On 01 July 2011, Allied Irish Banks (AIB) announced that it intends to raise 5 billion EUR in new capital at a price of 0.01 EUR per share.
That announcement seems to have missed the attention of most investors, who are trading AIB shares as if nothing has changed – the stock still trades above 0.13 EUR per share. Given the intention of the company to sell 500 billion shares at 0.01 EUR per share, AIB shares have significant downside potential from here.
My target prices are 0.033 EUR per (Ireland listed) share, and 0.49 USD per (New York listed) ADR. These price targets represent a decline of over 75% from recent prices of 0.14 EUR (Ireland shares) and 2.08 USD (New York ADRs) respectively.
Calculation for price targets:
1. Background and details of capital raising to be completed by end of July
Although there will be a 5 billion EUR capital raising at 0.01 EUR per share, recently there have been some developments which have been beneficial to AIB’s capital structure.
On 31 March 2011, the Central Bank of Ireland set out capital raising requirements for Irish banks. The capital requirement for AIB is 13.2 billion EUR, comprised of 11.9 billion EUR for AIB and 1.3 billion for EBS.
On 1 July 2011, AIB confirmed that the acquisition of EBS is complete.
The 5 billion EUR capital raising is less than half of the total 13.2 billion EUR capital requirement. In its capital raising announcement on 1 July, AIB announced that any further capital requirement not met by bondholder “burden sharing” would be provided by the state “for no consideration and accordingly no new Ordinary Shares will be issued by AIB to the State in return for the Capital Contribution.”
We can then assume that the entire 13.2 billion EUR capital requirement will only result in the issuance of 500 billion shares, given that the remaining capital requirement will be met by a combination of “bondholder burden sharing” and “no consideration” capital raising.
Therefore the capital raising will take place at an effective share price of 13.2 billion EUR / 500 billion = 0.0264 EUR. Although this is less than 3 EUR cents per share, it is much more favorable than the 0.01 EUR price paid for the 500 billion shares.
AIB has approximately 12.245 billion shares outstanding
This is insignificant compared to the 500 billion shares to be issued under the capital-raising plan.
2. Calculation of price target in EUR and USD
Effective share price of capital raising: 0.0264 EUR
Often banks that undergo substantial recapitalisations will trade at a 20% to 25% premium over the capital raising price.
Price target calculated at 25% premium of effective capital raising price:
0.0264 * 1.25 = 0.033 EUR price target for Ireland listed shares.
Calculation of ADR price target:
There are 10 Ireland-listed shares per 1 ADR.
10 * 0.033 = 0.33 EUR per ADR
Using EUR/USD of 1.4600
0.33 * 1.46 = 0.4818 USD price target for New York listed ADRs.
Even if AIB trades at a premium of more than 25% above the effective capital raising price, it’s hard to believe that the stock will be trading close to current levels (0.14 EUR and 2.08 USD) for much longer.
After all, at a share price of 0.14 EUR, the market capitalisation of the bank would be 71.71 billion EUR, which is extremely high for a bank that is getting a 13.2 billion EUR bailout from the government, even when considering the positive effect of gains received from bondholder “burden sharing.”
Disclosure: I am short AIB.