Written by Tom Richardson, April 28 2020 in the Australian Financial Review (AFR)
Ever since COVID-19 sent the economy into shutdown much investor thinking has been dedicated on how to best profit from capital raisings by companies desperate for cash to see them through the downturn.
According to the latest analysis out of Macquarie, 35 ASX companies have already raised $15.4 billion between them from March 18 to April 27 representing 13 per cent of their market capitalisation pre-raising.
The good news is that three quarters of the COVID-19 raisings are trading in the black, with a healthy average return on offer prices of 17 per cent.
The strength of short-term returns are often determined by a couple of key variables inherent in every raising, according to the broker.
Generally, the larger the discount on offer to investors, the larger the short-term capital gains.
Companies offering the biggest discounts include media and resources stocks and those in the deepest cashflow holes due to the physical nature of the economic lockdown.
On April 6, Southern Cross Media offered investors shares at 9¢ each – a wide 47 per cent discount to its last closing price of 17¢ per share.
On Tuesday, the shares changed hands for 13¢, at a 44 per cent profit.
On April 1, travel group Webjet offered investors shares at a 55 per cent discount from its last closing price of $3.76 in an emergency raising.
The shares have since dropped 32 per cent to $2.55, but remain 50 per cent above the offer price of $1.70.
However, the wider the discount, the greater the dilution in terms of future earnings per share.
This means wider short-term profits won’t always translate into stronger medium-term gains.
Upsized placements
Macquarie says investors should also watch for deals where the size of the initial institutional placement is increased (prior to an entitlement offer for retail investors) due to strong demand.
Strong institutional demand is a good harbinger of a solid share register and attractively priced shares versus the outlook.
The broker points to upsized placements for Cochlear, IDP Education, and Invocare as going on to outperform other raisings, with an average return of 25 per cent, versus 17 per cent for all deals.
Macquarie also noted the ‘supersized deals’ where companies took advantage of new rules to raise more than 15 per cent of their existing equity at an average discount of 42 per cent.
These companies have posted an average return of 31 per cent for investors.
The supersized raisers are Webjet, oOhMedia!, Flight Centre, Dacian Gold, G8 Education, Monash IVF, and Senex Energy.
However, in this example the outsized returns could be related to the size of the discount more than anything else.
Best opportunities
According to the broker, the purpose of the capital raising (what the funds are required for) could be the best guide as to whether it will produce sustainably strong returns.
If the raising is to repair indebted balance sheets, or grab cash to replace lost income, then the shares are unlikely to perform as well as those raising money to invest.
Macquarie reports seven out of 35 post-COVID raisings have been for investment purposes or mergers and acquisitions.
These raisings have returned an average 24 per cent (versus 17 per cent for all deals) and only offered an average 12 per cent discount, versus a 22 per cent average discount for raisings to repair balance sheets.
A lower discount should translate into greater future profitability all else being equal.
The seven companies named as successfully raising to invest are Bega Cheese, NextDC, Red 5, Megaport, Paradigm Pharmaceuticals, Rhipe Ltd, and Infomedia.
An investor could logically conclude the best raisings are where a company can achieve a high return on invested capital, rather than pay down debt accruing little interest in today’s low-rate world.
Article Written by Tom Richardson, April 28 2020 in the Australian Financial Review (AFR)
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