The essential network services company is currently part way through a large capital raise to purchase Lendlease Services for $310m. The total equity issuance is ~$185m which is large relative the size of SSM (~$400m). The institutional component of the capital raise included a placement and a rights issue and was completed at 90c, raising ~$130m. For those not familiar, a placement is generally new shares going to new holders while a rights issue is new shares going to existing holders. The retail component is a 1 for 3 rights issue at 90c raising ~$55m, which means for each 3 shares held we have the option of buying 1 more which will increase our holding from a ~3% weighting in the portfolio to a ~4% weighting. The offer is non-renounceable which means that shareholders cannot sell these rights.
We are taking up the offer for 4 key reasons:
- SSM is a sound business that has made a solid acquisition at a reasonable price that is forecast to be earnings accretive by ~30% in FY22 (i.e. add 30% to SSM’s earnings next year)
- The SSM share price is at lows partly in MM’s view because of the market’s perception that a large equity raise was likely. Sell the rumour, buy the fact.
- The discount was slim (~6%) which implies strong instructional support and a likely floor in the share price.
- SSM is at a low point in earnings & valuation, trading on an expected PE of 9.5x & likely to yield ~7% with earnings growth now likely.
It’s cheap because there are risks around integration & execution however at 90c we see this as a good risk / reward level to average into the weakest link in the portfolio.
MM plans to take up the rights in Service stream (SSM)
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