Share issues – And An Interesting Rule

Spring is in the air, and companies are clearly in a mood to raise cash. A lot of these have been share placings but the reasons given have been varied. Placings rather than rights issues are always prejudicial to private shareholders as they are generally unable to participate, unless an “open offer” is included.

The share placing at IDOX (IDOX) was covered in the January issue of the ShareSoc Informer Newsletter and there is now a report on the AGM of that company on the Members Network where shareholders raised the issue again.

Cello Group (CLL) undertook a placing to fund the acquisition of Defined Healthcare – they raised £15 million to do so, but the placing share price was at a small premium to the previous market price. although the price moved up significantly after the placing was announced.

Learning Technology Group (LTG) did a placing to finance the acquisition of NetDimensions.

TrakM8 (TRAK) raised £1.66 million through a placing at 65p so as to reduce the company’s bank debt and strengthen its balance sheet. This was at a significant discount of 17% to the previous market price. The directors of the company took up a large number of the shares on offer.

One company that is doing a full rights issue is property business Segro (SGRO) although they had done a placing recently. The new transaction is to raise £573 million to finance the acquisition of the balance of an interest in Airport Property Partnership they did not already hold. However, the rights issue is being done at a discount of 28.9% to the previous closing price. Although investors can sell the “rights”, if they don’t and otherwise do not take them up then they will be diluted. Investors in Royal Bank of Scotland will not have happy memories of their heavily discounted rights issue in 2008.

One interesting recent announcement was from South African gold mining company Pan African Resources (PAF). They have apparently been “book building” to finance the development of a new gold mine at Elikhulu. But the Johannesburg Stock Exchange (JSE), where PAF is dual listed, has a rule that a company cannot issue shares at a price that is in excess of a 10% discount to the 30 day volume weighted average price. But as the current share price is lower, they have decided not to undertake an equity issue at this time and will finance development in other ways for the time being.

Now would that not be a good rule to adopt in the UK? It might make shareholders a lot happier because there are grumblings about all the above.

Roger Lawson

IDOX and Prejudicial Placings

One of the things that private investors hate is placings made by companies to raise money in which they cannot participate. In other words, the issuance of shares that dilutes your interest in the company when it is not a rights issue and there is no “open offer” alongside. Sometimes those placings are done at a price which is a considerable discount to the open market share price, thus enabling institutional investors to pick up shares at a big discount to what you may have paid for your shares, or less than you can buy them in the market.

On the 14th December, IDOX announced their preliminary results and a placing to raise up to £20.5 million for the proposed acquisition of 6PM. There was no Open Offer included. Incidentally I do have to declare a interest in IDOX as I have been a long-standing investor in the company – indeed this was a “ten bagger” for me until the share price fell after the announcement. My holding is therefore not trivial.

The company has been well managed by Richard Kellett-Clarke who only recently stepped down from CEO to become a non-executive director so I don’t doubt the possible merit of the acquisition. The acquisition is likely to be earnings enhancing. 6PM produces software for medical applications and IDOX already has interests in this area as local government (in which it specialises) are heavily involved in delivering care. But 6PM seems to be more into clinical applications sold to the NHS which is somewhat new.

But that does not mean that a small open offer could not have been included alongside the placing. As it was the placing was completed on the day of the announcement at a price of 60p per share – that’s a discount of 14.3% to the previous days closing price and 3.8% to the average over the prior 20 days. The market offer price at the time of writing is about 66p, so private investors have definitely missed an opportunity while institutions can realise an instant profit.

Having communicated with Mr Kellett-Clarke on this matter his argument for not including an open offer was the necessity to be sure of raising the funds in the timescale required to close the deal with 6PM. Also the costs of producing a prospectus are high. However, I do not fully accept those arguments. An immediate placing to institutions followed by a small open offer for other investors (at the agreed placing price) does not seem impossible to me bearing in mind that the take up by retail investors on such offers is often low (and could be scaled back if excessive). I believe a full prospectus is not required for a smaller share issue.

In essence it’s likely to be about “can’t be bothered”, or “it will cost something” to meet the demands of small shareholders when their main interest is in keeping institutions happy. In other words, shareholders are not being treated equally with larger ones benefiting at the expense of smaller ones. Even larger private investors have been excluded I understand.

If other companies can do it properly (recent examples are AB Dynamics, a much smaller business than IDOX, and Tritax REIT) then why not IDOX?

Now there will be a vote on the placing because this is a larger financial transaction and hence there is a General Meeting scheduled for the 5th January. Shareholders should consider whether they should vote against this transaction on the basis that the directors have not tried hard enough, as I am likely to do.

Roger Lawson

ShareSoc Company Seminar Announcement

The initial line-up for our next seminar at which public companies will be presenting on the 15th July is now available and registrations are now open. This event is in the City of London (in the usual FinnCap offices venue), with registration starting at 4.00 pm. Four companies will be presenting this month and answering your questions, which are:

– IDOX (IDOX): Public sector software solutions, and for highly regulated asset intensive industries.

– ABZENA (ABZA): Services and technologies to support the development of better biopharmaceuticals.

Plus two other companies to be advised (keep an eye on the web page below for the details).

Refreshments and a buffet will be provided of course and the event is free to Full ShareSoc Members with only a nominal charge for others. You will be able to talk directly to the senior executives of these companies after their presentations. In addition you can discuss them with fellow investors. It is also a good opportunity to socialise with other ShareSoc Members.

To register for the event, please go to this web page (click on to access):

http://www.sharesoc.org/seminarjul2015.html

Roger Lawson

Affected by the Oil/Gas Price slump? Weir, Petrofac and IDOX

I don’t think any investor will be unaware that the price of oil has fallen off a cliff in the last few weeks. It was good to hear at the IDOX AGM this morning (26/2/2015) that the impact on their business was relatively minor – they supply engineering management information software plus public sector software and the former does have about 11% of sales in the oil/gas sector. The share price barely moved after a positive announcement in the morning that trading was in line with management’s expectations.

Incidentally this is one company that employs a serving Member of Parliament, Peter Lilley, as a non-executive director. After Sir Malcolm Rifkind M.P. suggested he needed other work to live on as his parliamentary salary was insufficient, it has become something of a political debating topic. Should M.P.s do consultancy work or take other jobs? Although Mr Lilley received a substantial number of votes against his re-election at IDOX this was probably more to do with the fact that he had been on the board since 2002. There is a full report on the IDOX AGM on the ShareSoc Members Network.

But yesterday was a different scenario with Weir and Petrofac reporting full year results. Petrofac reported an increase in profits and revenue over the previous year and said the results were “consistent with their previous guidance”. They also maintained their dividend. As they develop large engineering projects you would have expected that they would be severely affected by the slump in oil prices but they reported a record backlog of orders.

The share price had indeed slumped in recent months (as had Weir’s), but it started to bounce back in mid-January when it looked like the oil price had a least bottomed out. On the day of the results announcement it was up 72p (i.e. 9%).

Weir was a very different outcome even though they announced an increase in their dividend (which is usually a good indication of a board’s view of the future). They sell pumps mainly to the oil and mining sectors. Despite their results report being “in line with expectations” (in fact slightly better than analysts forecasts) the share price promptly dived ending up down 9% on the day. Perhaps the killer was that the announcement included the statement: “While visibility in oil and gas remains limited, it is clear that the Group’s strategic progress and cost initiatives will only partly offset the impact of a substantial reduction in demand and the associated pricing pressure.  As a result we are planning for a significant reduction in constant currency Group revenues and lower operating margins in 2015. However, we will continue to invest in extending the Group’s global leadership positions and increasing market share, supported by a strong balance sheet and the cash generative nature of the Group.”

But it’s worth pointing out that analysts had already forecast significant reductions in earnings for both companies, particularly in 2016 for Petrofac and 2015 for Weir. So surely this was old news at Weir? The company does have shorter lead times on orders of course as against the big projects of Petrofac.

You can also listen to the Weir results announcement, and the subsequent question/answer session on their web site but it does not really explain the larger share price impact a lot more. Perhaps it was simply that the Petrofac “outlook” statement in their announcement was a bit more bland.

It can be one of the mysteries of stock market investment as to what influences share prices. It can be simply confounded expectations  – perhaps expectations of better news than materialised or a more dour presentation style from the management.

Both companies operate in a sector that is cyclical in nature and driven by the price of the oil commodity, but Weir has traditionally had a higher rating than Petrofac perhaps because contracting businesses such as Petrofac are subject to large swings in orders and other factors around the company. But both now seem to be getting to low prospective price/earnings ratios presumably on the basis that there will be no quick recovery of the sector (as Weir specifically indicated).

Roger Lawson