Know your rights

As Mr Price and Stor-age raise cash from keen buyers, the FM rounds up a few other names that might need more lolly

ý It should not surprise investors if the Covid19 chokehold on local business activity triggers a spate of rights issues from companies trying to shore up their balance sheets against the effects of a prolonged pandemic.

Interestingly, two capital-raising initiatives announced last week were by companies operating from positions of relative strength: fashion and homeware retailer Mr Price and niche property group Stor-age.

Mr Price’s proposal to issue shares up to a limit of 10% of its issued ordinary share capital for cash is hugely instructive, since the group has a robust balance sheet with no gearing.

So to consider issuing new scrip at a share price that is much closer to an annual low of R98 than the 12-month high of R213 has to be convincingly rationalised to shareholders.

It’s betting that the prospect of attractively priced deals and an organic growth spurt could do the trick.

What’s more, Mr Price is trading on a trailing earnings multiple of 11 times, about double that of rivals Truworths and TFG, so it could be argued there is relative value in a stock issue.

The billion-rand question is whether other listed counters could follow Mr Price’s example.

Nic Norman-smith, commercial MD of Lanciaconsult, sees three permutations for Covid-19 capital-raising efforts.

One would be companies with share prices that are depressed but still overvalued compared with their peers. “Even if the timing of the rights issue is not perfect, an inspired acquisition can more than compensate in terms of longer-term value creation.”

Another would be companies that expect a tough trading period for their shares, but whose directors reckon that on an absolute basis the shares are still overvalued relative to possible profit performance in the next 12 to 18 months.

Then there are companies for which the share price simply does not matter — they

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urgently need cash to keep going until the pandemic is over.

Still, it is important to acknowledge that all capital has a cost, and the trick is to generate