Does the stock price go up if you issue a free stock issue? If there is no performance, eventually
In February, the minority shareholders of Labgenomics, a company specializing in molecular diagnostics healthcare, got together. This is because the company is not returning shareholder value at all despite the sharp increase in operating profit. Minority shareholders demanded 200% of the capital increase. The company accepted it, and the stock went straight to the upper limit. It was the result of confirming the myth of the stock market that ‘no certification = rising stock price’.
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Recently, as the domestic stock market has been sluggish, more and more companies have suffered a drop in share prices. The strong ‘ant investor’ is demanding a free capital increase, and it is clear that companies are actively using it as a share price stimulus measure. According to the Korea Exchange, 21 companies announced a free capital increase for three months until March 31 this year.
Free stock issue refers to the transfer of retained earnings (surplus money) to capital to issue new stocks and distribute them to shareholders. It is similar to a stock dividend in that it issues shares. However, the difference is that a free stock issue can be carried out at any time only with a resolution of the board of directors, whereas stock dividends must go through a general resolution of the general meeting of shareholders.
Strictly speaking, there is no change in the corporate value of a free capital increase. The stock price is adjusted downward by the number of shares increased through the free issue. Ultimately, the market cap remains unchanged. However, as the stock price is adjusted downward, an ‘optical effect’ occurs in which the price appears cheap. Companies aim to improve liquidity by lowering prices and increasing the number of shares. In addition, the market generally accepts it as a positive because it has a strong financial structure and can show the meaning of returning profits to shareholders.
It is not difficult to find a company whose stock price has risen sharply since the announcement of the free issue. Seojin Systems, a telecommunication, energy and equipment company, posted ‘best in history’ performance last year. Sales on a consolidated basis last year were KRW 600 billion, an increase of 88% from the previous year. During the same period, operating profit increased tenfold to 58 billion won. However, despite the strong performance, the share price was sluggish. It was the free issue card that boosted the sluggish share price. When Seojin Systems announced that it had decided to issue a new stock for each common stock after the market close on March 30th, the stock price rebounded.
However, a free issue is by no means a panacea for boosting stock prices. This is because, as mentioned earlier, the company’s value does not increase by issuing a free capital increase. In the end, there is no disagreement that the key variables that determine the share price after the free issue are ‘performance’, ‘growth’ and ‘performance’. Mezion’s stock price recently hit a lower limit. As news spread that the U.S. Food and Drug Administration (FDA) failed to approve udenafil, which is being developed as a new drug for patients with Fontan surgery. Mezion’s solution to boost stock was a free stock issue. It has decided to issue a ‘tong big’ free stock issue in which two new shares are allocated for each common share. Although the drop was partially offset by the news of the free capital increase decision, it was difficult to avoid an 18% drop from the previous trading day. In a situation in which the investment engine of FDA approval is shaken, the free capital increase was no help.
Some companies have rejected the request to use the free issue as a share price booster. This is the game company Krafton. Krafton, who debuted in the stock market with an offering price of 498,000 won in 2021, is having a difficult day. As of April 6, the stock price was 287,000 won, far short of the public offering price, and is continuing its record low this year. As the stock price continued to decline, some shareholders demanded a free capital increase. However, Krafton announced at a recent shareholders’ meeting that it is not considering a free stock issue. Dong-geun Bae, Chief Financial Officer of Krafton, said, “As a result of analyzing the cases of companies with market caps exceeding KRW 1 trillion since 2011, they may rise in the short term, but they all come down again after six months.” It is difficult to make a choice because there is no evidence that can play a role,” he said.
A stock market analyst said, “There is a case where a company whose performance is bad and insolvent, which can even go delisting, raises the stock price by offering a ‘free stock issue’ and the major shareholder is trying to escape. claimed.
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