the consequential rights issues
required by this business. “When
the unsecured lending market
started to turn down in 2013, we
took an interest in ABIL which
had been sold off dramatically.
Our valuation metrics specifically
factored in the November 2013
rights offer, which we followed. But
we underestimated two matters –
the size of the rights issue that was
required, as well as the large loan
impairments in the business.”
With ABIL in mind, he cautions it’s
important to determine whether the
challenges the business faces have
led to a permanent impairment to
the future cash flows that underlie
intrinsic value. “If this is the case, a
further capital injection won't lead
to a better outcome, and we'd be
pouring good money after bad.”
When a company has specific
funding problems or hits a
particularly bad patch in its
operating cycle, but remains an
intrinsically good business that can
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ISSUE 4 – JULY 2015
recover, investors tend to have
sympathy and follow their rights.
Court highlights one such example.
“In mid-2014, JD Group engaged in
a rights issue in order to redeem
outstanding convertible debentures
and strengthen its balance sheet.
The credit retail industry that JD is
exposed to was (and still is) going
through a tough time. The rights
issue price of R25 was below our
estimate of intrinsic value post the
transaction, and accordingly we
followed these rights. In May 2015
the JD Group is in the process of
being fully acquired at R34/share by
controlling shareholder Steinhoff.”
them to manage the solvency and
liquidity risk of their fast growing
balance sheets. As a shareholder,
your rights funding will go into
assets that generate revenue
and profitability.”
Rights issues for growth are an
entirely different animal. As a small
cap specialist, Mclachlan often sees
these corporate events in young
companies. “These are emerging
operations that are growing so fast
they are straining their balance
sheets and need to turn to the
market for funding - hence the
likely reason for their original public
listing. The rights issue will allow
In considering a rights offer, it’s
also important to observe what
company directors, management
and large private shareholders
are doing. “I want these guys to be
following all of their rights” says the
private investor. “It is ver H [[