Troubled engineer Redhall (RHL:AIM) is raising £7.5 million in a discounted share placing to help strengthen its balance sheet amid turnaround efforts. Despite expanding its share capital by 39%, investors greet the news with a smile, sending its share price up 2.4% to 43p as the cash injection helps to reduce the company's previously-high financial risks.
Full-year results (6 Feb) managed to trigger a relief rally in the share price to beyond 50p but the momentum was soon lost, putting Redhall's shares back in the doldrums ahead of today's placing. The £12 million cap over the past year suffered lots of earnings downgrades, a lower-than-expected cash payout for a court case and high levels of debt.
The order book was down year-on-year at February's results but there was good news in that its banking facilities had been extended until September 2015, giving Redhall some breathing space. Yet the market continues to be worried about the business as its balance sheet remains high-risk, meaning there's no room for error with day-to-day operations.
The low margin business manufacturers specialist doors that act as a barriers, such as to contain explosives or for use in high-pressure water, fire, nuclear radiation or oil and gas production. Four factories in Bolton will be relocated into a single, new facility. Redhall expects to sell a freehold property which will fund the new site. Production capacity will double.
In Bristol, Redhall makes items for the nuclear industry but that's not going to be a growth story in the near-term. The company is confident of eventual demand increase for capital works under a framework agreement at Aldermaston. There's also 'substantial opportunities' to support EDF in its plant life extension programme. Manufacturing also takes place in Newcastle, servicing the oil and gas industry with pipework where Redhall says there's been a 'big uptick' in work volumes so far this year.
The management says there won't be any big drain on working capital this year because the focus is on operational efficiency rather than chasing volumes of work. It is applying lean manufacturing principles. The benefits have already started to emerge during the early part of its new financial year, claims the company. Further margin improvement should come from a new agreement with an Indian low-cost component supplier. Indeed, cashflow beat expectations at the full-year results.
Analysts are bullish but the market is still voicing its doubts, hence why the rating remains low. Finncap's David Buxton reacts to the £7.5 million placing news by adjusting his EPS forecast from 7.1p to 5.8p for 2014, and knocking 31% from the broker's 2015 EPS forecasts to 6.8p. That means Redhall is trading on 7.4 times 2014 earnings, with the PE falling to 6.3 for 2015. The new shares are being issued at 39p, 7.1% below the preceding day's closing price.
'The proceeds will be used to reduce debt and fund working capital, with debt now expected to reduce to £11 million post the placing and the £2 million receipt from the Vivergo cash settlement,' says Buxton. 'This enables an interest cost saving of £0.2 million this year and £0.4 million next year.'