Continuous Disclosure: Calm before the capital raising storm

How many companies will need a capital injection in the near future? Photo /123 RF.

While the share market remains highly volatile in the face of uncertainty around coronavirus, investors are preparing to see balance-sheet stretched companies look to raise new equity soon.

Mark Brown, chief investment officer at Devon Funds Management, pointed to Cochlear which did a A$830 million capital raise in Australia this week.

"A bit of stability in the market will allow people to come and do those deals."

Brown said while some businesses were technically closed if they had strong balance sheets they should be okay.

"It's when you have no operating cash flow, that is the phenomenon they are not prepared for."

Fisher Funds senior portfolio manager Sam Dickie believes a number will be looking to raise capital.

"We will see several New Zealand companies have to raise equity capital at significantly lower share prices than they were trading at just a few short weeks ago as their balance sheets come under pressure."

But Dickie says not all investors will be in a position to buy into capital raisings.

"To participate in these opportunities, you need to do two things: one, be invested in high quality companies with high quality management teams that have balance sheet flexibility so that your existing portfolio is in good shape; two, have balance sheet capacity/flexibility yourself."

Dickie said that while COVID-19 was a tragedy first and foremost and the extreme volatility in the market was no fun for anyone it did create opportunities.

"As long term investors, these opportunities to buy or help recapitalise some of NZ's great companies are very attractive and only come around once every decade or two."

DEAL DOUBTS

Metlifecare's share price headed sharply lower after doubts emerged that the $1.49 billion takeover by Asia Pacific Village Group might not go ahead.

By late afternoon, Metlifecare's stock was down by 94c or 19.5 per cent at $3.89 while the benchmark S&P/NZX50 index was 4 per cent up.

The company earlier said it was continuing to advance its scheme implementation agreement with Asia Pacific Village Group (APVG).

APVG had advised Metlifecare it was monitoring the Covid-19 pandemic and the implications of it in New Zealand.

APVG has termination rights under the agreement, including termination rights in the event of a "Material Adverse Change (MAC)".

"Metlifecare does not consider that a MAC has arisen at this point in time but can give no assurance that a MAC might not arise in the future," it said.

Devon's Mark Brown said Thursday morning's announcement had cast a shadow of doubt of the future of the deal, "if not the deal then perhaps the price".

Brown said it appeared that arbitrage-based hedge funds had taken positions in Metlifecare on the assumption that the deal would proceed.

"There is a large proportion of investors who have bought stock for an arbitrage, so if the deal does not go ahead then clearly there is a risk," he told Stock Takes.

If the Metlifecare deal does not go ahead, it will not be the first to fall fall over in recent times.

Property company Augusta said Thursday that Australia's Centuria Capital would not proceed with its $180 million takeover of the business. The parties gave no explanation as to why the deal had been scrapped.

Kathmandu is due to report its half year result next week. Photo / Supplied

BUYERS REMORSE?

Clothing store Kathmandu is due to report its half year result next week but its share price has been hammered in recent weeks falling from $3.60 to a new low of 70c on Monday.

Castle Point fund manager Stephen Bennie believes Kathmandu's share price was vulnerable to a shift in sentiment with investors changing their view to focus on downside risk of the Rip Curl acquisition.

"The major acquisition of Rip Curl last year had clear pluses and minuses. On the plus side greater scale, new markets and retail segments, essentially creating potential for future growth.

"On the minus side acquisition integration and execution risk and of course $230m of net debt. The market chose to focus on the positives and the share price rose from $2 to $3.50 in the subsequent months."

But now its debt is being viewed much more negatively and combine that with store closures in New Zealand due to the lock-down and Bennie says you have the ingredients for an 80 per cent drop in share price.

"This is what happens when the future of the business depends more on the lending bank executives than Kathmandu executives. On the plus side, there is already talk of rescue packages and banks looking to help customers with their near term liquidity requirements.

"But that is clearly not been of great comfort, at this stage, for investors of companies, like Kathmandu, that are facing a near term cash crunch."

Fletcher Building is being seen as resilient in the face of the coronavirus shut-down. Photo / Supplied

BUILDING RECOVERY

One company which investors have been down on for a long time now seems to have a comparatively brighter future.

Forsyth Barr has upgraded its view on Fletcher Building to neutral. In an analyst note this week Matt Henry said it was "no surprise whatsoever" that Fletchers had withdrawn guidance and cancelled payments of its interim dividend.

"Clearly, at this time, for the majority of companies near-term forecasts are largely guesswork."

But Henry said looking beyond the New Zealand lockdown it believed construction activity was likely to recover more quickly and be more resilient than other cyclical sectors in the economy such as tourism, retail, gaming, media and manufacturing..

"Fletcher Building's balance sheet is in a strong position to navigate the crisis."

Henry predicted construction projects that have shut down during the lockdown would resume immediately after it is lifted.

"It is a domestic focused industry, not hugely reliant on international supply chains. There is a healthy pipeline of consented projects. Government will look to
accelerate its considerable investment plans in transport and social (health, schools etc.) Infrastructure."

He noted continued tight housing supply and (even lower) record low interest rates should help insulate, at least some of, the impacts on consumers' confidence and
financial position.