Floor price may inflate BAT Bangladesh’s market cap by 60%

Emergency floor price in the stock market – introduced in the wake of the Covid-19 pandemic – was almost forgotten as the market bottomed out with the help of the better-than-expected state of economy, low interest rate, and improved confidence in regulator.

But floor price as a topic has returned to the street as soon as BAT (British American Tobacco) Bangladesh announced a 200% stock dividend alongside more cash following its board meeting last week.

Analysts estimate that after the stock dividend is adjusted, the multinational tobacco giant's market capitalisation would get a 60% boost without any fundamental reason if the floor pricing instructions remain the same.

If the floor price is not lowered, despite the massive price adjustment following asset and earnings dilution, BAT Bangladesh alone might artificially boost the Dhaka Stock Exchange's (DSE) market capitalisation by more than Tk18,000 crore.

A market research note to private clients seen by The Business Standard also reveals investors' fear that after the stock dividend adjustment, investors might fail to find buyers at the mandatory height – the floor price of Tk907.6 for each BAT share.

The math

When a company capitalises its retained earnings through issuance of fresh shares in proportion to its existing shares, the new shares are called stock dividends.

The number of BAT Bangladesh shares would be tripled as the company would issue two new shares against each existing share.

Its existing net asset value and profits per share will be divided by three; hence rational investors will simply divide the existing stock price by three to calculate the rational post-dividend stock price.

Speaking with The Business Standard on Thursday, an analyst said due to the floor price, BAT Bangladesh is going to experience an extraordinary situation.

He explained that considering the closing price of Tk1,700 on Thursday, BAT Bangladesh's post record date stock price would be Tk567. But its floor price was set at Tk907.60 on 19 March 2020.

So, after the record date, BAT would be stuck at floor price and there would be no buyers and no trade as logical buyers may quote a price of around Tk567 after availing stock dividends, instead of bidding at floor price of Tk907, which is 60% higher than stock dividend-adjusted price.

Thus, the market capitalisation of BAT Bangladesh would jump by more than Tk18,300 crore, which is Tk27,175 crore now.

"We expect that the stock exchanges would discuss the abnormal situation with the Bangladesh Securities and Exchange Commission (BSEC) and lower the floor proportionately," said the analyst who requested anonymity.

The speculation

There have been a few examples where a stock became stuck at the floor price after record date and virtually remained non-tradable as no buyer appeared to be interested in buying at an irrational high price.

As BAT Bangladesh appeared to be the case of biggest dilution of assets and earnings since the introduction of floor price, it became a big puzzle to rational investors.

Meanwhile, a number of irrational investors have begun speculating about the situation for a possible short-term gain.

Abdullah, a retail investor, told The Business Standard on Saturday that if the floor price remains over Tk900, the pre-record date price might go further higher to catch up or justify the post record date price.

On the record date, the company's stock trading remains off and the company identifies its shareholders to participate in the general meeting and avail dividends against their shareholding. 

Abdullah and one of his friends bought BAT shares at around Tk1,650 on Thursday with a hope that the price would go higher before the record date.

Ahead of corporate earnings and dividend announcement, BAT shares have gained more 50% in the last few weeks.

Both the small investors acknowledged that the expected price hike would not be due to any fundamental reason, rather because of a similar thinking by other investors.

Stock market expert Abu Ahmed, a professor emeritus of economics at the University of Dhaka, recommends a rational modification of floor pricing method. 

"I myself was never a supporter of floor pricing in the stock market, but it helped the market avert devastation during the days of panic last year," he said.

"It was a prudent decision and now that it would be more prudent to proportionately lower the floor prices of individual stocks if the number of shares increases after record date," he said adding, "Investors need liquidity – the ease to buy and sell, and also any artificial pricing does not sustain in the long run."

The Business Standard talked to two senior officials of the BSEC, but they are unaware of any concrete plan within the capital market regulator in this regard.

Abdullah and his friend are praying for no change in the floor price rules.

On the other hand, the analyst said, "Let the floor price be there as it worked well. The market just needs to get rid of the BAT-like situation."