DISA: 2 ways to figure out when share plunge may reverse

In just over six weeks, DISA' s share price has lost about 60%, falling from 3.1 cents (11 May closing) to 1.2 cents this morning (28 June).

What gives? 

Investors point to the looming expiry of DISA warrants on  2 aug 2017, or about 5 weeks from now.

These warrants can be converted into shares at 0.7 cent a warrant, or $7 per lot of 1,000 warrants. 

Holders of DISA shares would be motivated to exercise DISA warrants they hold since  the mother shares have been trading way above the warrant conversion price. 

But because there is not much liquidity for the warrants, DISA shareholders may sell their shares in order to raise money to pay for the conversion of the warrants. (Such sellers either do not want to put extra money into their investment of DISA or are short of funds).  
 

Warrants expiry	2 Aug
Warrants exercise price	0.7 c
No. of warrants outstanding	2.9 billion
No. of shares outstanding	7.17 billion
Recent stock price	1.2 c

There are nearly 2.9 billion (unexercised) warrants of DISA out there currently. 

We can do some guessing about how many holders of the warrants will sell the mother shares in order to fund the conversion of the warrants. 

Let' s create 3 scenarios (out of many possible ones):


&diams Scenario A: If you think holders of 1.5 billion warrants would sell their mother shares ... so about $10.5 million would be raised (ie 1.5 billion x 0.7 cents).

&diams   Scenario B:  If it' s holders of 2 billion warrants... so about $14 million would be raised (ie 2 billion x 0.7 cents).

&diams   Scenario C:  If it' s holders of 2.5 billion warrants ... so about $17.5 million would be raised (ie, 2.5 billion x 0.7 cents). 

Consider the volume of DISA shares traded in the past 15 trading days (ie, 6 June - 27 June). It adds up to about 1.2 billion shares. 

Let' s take 1.8 cent as the average traded price. That means about $22 million worth of shares traded. 

We can' t assume the $22 million of shares traded arose entirely from the selling by shareholders to raise funds to convert their warrants. 

There would be other good reasons for the share price plunge: (1) profit-taking, (2) cut loss by those who bought at higher prices, (3) short-selling, (4) weakened demand from potential buyers whose buying sentiment has been affected.

We can make some guesses as to how much of the $22 million share traded was for warrant conversion. 

If we think $11 million was raised solely by people to convert their warrants.... and if we think that Scenario A (as outlined earlier) applies, then the selling of DISA shares is about done (by this group of shareholders).

If we think Scenario C applies, then the selling of DISA shares is about two-thirds completed.  

But if Scenario C applies, it does not necessarily mean the share price of DISA will fall lower -- because there could be buyers who find it attractive enough to buy and provide support.

(There are many permutations to this guesswork approach!).
 

Let' s look at this from another perspective, which I think puts us on firmer ground: What was the market valuing DISA for a significant period of time prior to the sell-down? Shall we assume that valuation was rational and fair? Between late Jan 2017 and mid-May 2017, the market valued DISA at about S$215 million (as the stock traded around 3 cents a share then, and there were about 7.17 billion shares outstanding).   If DISA has $215-m  market value  &hellip No. of shares outstanding Share price 7.17 billion 3 cents 10.0 billion 2.1 cents With the conversion of 2.9 billion warrants by 2 Aug, the share capital rises to 10 billion shares.  With this significant dilution, on a  $215-million  market value,  DISA shares would be worth  2.1 cents  apiece.  Of course, no one can be certain that the market value of DISA would reflate to $215 million after 2 Aug.  It could stay low, or go lower, or rise. So is the current 1.2-cent level attractive enough as an entry price? What do you think? (If  the  $20 million cash from the warrants conversion is considered, one may adjust the market value of DISA to $235 million and the theoretical share price to 2.35 cents).  At 1.2 cents, post-warrant conversion deadline in August, Disa' s market cap would be 10 b shares x 1.2 cents = S$120 m. (Currently, market cap is 7.17 b shares x 1.2 cents = S$86 million). DISA will soon be sitting on a lot of cash: It' s $40 m or so, by Maybank Kim Eng' s estimate ($19 m on balance sheet as at end-Mar 2017 plus $21 m from 3 b warrants x 0.7 cent conversion price).  Note that DISA has S$12 m of outstanding redeemable convertible bonds.

 
DISA has attracted a number of prominent investors, as the table shows: 

Name	Funds provided in 2016 (S$&rsquo m)	Shares held (m)	Convertible bonds held (S$&rsquo m)	Total shares after CB conversion (m)	% of diluted share base
Alan Wang (owner of Asdew Acquisitions)	8.4	669.2	5.5	1,169.2	10.3%
Eddie Ching (Founder & CEO of DISA)	-	975	--	1,054.0	9.3%
John Wong (ex-chairman of Goodpack)*	-	449.4	--	449.4	4.0%
Teo Khiam Chong (investor, ex-analyst)	2.6	280.0	--	280.0	2.5%
Tang Wee Loke (ex-UOBKH executive director)	3.0	--	3.0	272.7	2.4%
Tsai Yi-Chen (daughter of Mediatek chairman)	3.0	--	3.0	272.7	2.4%
Chen Dawei (ex-chairman of Hankore)	1.4	160.0	--	160.0	1.4%
Island Asset Management (fund manager)	1.0	120.0	--	120.0	1.1%
Lee Teong Sang (owner of Cyrus Consulting)	0.5	-	0.5	45.5	0.4%
* Long-time shareholder Source: Maybank Kim Eng

The above discussion does not consider the fundamentals of DISA, which is beyond the scope of this article.

For some idea, here are excerpts from (and a link to) an excellent Maybank Kim Eng  17 April 2017 report  written by its analyst, Gregory Yap: 

 

Investment Pros & Cons
Growth proposition:   DISA has the unique opportunity to become the retail industry&rsquo s solution to prevent shoplifting or employee theft of electronic products.  In a blue skies scenario, if it succeeds in gaining universal adoption by all US retailers, the recurring revenue for DISA could hit an annual value of SGD120m, a far cry from the losses and only SGD0.8m in revenue it did last year.	Value proposition:At this point, there is no value proposition for DISA.  The company has an asset value of only 0.4 SGD cents (vs the current share price of 3 SGD cents). This is a pure concept stock at this stage.
Main risk factors:  [1] DISA is unable to capture first-mover advantage with US retailers and its solution is not adopted by the rest of the industry. [2] Its cloud infrastructure and human resources may not be able to keep up with demand. [3] There may also be outstanding liability issues with the impending closure of its old businesses.