Tuesday, March 31, 2009

Discrepancy in IOI Corp and IOI Properties Stock price

Today, i noticed a discrepancy in prices between those 2 shares. Since i can't take advantage of it, might as well i share it here in the hope that you'll learn a lesson or two, and take advantage of it, if the condition fits you.

Let me share some background info:

1. On 4th February 2009, IOI Corp issues a Voluntary Take-Over Offer to take over IOI Properties at:
  • 0.6 shares of IOI Corp , and RM 0.33 CASH for every 1 share of IOI Properties.
    Full Details of the offer is here.

2. Then, on 30th March 2009, IOI Corp have already received (plus their own ownership in IOI Properties) in excess of 90% of the shares outstanding. Since they own more than 90%, the remaining shareholders of IOI Properties are "forced" to convert their shares to IOI Corp at above terms. Full Details of the 90% ownership of IOI Corp is here.

3. By 7th April 2009, IOI Properties would be delisted from Bursa Malaysia, and converted to IOI Corp shares at above terms.

So, the equation below must hold true.

1 IOI Properties share = 0.6 IOI Corp shares + RM 0.33 CASH

If the above equation differs by anything more than the brokerage fees involved (say, 1.5%), then arbitrage opportunity would arise.

As of this writing (4.30 pm on 31st March 2009), you can buy IOI Properties at RM 2.50 per share, and you can sell IOI Corp at RM 3.80 per share. Fitting it to the equation above:

Left Side : 1 IOI Properties share = RM 2.50

Right Side: 0.6 IOI Corp shares + RM 0.33 CASH = RM 2.61

That's a difference of 11 cents, or 4.4% !. Seeing this, I can buy 100,000 shares of IOI Properties at RM 2.50, and "sell" 60,000 shares of IOI Corp at the same time.

This way, i'm making a nearly risk free return of at least 3.4% in a week (that's the holding period for my IOI Properties shares to be converted to IOI Corp shares). After my IOI Properties shares is being converted to IOI Corp shares, i'll "return" the IOI Corp shares back to cover my short selling position.

Nice Arbitrage Opportunity? Too bad Short selling is not allowed in Malaysia since 1998. :-(.

However, if you own IOI Corp shares, you can sell those shares, and buy IOI Properties shares (with the above proportion). 1 week later, you'll have back the same number of IOI shares, and make at least 3.4% profit (assuming total brokerage fee is 1% both sides).

I know i would do that if i manage a portfolio of a few hundred Millions like a mutual fund. :-).

Would i just buy IOI Properties (without short selling IOI Corp at the same time), in the hope that i can sell IOI Corp shares at that above price 1 week later to make 3.4% profit?.
No, i won't. That involves risk, and possibly i might lose money. To me, this way is Speculation (and not Investing). Read the difference between Investing and Speculating here.