- Canny management can use buybacks and equity raises to shareholders’ advantage
- Timing and language have proven problematic for Sosandar in the past
Equity placings are a bone of contention for private investors. This is because private investors are often shut out of the plum deals, and the fund raisings are often messed up.
However, there has been a fervour for equity issuances that I’ve never seen before in recent weeks. In fact, equity issuances relative to the US GDP has not been this high since the dotcom era. It’s hard to mess up a deal these days when investors are all clamouring to get a piece of the action.
If we believe that markets are generally rational, then who is right? The company selling stock, or the investor buying it? The former would mean that prices are overvalued and the company is taking advantage, and the latter would mean that stocks are undervalued and investors are lapping up shares on the cheap. The reality is somewhere in between.
I remember a time when I would be made inside on a placing and weeks later the price would deteriorate until the placing was announced. Not anymore. Placings are often snapped up pronto. John Menzies (MNZS) was heavily oversubscribed – I received only 12 per cent of my order as an allocation. Gross proceeds here were £22m, which suggests that demand was many multiples of this. This placing was done at a 6.6 percent discount to the closing price the night before.
There is increased appetite for placings now because so many of them do well from the announcement. This only furthers the belief that placings are a good way to get a return, and so the appetite increases. It becomes a self-fulfilling cycle (for now).
The demand for placings will fall at some point. Companies that are taking advantage of market froth now are attempting to guarantee that they won’t go hungry when the tap is eventually turned off.
This is exactly what Warren Jenson, Amazon’s new chief financial officer, did back in early 2000. He believed that the company needed a stronger cash balance because suppliers may demand to be paid quicker. In February of that year, Amazon sold $672m in convertible bonds to overseas investors, which was a month before the stock market crashed. If Amazon hadn’t raised this money, perhaps the company might have gone under like many of its peers.
One company that has played the placing game well this week is Sosandar (SOS). Finally, it appears that management have learned their lesson and raised capital when they don’t need it. Tuesday’s placing was heavily oversubscribed and done at a tiny premium to the prevailing stock price. The company had net cash of £3.93m as of 31 March 2021, and this week’s raise removes all fear of any placing in the immediate future.
This now gives management time to be aggressive on growth, build some value, and then come back to the market again in the future from a position of strength. Far too many companies run down their cash positions then wonder why they get screwed by institutions demanding deeper and deeper discounts. More management teams should be acting this way to protect their shareholders. And if you’re reading this and you’re the finance director of an overvalued company, then you know what you should be doing. Get out there and get some cash in.
Getting the timing right
Placings at Sosandar have not always been so straightforward. There was outrage when the company raised £3m from an institution back in 2018, even though the valuation was richer than a triple chocolate gateaux at time. With the benefit of hindsight it is easy to say that management should have been selling as many new shares in the company as possible – chief executives who are clever with stock issuances and buybacks can drive significant value for their shareholders.
Chart 1 shows Sosandar stock rising on strong volume in late 2018, before pulling back and taking a breather. When stocks rally hard, watch how investors react when it dips. Ideally, you want to see the stock bought up showing continued demand, as otherwise it suggests there was no reason behind the positive move. When demand is strong, there’s usually a reason.
In Sosandar’s case, the stock broke out of the base in its first year of trading and rallied on heavy volume, offering a nice breakout trade.
Since then, we can see the trend has been mainly down, although there are signs of strength beginning to show.
Chart 2 shows that the 200-exponential moving average (EMA) has now started turning up, and the price is trending above all of the moving averages.
That said, there are no real significant support or resistance zones to trade from anywhere near here. The closest level I can identity is the pre-Covid January 2020 high at 30p. With the price currently trading around 21p after the placing, I have no intention of taking a position anytime soon. Rather, it would be best to let the flippers take their five or ten percent profit and allow the stock to churn, and set an alert to see if the price comes near the 30p high. This could be weeks or it could be months, or the price may never even get there. This is why alerts are useful because we outsource the monitoring of the trade to an alert rather than having to keep watch on various stocks.
Sosandar could potentially be an exciting growth story. In its recent trading update, revenue was up to £3.94m for the January to March quarter – 63 percent up year-on-year. Cash is being sensibly managed and the company now has a large pile to drive customer growth. But until I see clear direction in the trend and a breakout, I’ll be leaving it alone for now.
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