Forge may look for fresh capital on second profit warning

Forge Group (FGE) may soon be tapping shareholders for additional capital after management warned of a further writedown to its problem power plant construction project.

The stock plunged 9.6% to $1.13 in early trade when the engineering contractor said losses on the West Angelas power plan will deepen by an additional $23 million to $28 million for the current financial year and it will need another $14 million to $19 million in cash to complete the project.

Management didn’t explicitly talk about a capital raising but said in the press release to the ASX that it was in talks with “other key stakeholders to formalise and secure their ongoing support”.

Forge shocked the market on November 28 last year by announcing a $127 million writedown on the West Angelas and Dimantina power plant projects and thought it would need $45 million in net cash outlay to complete the projects.

The group faced a liquidity crunch that would have brought it to its knees if its banker Australia & New Zealand Banking Group (ANZ) did not come to its rescue with a lifeline. ANZ remains committed to Forge despite today’s bad news and the additional cash outlay will be financed by Forge’s existing resources.

But the bad news doesn’t really surprise. As we wrote last year when downgrading the stock, there is a risk of other skeletons in the closet as such projects are really hard to rein in when things go south.

What’s more, Forge’s chief executive David Simpson reassured shareholders when Eureka Report spoke to him following the November shocker that Forge was on top of the troubled projects and both would be completed early this year as they were in the final stages of commissioning.

He said back then that there was only “10% left to go” on West Angelas.

That might be true for Dimantina, but today’s announcement said that West Angelas will only be commissioned in the early 2014-15 financial year.

Forge is part of the Uncapped 100.