Pipe Networks raises $26m

Pipe Networks (PWK) announced today that they raised $26m via a private placement of 6.5m shares at $4.00 per share. The purpose for the capital raising was to complete the funding for PPC-1, (the Guam to Sydney undersea cable) and for additional working capital purposes.

The company had flagged in the half year report that they were considering different funding options for PPC-1 so the capital raising does not come as a complete surprise. The company also vaguely refers to the possibility of using a portion of the funds for 'other strategic opportunities.'

Whilst the injection of capital boosts the equity per share in the business it also has the effect of lowering the return on equity and thus the valuation. In fact the ROE is significantly impacted to the point of lowering the valuation substantially from $3.63 per share to $2.11 per share.

Remember also that my valuation does not ascribe anything to PPC-1. I am only valuing the company based on the company's own forecasted profit numbers out to FY09. That is the difficulty with valuing a company in such a strong growth phase. The current price is well ahead of the current value as so much is contingent on future potential.

That future potential is huge and coupled with the management's exceptional track record of delivering on promises, are the key reasons I continue to hold the stock.