Friday, 13 February 2009

PWK 1H09 NPAT Up 57%, Another Capital Raising

Pipe Networks (PWK) recorded a rise in 1H09 NPAT of 57.1% from the previous year to $5.5m, eps rose 41%. The domestic Australian business continues to perform strongly with growth across all business sectors.

Also announced was a share placement of 3.5m shares at a price of $2.80 to raise $9.8m. In addition, details of a share purchase plan for existing shareholders was released whereby existing shareholders would be eligible to subscribe for up to $10,000 worth of new shares prices at $2.80.

According to the latest Annual report there are about 2200 shareholders, so if we assume most, say 2000 of them subscribe, that would raise an additional $20m. So altogether we have an additional $30m or about 10.6m shares. That is about 20% of the current share capital of the company.

That of course means quite a big dilution for current shareholders. Analysts will need to cut their earnings forecasts from current consensus of about 22.0 cps to 20.0 cps for FY09. By pumping in new capital you reduce the overall return on equity and thus the value of the business. Based on Profit forecasts for FY09 and FY10 I value PWK at approximately $2.60.

Of course PWK is undertaking a massive project for a small company by building the undersea cable PPC-1 and it has to be paid for somehow. Raising capital in the short term drives down overall returns on capital and thus the value of the shares.

Thus for long term investors making an investment today, they have to believe that future returns on capital will increase once the cable is paid for and fully operational. Given the potential of PPC-1 I believe that to be the case.

Also in the capital raising announcement The company outlined how they intend to pay for the rest of the PPC-1 project and it appears that sales from PPC-1 are expected to cover it and thus no more additional capital needs to be raised.

That would be good news for investors because at the end of the day, you want to invest in businesses that can manage above average rates of organic growth without the need for continual infusions of capital to support that growth.