Despite a solid interim result for struggling discount retailer The Reject Shop, the shares sold off by more than 8% yesterday as investors initially took fright at a surprise $25 million heavily discounted share issue.
While the company believes its retail business has been “successfully stabilised” following a change in leadership, with both sales and profits growing in the December half, investors were not listening.
The share price dropped 8% to $3.14 at one stage before rebounding when they realised raising fresh capital was a good idea, even if it is in the midst of the worst sell-off in the market for months.
In fact, the money will replace a working capital loan from the ANZ after that bank told The Reject shop to look elsewhere.
The shares ended the red-inked session down 1.7% at $3.36. That’s a sign investors now welcome the issue because the 52 cents a share discount in the offer price has been trimmed to just 6 cents.
Directors said the issue is being made as part of what it called “new agreed financing arrangements to be implemented with the bank that will see the retailer reduce its funding needs from its banks.
It said the “(The) 25.0m equity raising announced to facilitate new management’s strategic initiatives together with allowing working capital flexibility and reducing the Company’s reliance on its banking facilities.”
The $25 million equity raising will be through a fully underwritten 1 for 3.12 traditional non-renounceable pro-rata entitlement offer at a deep discount of $2.70 a new share.
The company named former Kmart executive Andre Reich as CEO from January 13, a move which sent shares soaring over 70% as investors took confidence in Mr. Reich’s ability to turn the company around.
Net profit after tax, and excluding the impact of a new accounting standard, grew 5.3% to $11.1 million, and on a marginal, 0.7% rise in sales to $435.7 million.
Comparable sales for the first half of the financial year rose 0.5, largely due to stronger Christmas sales which saw comparable sales up 0.9% for the second quarter.
There’s no interim dividend after the company dropped its final payout for 2018-19 to conserve cash as it negotiated a new funding deal and sought to boost cash levels.
“The combination of solid working capital management, a moderated capital expenditure program and a decision not to pay a final dividend in the prior year, has resulted in free cash flow generation increasing to $45.1m during the half, with a net cash position (excluding lease liabilities) of $51.9m at balance date,” directors pointed out.
The $25 million issue (of which $24 million will be net to the company) was driven by the need to find new finance after the ANZ Bank told The Reject Shop last year tp go elsewhere for its major funding by now later than the middle of this year.
“As previously disclosed in the Company’s Annual Report 2018-2019, Australia and New Zealand Banking Group (ANZ) requested the Company to complete refinancing of the Company’s banking facilities with a different lender, ideally by 30 April 2020, but by no later than 31 August 2020,” the company explained in yesterday’s announcement.
“Despite that, the company has struck a new, smaller funding deal with the ANZ.
“The limit for the working capital facility has been reduced from $25m to $10m, however the limit for the seasonal facility remains unchanged ($20m with the facility only used between October and December each year).
“The Company will be required to deposit $5.0m with ANZ when the seasonal facility is being used.
“The Company also confirms it is well within the operating and gearing ratios set by ANZ as part of its annual facility renewal in August 2019,” The statement from the company added yesterday.
