All,
1/ Conclusion
We believe the impact of arbitrageurs playing the oversubscription trade is offering an opportunity on ALO FP's stock.
Indeed, as we present below, most of ALO FP's volume in the past 2 days is probably the result of hedging the acquisition of rights (average arbitrage intensity ratio of 0.9x in the past 2 days).
As a result, ALO FP's stock has underperformed its key peer SIE GY by up to 7.6% in the past 3 days (see below).
ALO FP is currently trading at the lower end of the valuation range when assuming it should trade at a 15% discount to SIE GY (see section 3 below).
We suggest investors should buy ALO FP's rights and:
Such a trade could generate an IRR of close to 10%.
2/ Impact of the rights issue arbitrage on ALO FP's stock
21.1% of all rights have traded so far (using the EU ticker's volume for the rights).
Most importantly:
12% of all rights have traded in the past 2 days
The average arbitrage intensity ratio ([Right volume / Stock volume] / Nb of rights for one new share) has been 0.9x in the past 2 days versus an average of 0.3x in the first 4 days.
This implies that most of the stock's volume traded in the past 2 days was hedging the acquisition of rights.
This happened as the average market implied pro-rate in the past 2 days has been around 5.3%, significantly lower than the 7.5% average in the first 4 days.
As a result of arbitrageurs' positioning, ALO FP's stock has underperformed its key peer SIE GY by up to 7.6% in the past 3 days.
3/ Implied ALO FP's valuation post Rights issue
ALO FP is currently trading at the lower end of the valuation range when assuming it should trade at a 15% discount to SIE GY.
This is the case despite recent ALO FP's consensus downgrades (which might already include some of the post Rights issue dilution, and hence some double counting).
David
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