Capital issues deliver solid performances

Recent capital raisings have paid off for participating shareholders, with those priced at bigger discounts such as Flight Centre’s entitlement offer delivering immediate returns and surprising investors.

According to data from consulting firm Vesparum, $20 billion of capital raisings were announced between 1 April and 15 May. The surge in capital raisings came as market volatility levels subsided and the ASX temporarily relaxed capital raising rules in response to the coronavirus pandemic.

Most of these capital issues have been offered to existing retail shareholders at discounts to their market prices in the form of share purchase plans  or entitlement offers to buy additional shares in proportion to existing holdings.

Investors have mostly made attractive returns by participating in these COVID-19 raisings, with a median return of 14 per cent for capital issues and 58 per cent for offers priced at a 30 per cent-plus discount to a company’s market price.

“On an annualised basis, these returns are extraordinary,” Vesparum said in a research paper on the topic, Analysis of capital raisings in the COVID-19 period.

Immediate gains pocketed

Drew Meredith, director and adviser at Wattle Partners, says there have been some surprisingly good results, especially for companies struggling the most with the coronavirus pandemic.

“Interestingly, it has been those businesses that were relying on a successful capital raising just to survive that have recovered most strongly. Webjet (ASX: WBJ) and Ooh! Media (ASX: OML) are both up over 100 per cent and Flight Centre (ASX: FLT) is around 49 per cent [as at May 22],” said Meredith.

“The big question, however, is: will these companies require another round of capital before 2020 is out? With the threat of JobKeeper being pulled, spiking inflation and continued border closures, it’s difficult to see the travel industry recovering anytime soon,” says Meredith.

The biggest capital raising to date has been from National Australia Bank (ASX: NAB). NAB’s SPP offer price of $14.15 represented a substantial discount to Morningstar’s fair value of $25.00, so Morningstar bank analyst Nathan Zaia had recommended investors participate.

“We do believe the bank is materially undervalued, with the market overly focused on near-term earnings,” he said. At 2.50pm on Monday, NAB shares were trading at $15.68.

Shareholders who bought into the SPP of hearing implant maker Cochlear (ASX: COH) would be happy, for now. The shares were sold to existing shareholders at a price of $140 and have traded above $180 since the offer closed in April, giving shareholders a gain of at least 20 per cent.

But getting hold of the shares was difficult and the offer was well oversubscribed, reflecting the popularity of healthcare stocks.

Morningstar analyst Nicolette Quinn says Cochlear’s SPP has the effect of reducing Morningstar’s five-year EPS forecast compound annual growth rate to 5.4 per cent from 5.8 per cent prior.

However, because the SPP was priced near Morningstar’s $139 fair value estimate, the increased equity raising has minimal impact on its valuation. But at current levels close to $190 a share, Cochlear shares screen as overvalued.

Shareholders who bought into the SPP of hearing implant maker Cochlear would be happy, for now.

Need to look past short-term

In each capital raisings Meredith has tracked, shareholders have been better off, at least in the short term, “except for long-suffering Metcash (ASX: MTS) and QBE (ASX: QBE) investors.”

“Some of the higher quality raisings in our view have been Qube Holdings (ASX: QUB) and Ramsay Healthcare (ASX: RHC). Both companies suggested the proceeds would be used for further acquisitions and organic growth, delivering a return of 35 per cent and 21 per cent each to date [to May 22],” says Meredith.

In contrast, QBE offered shares at a price of $8.25 to existing shareholders, well below its recently revised fair value of $11. The insurer’s shares have traded below $8 since the offer closed, so shareholders who bought in have borne an initial loss. 

But according to Meredith, any good or bad returns reflect only a very short period of time and don’t consider the capital lost prior to their announcement. “I’d suggest the companies not [issuing capital] are where investors should really be looking.”

Morningstar’s Zaia says shareholders should not judge the success of participating in a capital raising by where the share price is trading weeks or months later.  

“We cannot, and do not, try and predict where share prices will go short-term,” he says. “Sometimes better opportunities to purchase on market following a raising do present.”

Nor should shareholders participate in an equity raising hoping to make a quick buck.

Instead, think about your portfolio and how any additional shares would fit.

“Consider what value you ascribe the company long-term, and whether more exposure to the company and sector makes sense for your portfolio,” Zaia says.