Australia | Dec 18 2008
By Andrew Nelson
In such a tough credit environment, news that a company was able to easily get away a $300m equity placement would normally be seen as a positive sign. But given the motivation for the capital raising is incredibly unclear, brokers are wondering what the real reason for the raising was and what the real implications are for the company.
First, let’s differentiate between concerned and worried.
If the company were in bad shape, if it had a million things it could do with the cash, but said nothing, now that would be worrying. But the truth is, the stock is well liked and the company is seen as being in a pretty solid position right now.
In fact, the FNArena Sentiment Indicator is sitting at a near perfect 0.9, with eight brokers out of nine polled having a Buy on the stock. The only blemish is a Restricted from Deutsche Bank, who looking at the recent run of positive commentary, would probably be on a Buy as well. (My best guess)
So, given all the Buys on the stock and the fact that raising $300m in the current environment would normally be a good sign, the unanswered questions at worst should be labelled concerning. But still, if a dam breaks, the first sign is only a crack. And while a little crack is nothing to be worried about, it should still cause enough concern to be addressed because ignoring concerns leads to the certain development of worry.
JP Morgan believes there are no plans to use the capital for a specific purpose, especially given $300m is too little to make the type of acquisition the company would normally make. The sum is also too small to help recapitalise an associate or to pay down a meaningful amount of debt. It is also too little to make a meaningful dent in the company’s debt balance, which the broker estimates at around $5.1bn on a look through basis.
So after losing almost 30% off the share price in the last month and a half, the broker is “concerned” about the timing of the raising. JP Morgan also notes that it was done at a price that is close to the 52 week low of $4.33, on November 24, 2008.
The broker’s real concern is that while the balance sheet debt may look reasonable, incorporating the equity accounted debt balance of the group’s associates on a look through basis indicates to the broker there may be significant financial leverage with an estimated Net Debt/Earnings in FY10 of 5.1x.
While this is still below the levels of international comps, the broker still sees this level of financial leverage as high. This leads the broker to think that maybe the company could be signalling it thinks its share price is overvalued. If so, then the raising was just the medicine, because on JP Morgan’s numbers, the valuation has fallen to $7.48, mainly due to the increased number of shares now on issue.
On Macquarie’s numbers, the $300m placement sees Crown’s forecast EPS diluted by 1.3% and 5.1% in FY09-10, but Macquarie points out that even using a conservative valuation, Crown is trading at a discount to implicit casino value.
UBS see the move as a pre-emptive step to keep the ratings agencies at bay, with the raising strengthening the balance sheet. This is a good move in the current environment and despite the dilution, the broker suggests the placement price offers good value for Australian casino exposure. Merrill Lynch similarly thinks the money will be used to strengthen the balance sheet rather than make an acquisition.
Citi is in the same camp, thinking the funds will be put to use strengthening the balance sheet and will also see a modest retirement of debt, while also providing more headroom for currency swings on the US$900m component of debt. The raising is otherwise too small to signal any acquisition intentions, says Citi.
But Citi also fits in with JP Morgan’s view, with the raising bringing down its FY09-11 EPS forecasts by 4.4%, 8.9% and 8.5%, resulting in a decreased valuation and a cut in the target price to $8.00 (from $8.80).
So while there are no specific answers to the questions at hand and while consensus opinion seems to address the concerns of JP Morgan, there does seem to be a small crack in what is an almost perfect dam. As balance sheet issues seem to be the most popular answer to the possible purpose of the issue, it has now become a topic worth keeping an eye on despite the anecdotal health of the company and its debt position.
It’s is also obvious the concerns haven’t turned to worry in the broader market, as shares in Crown were today up 22c, or more than 4.2% to $5.36 at 2:50 pm versus a twelve-month trading range of $4.18 to $11.49.