Capital Raising at times of market distress always create a conundrum for the retail investor.
As I write this, of the ASX top 50, Cochlear and Oil Search have tapped the market for additional funds, and Ramsay Healthcare, QBE Insurance, Lend Lease and NAB have announced they will do the same. Who will be next? No one knows, but we do know there will be more!
The text in the offer document is almost always the same. The raised funds will be used to “stabilize the balance sheet”, “reduce gearing” and/or “put us in prime position for upcoming opportunities”. Of course, all of this is true. Having a few extra hundred million lying around will certainly improve their financial position! The company will typically raise the bulk of the funds from larger institutional investors, before allowing smaller retail investors the opportunity to participate.
We have known for some time that capital raisings would occur during the COVID-19-led economic downturn. While we have been buying shares in this current market, we have advised clients to hold some cash back for these inevitable raisings. Administratively, these offers are time consuming for our advisers, however they do provide significant opportunities.
During 2009, at the height of the GFC, there were a number of capital raisings across major companies. Wesfarmers had a rights issue (entitlement based – number of shares based on number you already hold) at $13.50 each. At that time, their shares were trading at $16.70, so an instant profit could be made. They are now valued at over $37 per share (and have spun out Coles too!). Macquarie Group raised capital via a share purchase plan (purchase an additional amount of shares regardless of the size of your holding) at $26.60 per share. They were trading at $37.20 at the time and are currently at $98 per share. Not every raising was as successful for the retail investor, but it does highlight the potential value of participating, even if only in a small way. No brokerage costs are another selling point!
Of the current raisings, NAB are charging $14.15 per new share, while they currently trade at $15.35. Ramsay Healthcare’s offer is at $56 per share, and they currently trade at $62.82. Good quality companies (well, at least unlikely to go broke!) at decent discounts based on current prices.
The biggest issue for retail investors, particularly those with a number of holdings, is “which one(s) should we go for?”. Investors often feel the need to participate in as many of them as possible, as they understand the dilution that occurs to their holding if they don’t participate. That is, if they don’t buy new shares and every other investor does, the percentage they hold of the company (and therefore their percentage of dividends and growth) is diluted.
With so many offers potentially on the table, it can be like being a kid in a candy shop!
Our advice is to assess each offer on its merits. If they are raising funds because of significant debt, how good a business were they in the first place? If the price they are offering shares for is significantly discounted (i.e 15% or greater), does this ring alarm bells? Do they need to offer such a discount to drum up enough interest? Why do you hold the investments in the first place (for example, Ramsay is a growth stock, whereas NAB is held by many for income)? Add to those that most fit your investment objectives. And most importantly, focus less on where the company is now (these are once-in-a-generation times), and more on where you think it will be on the other side of all of this. No point picking up the most discounted new issue if the company is broke in 6 months.
Contact our advisers if you need a hand in sorting the wheat from the chaff! Good luck!
