Pretoria – What does the planned rights issue of
construction group Murray & Roberts Holdings [JSE:MUR] hold for investors?
The market’s first reaction to the group’s announcement that
it wanted to approach the market for R2bn to reduce its debt, increase
operating capital and finance growth, was regarded as bad news. The share price
responded by falling more than 4%, although it has since recovered.
The rights issue needs to be approved by shareholders on
February 29, after which more details will follow.
Rudi van der Merwe, head of investment at Standard Equity
Advisory Services, says the rights issue is bad news for investors, whose
interests will be diluted.
Van der Merwe expects that the issue will take place at a
discount of around 20%, but reckons there is better value to be found elsewhere
in the construction sector.
Another analyst, who does not wish to be named, says the
rights issue will relieve pressure on M&R’s working capital and thus reduce
risk in the longer term.
He says the problem is that the new capital will not really
be used to deliver returns to investors, but rather for working capital.
M&R is involved in several large claims that may take
years to resolve. Although it expects to derive income from them, it could be
years before it receives it. Meanwhile M&R needs working capital to carry
out the projects in its R57bn order book.
The analyst warns that not only is the amount of work in the
order book important, but also the profit margin at which it is obtained. Time
will tell, he points out.
“We reckon M&R is the cheapest, but Wilson Bayly Holmes
- Ovcon [JSE:WBO] is the construction company that is best managed,” he says.
A third analyst says investors should consider the rights
issue in light of the price at which it is being offered and how much cash they
have available. “We believe there is still money to be made from Murray &
Roberts, but it's a long-term story,” he says.
The analyst expects the group to offer a healthy discount to
ensure adequate take-up.
Based on the average share price of R27.58 over the 30 days
up to Thursday, the shares could be offered at a 25% discount at just over R20.
M&R will issue around 96.7m shares and the post-issue share price is
estimated to be around R25.79.
At this discount it might be possible to make a few rand per
share, which could compensate for the dilution of existing shares.
The analyst agrees that the new capital will relieve the
pressure on M&R’s finances and that its prospects will then improve.
He says the order book looks strong and it indicates that
the bottom has already been reached. This will not yet be reflected in the
He expects the results to end-December, due to be announced
shortly, to be the worst in the cycle, after which they should slowly improve.
The analyst has drawn up the accompanying table.
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