Take advantage of arbitrage opportunities | The star
BURSA Malaysia took another step last week when a company listed on the Australian Stock Exchange (ASX), OM Holdings Ltd (OMH), obtained a secondary listing. The listing was considered a direct listing as no new or existing shares were sold or offered to investors here.
The company’s listing in Australia remains the primary listing on the stock exchange. When a company’s shares are listed on two markets, investors and traders are always looking for potential arbitrage opportunities.
On the first day of listing in Bursa, the reference price used is based on the OMH closing price the day before Bursa is listed and after adjusting the closing price of the Australian dollar and the ringgit on that day.
As this is a dual listing, all shares listed and listed on both Bursa or ASX (Australia Stock Exchange) are fully fungible.
This means that shareholders holding the shares under the Australian register, can request to withdraw their shares and transfer those shares to the Malaysian register by depositing them in a CentralDepository System (CDS) account which is maintained with an authorized depositary agent ( ADA) from the custodian of Bursa Malaysia, and vice versa. -versa too.
However, as no shares were originally offered for Bursa listing, 16.8 million OMH shares were transferred by some shareholders to ensure the availability of liquidity for trading. This represents approximately 2.3% of the total shares issued by OMH of 738.6 million shares. OMH was listed in Bursa on June 22, 2021, with a benchmark price of RM 2.57, which was derived from the last closing price of A $ 0.825 on ASX and based on the exchange rate of 3.1115 .
On the secondary listing, we observed a particular price movement. OMH listed on Bursa closed on the first day of trading with a premium of around 10% over the close of ASX and this premium widened to 42.9% the following day.
As of Thursday’s close, this premium has fallen to just under 11%, as shown in Table 1.
As the shares are fully fungible, investors holding ASX shares can transfer the shares to Bursa for an arbitrage profit.
Based on the information provided by the OMH in its secondary listing prospectus, this process takes at least three trading days and that too, if the application is submitted before 10 a.m. (Sydney time) on the day of filing. A shareholder requesting the transfer should also ensure that they have provided appropriate and timely instructions to the two share registers in Malaysia and Australia respectively.
Since there is a time gap between when a transfer request is initiated and the receipt of shares in another exchange, the arbitrage opportunity that was available at the time of initiation may or may not exist at the time the shares are received in the market which has a richer market price. Therefore, while on paper the arbitrage opportunity looks attractive, in reality it is not easily executed at a profit.
In other words, arbitrage profit is only considered attractive, but converting it to profit may or may not be the same.
In this case, the ASX market price is used as the reference price, being the market where OMH has the main quote.
Is there an arbitrage opportunity in American Depository Receipts (ADR)?
A few weeks ago and over a weekend ago, there was some buzz in the market when Top Glove’s ADRs which are listed in the United States and traded over-the-counter (OTC) took a sudden turn. price increase.
These US dollar denominated ADRs have an exercise ratio of one ADR for four Top Glove common shares. The total number of shares that can be purchased under ADR will at no time exceed 5% of the total issued and paid up capital of Top Glove.
It is understood that despite the high allocation in terms of the number of shares that can be purchased through the ADR program, there are only around 2.6 million ADRs in issue, which translates to around 10, 4 million Top Glove shares.
Table 2 summarizes the prices of Top Glove shares listed on Bursa and the ADR market price in US dollars.
Here, the Top Glove shares listed on Bursa are the point of reference, being the main market where the shares are listed.
In terms of the price differential, ADRs, which were priced more or less efficiently until June 10, 2021, experienced a sudden rise in prices and caused ADRs to trade at a 63% premium over shares listed on Bursa.
Is there an arbitrage opportunity here too?
Can anyone buy Top Glove shares listed on Bursa and sell them in the US OTC through the ADR program to take advantage of the price anomaly?
The simple answer is no.
Shares in the Top Glove ADR program are not fully fungible, unlike the company’s shares which are listed on the Singapore Stock Exchange (SGX), where investors can sell / buy in one market and buy / sell in the other. quite effectively.
For now, as the Top Glove ADR sells at a premium to locally traded Top Glove shares, the arbitrage opportunity that exists is to buy on Bursa and sell in the US market over the counter in as ADR.
However, this can only be done by the custodian bank. No one else can “create” these ADRs and then sell them in the US market over the counter.
Based on the prices seen in Table 2, the huge 63% premium seen on June 11 has narrowed and this premium has fallen to a minimum of 16.5% at the closing price level on Bursa Malaysia.
This has since rebounded to 26.4% from Thursday’s closing price for ADR.
An existing ADR holder also has an arbitrage opportunity by selling in one market and buying in another.
He or she can sell the ADR through the US OTC market and buy the same number of underlying shares to represent the shares held in the ADR and maintain the same level of ownership.
Overall, an arbitrage opportunity always looks easy on paper, but in reality it might not be as straightforward as it is.
Two key factors play an important role and the first is of course whether stocks are fully fungible or not, and the second is the time it takes to move from one market to another.
These are the two critical factors that would determine whether an arbitrage opportunity is profitable or not.
Pankaj C Kumar is a longtime investment analyst. The opinions expressed here are his.