Should you trade PSMC share in the current environment?

Pakistan Suzuki Motors (PSMC) stock is on a roll these days. It went from Rs. 130 to Rs. 450+ in less than a month. The reason: delisting. Once the company announced its intention to delist, analysts started working out the eventual delisting price. 

How is the delisting price determined?

The delisting price is worked out by picking the highest price of the share as per any of the following 5 criteria:

(a) Current Market Price as of the date the Exchange receives the notification under 5.14.1.

(b) Average Market Price (Annualized)

(c) Intrinsic value per share (estimated net realizable value of assets of the company)

(d) Earnings Multiplier approach (for profitable companies)

(e) The maximum price at which the Sponsors had purchased these shares from the open market in the preceding one year.

In the case of PSMC, it seems the highest value will be reached using the intrinsic value method. Naturally, brokerage houses would have worked out an intrinsic value for the stock. The upper locks ended once the price crossed the Rs. 450 mark, which gives us an idea that the intrinsic value may lie somewhere around that mark.

While the company will continue with the delisting process, nobody can stop traders and speculators from taking advantage of the wild price movements that might become the norm in the next few days.

Should you trade the share in the current environment?

Is it wise to try and make money during such wild moves? If you’ve perfected the art of trading when the market is full of unknowns, then the answer is yes. But it is hard to believe any retail investor out there knows what he is doing.

At best, you may have heard from your broker where the intrinsic value lies. But is that really worth putting your money on?

Why you should expect volatility in the coming days?

The share price of PSMC is subject to speculation at the moment, as the formalities with the PSX haven’t been completed yet, and the eventual delisting price has not been announced. This exposes the stock to speculation. 

The valuation of the company will be carried out by a professional evaluator. The intrinsic value calculated as a result will need to be approved by the PSX. We do not know all the factors that will influence this valuation, so no one really knows what the delisting price will be.

Moreover, there is the risk that the delisting process falls apart and the company takes back its decision to delist.

The investors who owned the shares of PSMC before the announcement are sitting on huge gains. They are likely to have already taken profit, as there is no point sitting around waiting for the delisting just for a few more rupees of profit. 

If they are still holding in the hope that the delisting price will be much greater than the current price, then they are also exposing themselves to the risk of the delisting process falling through, resulting in a series of lower locks. 

Perhaps the least smart of all the people are the ones taking entry now, hoping they will make money. Doing an arbitrage like this carries huge risk, and with so many unknowns, that risk is not worth taking. I doubt that is going to stop people from trying their luck though.