'Safe buy' not quite so, as Ten raises capital again
What do existing shareholders do with the latest issue? Given the current issue is non-renounceable you either take up the 20¢ offer or get diluted. Luckily, for retail shareholders you have until January 18 to decide whether to put more money in. Given the stock will be trading and the institutions have already committed $180 million it should be an easy trading decision on whether to commit the money at 20¢. If the stock is trading above 20¢ a share in January, put the new funds in and look to exit for a profit. If the shares are trading below 20¢, walk away and get diluted.
For those people not shareholders, do you buy in now? To justify the current valuation of 25¢ a share it has to dramatically grow market share at a time when it has announced cost-cutting. Every 1 per cent gain in free-to-air commercial TV share is worth more than $20 million in earnings before interest, tax, depreciation and amortisation. But the programming line-up believers might have to wait until 2014 to see the earnings swell.
If the company can claw back 2 per cent of market share in two years, then at current prices it will trade at around seven times EBITDA - about a fair price for a TV asset. If it can gain more market share it becomes a bargain.
All this adds up to sitting and watching how Ten performs in the next six months before making a decision to invest.
Silver Chef (SIV)
THE board of the Queensland finance group should consider renaming the company Silver Bullet given how rapidly the share price has advanced in recent times. We wrote about Silver Chef in early October when the stock was $4.40 a share. Our thesis was the company had managed to secure a second source of debt funding through a $30 million public bond issue. This would allow it to grow its hospitality and equipment financing divisions at a higher rate with demand robust.
Since October the stock has catapulted 20 per cent to $5.25 a share and now trades on about 12 times forecast 2013 financial year earnings. Silver Chef's long-term multiple is closer to 10 times and so investors should seriously consider unwinding the trade.
The company, under the strong leadership of Charles Gregory, has a fantastic future but requires capital to continue to grow. This means there should be equity issues allowing investors to jump into the stock at a price closer to its long-term average valuation. Silver Chef has delivered an impressive return on equity of more than 20 per cent in recent years and will continue to grow earnings at around 15 per cent per annum.
RXP Services (RXP)
DOWN at the small end, one of the Fielding family has teamed with SMS Management founder Lloyds Roberts to form IT services outfit RXP. This time it is Ross Fielding running the show. The former Telstra operative follows in the footsteps of Glenn Fielding of DWS and Paul Fielding of the successful but briefly listed Ingena Group.
RXP was formed after Ross Fielding cobbled together companies in the IT services world and then listed on the Australian Securities Exchange this year. The company continues to make acquisitions and is raising $10 million of equity to fund this growth. The money is being raised at 50¢ a share (current price is 53¢ a share), giving the company a market capitalisation of just under $40 million.
RXP has forecast it will post earnings before interest and tax of between $4.5 million and $6 million for the 2013 financial year. If we pick the mid-point of this range, the company is trading on an EBIT multiple of about eight times.
This company will continue to grow by acquisition and has a management team and board with the credentials to run a significantly larger organisation. While the value is not compelling at this stage, I would expect the company to deliver strong earnings growth in the next two to three years, making it one to keep an eye on.
The Age does not take responsibility for stock tips.
Frequently Asked Questions about this Article…
Ten is offering existing shareholders a 4-for-5 rights issue at 20c a share. That means for every 5 shares you own you can buy 4 new shares at 20c. The issue is non-renounceable, so entitlements can’t be sold on the market — you either take up the offer or you don’t and your ownership is diluted.
The article’s guidance is practical: watch where Ten trades in January. If the stock is trading above 20c then taking up the rights and planning to exit for a profit makes sense; if it’s trading below 20c you’re probably better off walking away and accepting dilution. Note retail shareholders have until January 18 to decide, and institutions have already committed about $180 million to the issue.
The article suggests caution. To justify a current valuation of about 25c a share, Ten would need to grow market share substantially while also cutting costs. A 1% gain in free‑to‑air market share is worth more than $20 million in EBITDA, and programming improvements may take until 2014 to lift earnings. If Ten can regain about 2% market share in two years it would trade near seven times EBITDA (a fair TV valuation); otherwise, the recommendation is to sit and watch Ten’s performance over the next six months before buying.
The author previously called Ten a 'safe buy' after a capital raising at 51c, believing the balance sheet was recapitalised and a new CEO could improve performance. The author says that Ten had deeper operational issues than expected, and six months later the company is back raising capital at 20c — about 60% lower than the previous issue.
Silver Chef’s share price rose from $4.40 in October to about $5.25, meaning it now trades on roughly 12 times forecast 2013 earnings versus a longer-term multiple closer to 10 times. Given the run-up, the article suggests investors should consider unwinding the trade. The company still has strong fundamentals — ROE above 20% and expected earnings growth around 15% p.a. — but it will likely need more capital to keep growing, which could mean future equity issues.
RXP is raising $10 million of equity at 50c a share (its current trading price is about 53c), which implies a market capitalisation just under $40 million. RXP forecasts EBIT of $4.5m–$6m for FY2013; using the midpoint, that equates to an EBIT multiple of roughly eight times. The company is growing by acquisition and has experienced management, so while value may not be compelling right now, the article expects strong earnings growth over the next 2–3 years.
The article notes that programming line-up improvements may take time to lift earnings — programming believers might have to wait until 2014 to see a meaningful swell in earnings. In the meantime, the recommendation is to monitor performance over the next six months before making a firm investment decision.
For Ten: observe trading into January and decide on the 20c rights based on whether the market price is above or below the offer, and otherwise watch performance over the next six months. For Silver Chef: consider taking profits or unwinding some exposure after the strong run, keeping in mind potential future equity raises. For RXP: keep an eye on its acquisition-driven growth — it looks promising for earnings over 2–3 years, but the current valuation isn’t yet a compelling bargain.
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