From Dawn to dusk

Financial Mail - - MARKET WATCH - @mar­chasen­fuss by Marc Hasen­fuss

Af­ter a dis­mal 2018, I would have pre­ferred to kick off the year on an op­ti­mistic note. Yet I can­not deny my mor­bid cu­rios­ity about de­vel­op­ments at build­ing sup­plies con­glom­er­ate Dis­tri­bu­tion & Ware­hous­ing Net­work (Dawn) over the past six weeks.

Ini­tially, I thought the 1c a share (or R5.8m) buy­out of­fer from Polanofield — a com­pany in­volv­ing former Dawn CEO Derek Tod — was a highly op­por­tunis­tic pitch, and one that could spur other bid­ders with higher of­fers. In fact, I snapped up a few shares at 2c.

Of­fi­cially Polanofield’s of­fer was pitched at an 80% dis­count to the 5c a share 30-day vol­ume weighted av­er­age price of a Dawn share prior to the re­lease of a cau­tion­ary no­tice. Polanofield’s of­fer also heav­ily dis­counted Dawn’s last stated tan­gi­ble NAV of around 90c a share given in the year to end-march re­sults.

Un­der­stand­ably, more than a few mar­ket watch­ers were keen to read the in­de­pen­dent ex­pert’s “fair and rea­son­able” pro­nounce­ment on the Polanofield of­fer. Even though the re­cently re­leased in­ter­ims re­flected a much-re­duced tan­gi­ble NAV of 12.7c a share, a fair and rea­son­able pro­nounce­ment of a 1c a share of­fer was go­ing to make in­trigu­ing read­ing. I was as­tounded to read in the hol­i­days that BDO Cor­po­rate Fi­nance de­ter­mined there was zero value at­trib­ut­able per scheme share af­ter tak­ing into ac­count Dawn’s out­stand­ing li­a­bil­i­ties and com­mit­ments. I have never seen such a pro­nounce­ment be­fore.

On this ba­sis the of­fer was seen as fair and rea­son­able — what with Dawn re­garded as be­ing in fi­nan­cial dis­tress. BDO added that the core val­u­a­tion re­sulted in a neg­a­tive eq­uity value of R48m. BDO also noted that a com­pet­ing of­fer for Dawn might be tabled — not that sur­pris­ing, since the ini­tial of­fer doc­u­men­ta­tion in­di­cated aware­ness of other par­ties ex­press­ing an in­ter­est.

But en­thu­si­asm should be tem­pered, es­pe­cially in view of the in­terim com­men­tary by CEO Ed­win He­witt. Most sig­nif­i­cant was his ad­mis­sion that the NAV “could fur­ther re­duce due to the cycli­cal na­ture of Dawn’s busi­ness, with De­cem­ber and Jan­uary be­ing his­tor­i­cally slow months”.

This com­ment can’t be taken lightly, with Dawn’s NAV re­duc­ing by more than 85% from Sep­tem­ber 2017. That is a fright­en­ing value burn, par­tic­u­larly be­cause Dawn ap­peared to have bought it­self am­ple breath­ing space af­ter a R350m rights of­fer in April 2017 and the sale of its 49% stake in Grohe Dawn Watertech for R324.5m in early 2018.

Dawn has a R140m loan out­stand­ing with Absa and an­other R31m in terms of other bor­row­ings.

The bot­tom line is that Dawn is not gen­er­at­ing enough cash flow to cover op­er­at­ing ex­penses, cap­i­tal ex­pen­di­ture and work­ing cap­i­tal re­quire­ments. Banks are prob­a­bly not go­ing to lend to it at this point, and long-suf­fer­ing share­hold­ers won’t be en­thu­si­as­tic for a(nother) rights of­fer.

False dawn?

What is puz­zling, though, is a change in the ir­rev­o­ca­ble sup­port for the Polanofield of­fer from some ma­jor share­hold­ers. The Sens an­nounce­ment of De­cem­ber 3 claimed ir­rev­o­ca­ble un­der­tak­ings of sup­port from 60% of Dawn’s share­hold­ers.

The sub­se­quent cir­cu­lar, how­ever, showed ir­rev­o­ca­ble un­der­tak­ings of 38.16% — be­ing Ukhamba (21.18%) and RAC In­vest­ments (16.98%). By in­fer­ence, that sug­gests Coro­na­tion (20%) and In­vestec (6%) have not pro­vided ir­rev­o­ca­ble un­der­tak­ings. As­set man­agers don’t usu­ally hold onto shares in un­listed com­pa­nies, and it would be un­likely for Coro­na­tion or In­vestec to stay on board af­ter the pro­posed delist­ing.

Hav­ing said that, Dawn’s board does in­di­cate that if Polanofield takes over the com­pany it would fa­cil­i­tate the re­quired rev­enue vol­ume growth to cover the high cost base as well as fur­ther im­prove­ments to re­duce the fixed­cost base. For me, this puts the 1c a share of­fer into per­spec­tive.

The bot­tom line is that Dawn is not gen­er­at­ing enough cash flow… Banks are prob­a­bly not go­ing to lend to it at this point

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.