Small Cap Value Report (3 Jul 2014) - CRAW, AXS, MPOW, AGA, THT

Thursday, Jul 03 2014 by
35

Good morning!

Crawshaw (LON:CRAW) & fundraisings generally

If I were a shareholder here, I'd be very unhappy with a Placing that has been announced this morning. It involves the enlargement of the share capital by 36%, to raise £8.8m at 42p per share. That would have been a sensible price when the roadshow started a few weeks ago, but the share price has risen very strongly since, on the AGM announcement about accelerating the roll out of stores nationally (it's a small Northern butchers chain at the moment).

The trouble is that the share price was 54p last night, 60p the day before, and peaked at around 70p a few days before that. So doing a Placing at 42p dilutes existing holders considerably at what is now an unfavourable price.

You can see from the chart below that the Placing was probably set up in early June, then there would have been maybe a fortnight of meetings with Institutions, etc, so at first the 42p price would have seemed sensible. However, the big spike in price since mid-June has caused the problems here. Anyone who bought in that spike must be feeling very bruised now, especially as a lot of the spike was caused by the company itself putting out a bullish strategy statement in the AGM trading update. This would not have been a problem if existing holders had a chance to buy at 42p too. The additional costs of an Open Offer are not a lot, about £30k I've been told. So this could, and should have been done.

53b51703ca4e0Screenshot_070314_093958_AM

The big mistake, as we so often see with fundraisings, is that existing shareholders were completely excluded. I don't hold here, but in principle this is totally unacceptable. Unless there is a very good reason not to do so (e.g. an emergency fundraise, which this wasn't), then companies should ALWAYS allow existing shareholders to participate in a fundraising on equal terms to people taking part in the Placing. A sensible fundraising would be 50:50 between Placees and existing holders through an Open Offer.

Better still, you can do what Volex (LON:VLX) recently did, and give priority to existing holders in an open offer, and then have placees lined up to take any shares which existing holders don't want. That's the best way to do a fundraising, as…

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Crawshaw Group Plc is a United Kingdom-based company, which operates a chain of meat-focused retail food stores. The Company has approximately 40 stores, which are located across Yorkshire, Lincolnshire Nottinghamshire, Derbyshire and the North West. The Company's product range is categorized into approximately two distinct areas, such as Traditional raw meat, and Hot and cold cooked food. Under the Traditional raw meat category, it offers various products sold either loose in a serve over counter for the traditional experience or as multi buy packs on supermarket style multi deck counters, which have all been cut and packaged in store. Under the Hot and cold cooked food category, it offers freshly prepared roast chickens, gammon and pork joints, hot roast sandwiches, shop cooked curries and casseroles, chicken and chips, as well as other traditional deli products. Its stores include Arndale Centre in Arndale; The Arcades in Ashton Under Lyne, and Fresh Meat Factory Shop in Astley. more »

LSE Price
2p
Change
 
Mkt Cap (£m)
n/a
P/E (fwd)
n/a
Yield (fwd)
n/a

Accsys Technologies PLC is a chemical technology company. The Company is focused on the development and commercialization of a range of transformational technologies based upon the acetylation of solid wood and wood elements (wood chips, fibers and particles) for use as construction materials. Its segments include Licensing, Management and Business Development; Manufacturing, and Research and Development. It is engaged in the production and sale of Accoya solid wood, and licensing of technology for the production and sale of Accoya wood and Tricoya wood elements through its subsidiaries. The Accoya solid wood and Tricoya wood elements technologies are manufactured through the Company's acetylation wood modification process. Accoya wood is used for windows, external doors, siding, decking, structural and civil engineering projects. Tricoya Wood Elements are used in Facade cladding/siding and other secondary exterior applications; window components, and door skins and wet interiors. more »

LSE Price
99.1p
Change
-0.5%
Mkt Cap (£m)
117.5
P/E (fwd)
n/a
Yield (fwd)
n/a

mporium Group plc is a holding company for mporium Limited and Fast Web Media Limited. The Company is a mobile first technology firm that monetizes the transformation that smartphones have had on consumer behavior. The Company provides Software-as-a-Service (SaaS) and supporting services. The Company is in the process of developing two products: impact and insights. The mporium impact is an advanced digital advertising platform. The mporium impact works for digital advertisers and their agencies. The mporium impact uses the stimuli that television content provides and generates the associated synchronized consumer digital activity. The mporium insights product provides enterprise level technology to the small and medium sized enterprise (SME) market. The mporium insights offers e-commerce analytics, customer segmentation, and real-time customer data, which include trend-based Web traffic reporting. more »

LSE Price
0.925p
Change
-1.1%
Mkt Cap (£m)
9.7
P/E (fwd)
n/a
Yield (fwd)
n/a



  Is LON:CRAW fundamentally strong or weak? Find out More »


24 Comments on this Article show/hide all

Delpher 3rd Jul '14 5 of 24
3

Placings
I can't see any immediate change in the attitude of the city towards private investors unless it costs. Whilst I am generally against Government intervention and more regulation this Gov's approach to change might just do the trick by legislating for a proportion of all placings to include PIs which would encourage investment in UK plc by wider share ownership.

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Brokertobroker 3rd Jul '14 6 of 24

Solid update from Somero Enterprises Inc (LON:SOM) today. looks decent value if they continue to beat expectations.

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danyou 3rd Jul '14 7 of 24

Paul,
Thanks for your fantastic daily postings.
Any thoughts about the Thorntons statement today?

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jjis 3rd Jul '14 8 of 24
4

In my days as an institutional investor in the City I seem to remember there were placings that involved a firm element and an element which was subject to claw back depending on the take up by existing shareholders. This seemed like a good compromise to address the issues you discussed. Guess it would be a bit more complicated and expensive to administer though but would at least recognise some of the existing shareholders pre-emption rights.

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Paul Scott 3rd Jul '14 9 of 24
4

In reply to post #84500

Hi jjjs,

Absolutely, that's the best way to do a fundraising for a small cap in my view - a firm placing, so the company has certainty of funds, then an open offer of at least the same size on top, with any shortfall being taken up by backstop placees.

There's no reason at all why this cannot be done in most situations.

The reality is that advisers push for the quickest & easiest way to do a fundraising, so that they can earn their fees for doing minimal work - namely a placing. Companies need to fight back against this, and INSIST on an open offer for existing shareholders too. There might be some circumstances where that is not do-able, but in most cases it is.

Also, the token Open Offers (such as done by SEE and SNTY) are the worst of both worlds - i.e. top whack costs, but only an insignificant number of shares going to existing shareholders. It must be at least 50:50 in number of shares going to existing holders.

The only reason that advisers get away with doing Placings that dilute existing holders, is because most investors are so passive, that we effectively have an absentee ownership class. That is also the reason that executive remuneration has spiralled out of control.

Regards, Paul.

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it_trader 3rd Jul '14 10 of 24

In reply to post #84500

And I thought I'd just invented a new process ;)

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Delpher 3rd Jul '14 11 of 24

In reply to post #84501

Hi Paul
The problem with all Open Offers is the rate of return for underwriting balanced against the share price plus the cost of administration. An Open Offer has to be underwritten and the cost will reflect the risk of it not being taken up and so will the price of those shares not taken by private investors. Hence the reason for Open Offers of the type you envisage not being popular. A 50/50 Placing and Open Offer is likely to be at a greater discounted price than a Placing alone to ensure take up on the Open Offer. All of which are relative to the liquidity of the shares and the quality of the company.

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Flackwell 3rd Jul '14 12 of 24

Re:quarterly reporting

Could not disagree more - encourages short-termism and hence why there is discussion in both the UK and USA to move away from that

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Paul Scott 3rd Jul '14 13 of 24
3

In reply to post #84505

Hi Delpher,

I take your points, but we're in a bull market, and if an Open Offer in a company like Crawshaw were made to existing shareholders at a 10-15% discount, they're going to bite the company's hand off!

So companies should do a Placing for most of the money they need, and then do the same amount again for an Open Offer - i.e. in total ask for MORE money than they actually need. That way you don't need to underwrite the Open Offer at all - if the take-up is low, it doesn't really matter, because you've secured the money you need via the Placing anyway.

Or the best option is to have Placees ready to take up any shortfall.

I can see that companies might need to fall back on a Placing only, in a bear market, and/or when they have their back against the wall in terms of funding, but really it's not acceptable at other times to block out existing holders from being able to buy new shares at a discount. Doesn't matter too much if the discount is low (under 5%), as it was with Volex. But when it's a whopping great discount as with Crawshaw, the lack of an Open Offer is a big mistake that has alienated a lot of the private shareholders.

It's a situation where I'm afraid the advisers run riot, and often choose the method that suits THEM best, not the method that is in the company or its shareholders' best interests, in my opinion.

When you get down to real micro caps doing tiny fundraisings, then realistically a Placing is the only way to do it.

Regards, Paul.

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Maddox 3rd Jul '14 14 of 24
1

Ironically, I believe it was Margaret Thatchers' Big Bang (sorry for that image) and the 'private shareholder revolution' that brought in the opportunity for companies to offer private placings. The idea was to reduce the cost of fundraising and improve the attraction of The City. However, in those days the full offer document would be published over several pages in a broadsheet newspaper - it must have cost a fortune. Now with the internet - a fraction and the offer document is pretty much ready canned - all those disclaimers - are effectively irrelevant - does anyone read them?

Time to change this blatantly unfair system.

Regards, Maddox

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slartybartfast 3rd Jul '14 15 of 24
1

Surely, if you offer a deeply discounted rights issue which is not underwritten then nobody loses. If you don't take up our rights then they are sold (or you can sell them ) for your benefit thereby compensating for your dilution.

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Graham Fraser 3rd Jul '14 16 of 24
1

Agree,startybarfast,much the simplest way,but those directors/employees with options don't like it,although it wouldn't be difficult to adjust the option strike price for a deeply discounted rights issue open to all shareholders.
It is also the cheapest way,as no underwriting is required,and for that reason also the least likely to be recommended by fee hungry brokers!

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Soundbuy 3rd Jul '14 17 of 24

Re THT, Peter Smedley (Charles Stanley) views re refinancing in Guardian (Business) today for interest....

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Aislabie 3rd Jul '14 18 of 24
1

An internet based rights issue must be a practical basis for the future. It should be possible to reduce the cost of disclosure requirements given an assumption that current holders are informed. It can be done quickly and it only requires that the current rules and regs are looked at through a more "crowdfunded style" internet prism.
Institutions/banks can then back up, rather as they do now by providing a guaranteed line of credit to support commercial paper issues. The obvious missing piece here is the whole tribe of those currently doing placings, and reducing their involvement is a) why the costs would be much lower and b) why it probably won't happen.

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nigelo 3rd Jul '14 19 of 24
3

It seems to be a standard wheeze that companies have a special resolution to disapply pre-emption rights, sometimes somewhat obfuscated.

Small shareholders should vote against it as well as rail against it.

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Maddox 3rd Jul '14 20 of 24
2

With PIs encouraged to hold their shares in nominee accounts they don't get the opportunity to reject the standard resolution to 'disapply pre-emption rights'. The term itself is utter gobble-gouk - I wouldn't be surprised if very many investors don't understand what it in means or the implications.

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jraitt 3rd Jul '14 21 of 24

Maddox, I hold shares in Barclays and Halifax nominee accounts. Both, if requested, send me letters confirming my holding allowing me to attend all AGMs etc and enclose postal voting forms for all shares that I hold in these accounts prior to the meetings. They ask that I renew the instruction every three years. There is no charge for this service.

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cig 3rd Jul '14 22 of 24
1

In reply to post #84519

This is not a nominee issue as such, brokers can ask their clients how to vote their nominee shares, and some brokers do. Maybe they should all be required to.

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cig 3rd Jul '14 23 of 24

In reply to post #84511

If the price goes below the discounted price (not impossible, in this case the discount is just 2 weeks' worth of price movement...) and it's not underwritten, the rights issue will fail (nobody will buy new shares if secondary market ones are cheaper).

For a growth situation fundraising (as opposed to a rescue one), the company can just cancel the expansion plans, but still people may be unhappy after a share price crash caused by a misfiring right issue, and the credit of the company may be impaired for a while.

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Maddox 4th Jul '14 24 of 24

In reply to post #84522

What I was pointing out is the inequity of a process reliant on shareholders' voting away their rights, in advance, to participate in a fundraising: when the nominee system discourages shareholder participation. Whilst their are exceptions, in practice it is difficult, time-consuming, paper-based and the language used opaque.

We thus already have the right to participate in fundraising but as a result of the nominee system we give up those rights. One way to shift the balance in favour of PIs would be to require a vote to allow a private placing each time - making it more costly to cut out PIs than to include them.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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