6125

Oh arithmetic, is the mother of safety.

The smallest quantity of share you can buy from KLSE is 100 shares. 100 shares of RM 10 will cost you 1K.

Stock ABC: ROE 10%, share price RM 1, cost of holding 1000 shares = 1K. Invested 1K have ROE of 10%

Stock XYZ: ROE 10%, share price RM 10, cost of holding 100 shares = 1K. Invested 1K have ROE of 10%

Stock 123: ROE 15%, share price RM 10, cost of holding 100 shares = 1K. Invested 1K have ROE of 15%

Avoid this simple psychological misjudgment if you meant to be a value investor.

In conclusion:

Becareful, sometimes the calculator of certain board directors works in arcane way, and your will found that you can outwit them in term of mathemetic.

A visit to Charlie Munger’s Poor Charlie’s Almanac is recommended. (I am gonna read some parts of it, again esp the psychological misjudgments)

Benjamin Graham:

Investment is most intelligent when it is most business like

Source :-KLSE Investor

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