Discounted rights offer an intriguing twist
Developments at Distribution & Warehousing Network (Dawn) over the past two years would have tested the most stoic small-cap investor.
Older readers may remember Dawn as a market darling in the run-up to the 2010 Soccer World Cup infrastructure boom. The share touched a high of R24.50 in late 2007.
Dawn initially survived the World Cup hangover better than most building industry players, and since 2011 the company has been largely viewed as a hard net asset value-based recovery prospect. But in the past 18 months it has suffered operational and reputational setbacks. The executive team was replaced, with former Hudaco CEO Stephen Connelly taking the reins.
He and chairman Diederik Fouché have rolled up their sleeves and, unfortunately, found enough evidence of operational brittleness to justify huge impairments. In the six months to end-March, tangible net asset value (NAV) was 248c/share, a far cry from the tangible NAV of almost 780c/share in the year to endMarch 2015 accounts.
While such write-downs might be expected when new management brooms sweep clean, a recent trading update — covering the year to endMarch 2017 — makes for harrowing reading. The headline loss will be around 79c/share.
The trading update noted Dawn’s board had implemented measures to lower costs and bolster profitability.
The trading update, though, might indicate to some shareholders that the appointment of a respected industrialist like Connelly may have come too late to rescue shareholder value at Dawn. Such a notion will
be reinforced by Dawn’s decision to embark on a R350m rights issue with new shares being offered at a knock-down price of 100c/share.
The rights issue is intriguing. Initial speculation was that Dawn would look to reinforce its balance sheet by selling off its remaining 49% share of the Watertech Grohe joint venture. The 51% stake in Watertech (Cobra, ISCA, Apex, Exipro, Vaal and Libra) was sold off in 2014 for more than R800m, so there were reasonable expectations that the minority shareholding still carried a chunky value.
The fact that Dawn opted to propose a heavily discounted rights issue might suggest that directors felt it was not prudent to sell off assets at unreasonable prices. But the terms of the rights issue support contentions that Dawn’s bankers have run out of patience.
Two anchor shareholders — Coronation Fund Managers and empowerment group Ukhamba — have agreed to take up allocations of R100m and R49m respectively. RECM & Calibre will underwrite the rights offer with maximum possible participation of R201m.
The participation of RECM & Calibre is telling. The company recently made a mint out of backing perennial turnaround candidate, unlisted liquor group KWV Holdings, which was sold at a hefty premium.