Dis­counted rights of­fer an in­trigu­ing twist

Financial Mail - Investors Monthly - - Analysis - Marc Hasen­fuss

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.

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