- Company raises £40 million in fresh capital
- Shares fail to sustain early gains
- Cash needed to shore up balance sheet and reassure suppliers
Having assured the market just two days ago that it had plenty of liquidity, online electricals retailer AO World (AO.) surprised investors with the launch of a deeply discounted issue of new shares to shore up its balance sheet.
After tumbling 18% on Monday and another 15% yesterday, the shares initially rallied on news of the ‘rescue’ capital raise, but sellers quickly gained the upper hand sending the price down 4% to 45p to take losses for the week to 34%.
Responding to weekend press reports that one of its trade credit insurers had withdrawn – or as the company put it, rebased – its cover, the Bolton-based seller of white goods insisted there was no impact on its liquidity, which it said was ‘in line with the board’s expectations for the 2023 financial year’.
Credit insurance is intended to protect trade suppliers from the risk of retailers going bust between dispatching goods and receiving payment.
Without it, suppliers could ask retailers for payment for their goods up-front which would mean a big increase in their working capital.
Firms which don’t have enough cash would have to borrow more from the banks or come to the market and ask investors for money.
AO said on Monday it had access to a short-term £80 million loan facility and was sticking by the full year earnings guidance it issued in April.
The company also said the cash cost of closing its German operations were likely to be at the lower end of its zero to £15 million range of estimates.
This morning, however, the firm announced it would place new shares at a price of 43p, an 8.5% discount to yesterday’s close of 47p, in order to ‘strengthen the balance sheet for suppliers and provide the flexibility to capitalise on market opportunities’.
Chief executive John Roberts said: ‘In addition to being a sensible piece of financial house-keeping given the short-term macroeconomic uncertainty, this capital raise will give us the necessary foundation from which to go after the significant long-term growth opportunities that we see for AO in the UK.’
To accompany the raise, the firm set out new forecasts for revenue growth, EBITDA (earnings before interest, taxes, depreciation and amortization) and cash generation.
After initial rallying more than 10% to 52p, presumably on relief the capital increase wasn’t larger, the shares quickly went into reverse and by mid-morning were trading lower at 45p.
Clive Black, vice chairman and head of consumer research at Shore Capital, described the equity raise as ‘immediately value destructive for AO World since its stock ‘currency’ has depreciated materially this year, down some 56%, and indicates no material acceleration in its capital expenditure budget’.
‘How then the business expects to robustly and comprehensively improve its operating metrics to us seems difficult to square with today’s updates and reasons for fundraising’, added Black.