Hastie Comes In From The Cold

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– Hastie announces a $160m raising
– Debt to be restructured
– Insolvency has been staved off
 

By Greg Peel

Mired in debt and suffering from a downturn in demand for its air conditioning installation and service business, Hastie Group ((HST)) has recently been hanging on for dear life. Once a $5 company, Hastie shares had recovered from a GFC level near $1 to be back over $2 early this year, but since then the slide has accelerated once more. A blow -out in working capital combined with the risk of debt covenant breaches had investors fearing the company's demise.

Hastie had been trying to put bandaids on its balance sheet up to now but what was really needed was something more decisive, and the market had begun to think maybe it would never happen. But it has, as last week Hastie announced a fully underwritten $160m capital raising at 14cps which would increase its share count by 240m to 1367m. Private equity firm Lazard will become a cornerstone investor with 16-21% of capital and will be hoping to repeat the success it had with recruitment company Chandler Macleod ((CMG)), suggests RBS. The investment will be escrowed for 12 months.

The money will be used to restructure debt and resolve Hastie's tenuous balance sheet issues. JP Morgan calculates an improvement in the company's net debt to net debt plus equity ratio to 11% from 43% and an increase in the interest cover ratio to 2.5x from 1.8x. It means that Hastie can now complete the work in its order book and not be excluded from work in its pipeline due to lack of funds.

It also means, importantly, that Hastie's suppliers and customers can relax, JP Morgan suggests. Suppliers had begun to insist on cash terms and customers were concerned existing jobs might not be completed – a recipe for a slippery slope into insolvency. With a new debt structure, demands on working capital should ease and customers relations improve, JPM believes.

It doesn't mean that the market in general for Hastie's services will suddenly improve however, so while JP Morgan and RBS have both upgraded their ratings they are both to the equivalent of Hold from Sell. 

It was last December when UBS upgraded Hastie to Buy from Hold after the initial stock price plunge, believing value had now emerged. UBS has been quiet ever since but has now reiterated Buy in the wake of the raising and on the belief that margins can stage a modest recovery over the next three years, leading to total compound earnings growth of 18.6%. UBS has been forced to trim its target nevertheless, from December's $1.40 to 21c.

JPM and RBS had trimmed their own targets previously, so with significant dilution now pending JPM has dropped to 21c from 24c and RBS moves to 17c from 20c. There are three other brokers in the FNArena database who are yet to update, so there's no point in taking the current 1/4/1 Buy/Hold/Sell ratio or 24c consensus target as indicative just yet.

It's only the beginning of Hastie's journey back, RBS suggests. It will take time to address working capital and internal controls and to restore confidence to suppliers, customers, and even staff. 

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