ADNIC – ADNIC2 relative value arbitrage

July 31, 2019 By in Trading

The Abu Dhabi National Insurance Company (ADNIC) currently has two share listings on the Abu Dhabi Securities Exchange: ADNIC and ADNIC2. This came about when a convertible bond issued by ADNIC, issued in 15/6/2016, converted into shares on 15/6/2019. The reason for issuing the converted shares under the symbol ADNIC2 is temporary and has to do with the accrued dividend expected for 2019. Since the new shares will be in existence for approximately half of 2019, they are entitled to only about half of the 2019 dividends issued to the original shares listed as ADNIC.

ADNIC and ADNIC2 shares are exactly the same except for the fact that ADNIC2 shares will receive half of the dividend of ADNIC shares for 2019. Therefore the share price of ADNIC2 should equal the share price of ADNIC minus 50% of the expected 2019 dividend, excluding the time value of money. This relationship allows traders to enter into a relative value arbitrage based on their expectations for ADNIC’s 2019 dividend.


As of close of trading on Tuesday 30/7/2019 ADNIC shares were priced at AED 2.75 and ADNIC2 shares at AED 2.50. In an efficient market this implies that the market expects that ADNIC will issue a dividend of AED 0.50 for the ADNIC listing and AED 0.25 for the ADNIC2 listing. As a quick check, the 2019 ex-dividend price for ADNIC shares, assuming everything else remains the same, would be AED 2.75 – AED 0.50 = AED 2.2.25. Similarly the ex-dividend price for the ADNIC2 shares would be AED 2.50 – AED 0.25 = AED 2.25. This equality makes sense since the shares will become exactly the same, and all listed under the ticker symbol ADNIC, at the 2019 ex-dividend date.

The question becomes, is an expectation of a dividend of AED 0.50 for ADNIC, AED 0.25 for ADNIC2, reasonable? To answer that we need some facts:

  • There are currently 375 million shares of ADNIC outstanding.
  • There are currently 195 million shares of ADNIC2 outstanding.
  • ADNIC had a profit of AED 236 million in 2018.
  • ADNIC paid out a dividend for 2018 of AED 0.30 per ADNIC share for a total of AED 112.5 million.
  • ADNIC had a profit of AED 53 million for Q1 2019 (AED 95 million for Q1 2018).

First let’s calculate the expected 2019 total dividend to be paid that is implied by the current share prices. This would be 375 million shares at AED 0.50 per share plus 195 million shares at AED 0.25 per share which equals a total dividend payout of AED 283.5 million. That would mean if the 2019 profit equaled 2018 then the dividend payout ratio would need to increase from 48% to 100% of total profits. The Q1 2019 profit however indicates that ADNIC is off to a slower start than 2018, about 46% slower. Another way to look at it is that in the last three quarters of 2019 ADNIC must generate the same profit that it did for all of 2018 to be able to payout the implied dividends.

If a rational trader where to look at these numbers and decide that ADNIC will not be able to more than double their dividend payout in 2019, then there is a relative mispricing between the ADNIC and ADNIC2 shares. As a hypothetical example, let’s say that such a trader believes that ADNIC will match the 2018 dividends per share of AED 0.30, which would mean ADNIC2 shares would receive about AED 0.15. All things being equal, including the current difference in the ADNIC / ADNIC2 share price, then in this scenario the ADNIC shares would trade at a AED 0.15 premium only to the ADNIC2 shares. This leads to the conclusion, in our hypothetical example, that ADNIC shares are priced as of close Wednesday 30/6/2019 at AED 0.10 more expensive relative to the ADNIC2 shares. Such a trader would then prefer to buy ADNIC2 shares rather than ADNIC shares. In particular, holders of ADNIC shares would prefer to sell their shares and buy ADNIC2 shares. A word of caution: I have not included the cost of brokerage and other fees in this calculation, but the argument remains the same.

Of course investors who believe that ADNIC will pay more than AED 0.50 per share in 2019 dividends for ADNIC shares would come to the opposite conclusion, that the ADNIC shares are priced cheaply relative to the ADNIC2 shares.

Objectively it would seem challenging for ADNIC to increase its total dividend payout 152% from AED 112.5 million to AED 283.5 million in the current economic environment. So why aren’t we seeing a narrowing of the price difference between ADNIC and ADNIC2? One reason could be that there isn’t enough liquidity to allow any real volume in trading that would narrow the gap in price. Another reason could be that the market is one sided, i.e. a trader cannot simultaneously short ADNIC and go long ADNIC2. A third reason could be that this situation is rare in this market and the mechanics of a relative value arbitrage are still not well understood.

Please note that is discussion makes no conclusions about the absolute price levels or value of ADNIC.