BWP Trust (ASX: BWP)
BWP Trust is well known as the owner of the warehouses that Bunnings Warehouse operates in. It’s not clear to me exactly what the impact of the pandemic will be on this indebted property trust. It says “BWP’s balance sheet and debt position continues to remain robust and the Trust is well-positioned with $129 million of cash and committed undrawn bank facilities available and gearing levels of 18.0 per cent as at 31 December 2019. BWP has no debt maturing in the next 12 months, with the next facility maturing on 30 April 2022.”
It may be that BWP never needs to raise capital at all. Alternatively, it may feel exposed to having its contracts renegotiated, given that its contracts with Bunnings range from just over 6 months to just over 5 years. If I was running it, I would raise capital, but I am averse to debt generally. Its tenants are good enough for me to want to risk a trade, if given a discounted opportunity.
Healthia (ASX: HLA)
Healthia runs physiotherapy clinics and hand and foot clinics. It was mildly profitable in the last six months, and was going to pay a dividend until the pandemic hit. It has a fat slab of debt — about $26 million. Usually, that wouldn’t be a problem given it did about $4.6m in free cash flow (excluding acquisitions) in the last half. While its clinics remain open, I’m guessing revenue will be down a lot, and they may need to raise some capital. Of course, the need for their services won’t expire, so I think it could be prospective.
Healius (ASX: HLS)
Healisus (formerly Primary Healthcare) owns GP practices, radiology practices, day hospitals and pathology practices. It has been negatively impacted by the widespread deferral of elective and diagnostic investigations but “continues to help combat Coronavirus through its dedicated COVID-19 pathology collection centres, testing laboratories, Medical Centre ‘safe zones’ and telehealth services.” The business has over $860m in debt and over $1.1b in lease liabilities, so it can’t really afford a big hit to revenues for long. In normal times, it could earn over 20 cents per share, so it is trading on a low multiple of normalised earnings (as befits its debt situation). That said, it certainly looks like an attractive candidate for this strategy due to a combination of a high likelihood that it will raise capital, and that it will survive if it does.
Virgin UK (ASX: VUK)
Virgin Money UK is the old Clydesdale bank, which was demerged from NAB a few years ago. I think the medium and long term outlook is very poor, as I see a recession and potentially deflation negatively impacting its customers at a wide scale. Most of its lending is related to real estate, so I think it will be alright in the end, but very likely to have some tough times and need to raise capital. My plan is to be in and out of this one as quickly as humanly possible for what I hope will be a profitable trade.
Propel Funeral Partners (ASX: PFP)
Propel provides funeral services not unlike listed competitor Invocare, which has already raised capital. As you can imagine, its business is hurt by the ban on large funerals. Propel says it “is well funded to navigate the challenging economic and trading conditions expected.” However, with less than $5m in profit last half and debt plus lease liabilities of around $100m, its creditors may feel differently. I would not be surprised to see it raise capital. In normal times, it can earn perhaps 10c per share in profit each year, if not more. On top of that, easy lending at low interest rates will probably favour its borrow to buy growth strategy. A discounted capital raising might really appeal.
Marley Spoon (ASX: MMM)
To my mind Marley Spoon has no real moat but I can’t deny it has soaring demand and lowered cost of customer acquisition. Prior to this pandemic, it was in a poor state but its share price has gone up around 5 times since then. I would have thought management would be keen to raise capital and put the company’s survival beyond doubt. Given the attractive narrative, I think there could be the opportunity for a trade. I’d need more information to make any kind of judgement on valuation, at this point, but I remain skeptical even if that has been to my detriment in the recent past.
AP Eagers (ASX: APE)
AP Eagers is in the business of selling cars, so as you can imagine its situation is very dire. The company has reduced its dividend and has $1.6b in debt and $1b in lease liabilities. This looks like a real basket case to me, and definitely the biggest near-term bankruptcy risk amongst all the companies I’ve bought as part of this strategy. Having said that, car dealerships do have a place in society and I would expect a capital raising to occur at a steep discount.
When they reduced the dividend, the company said “The Board intends to consider payment of an additional dividend of an equivalent amount later in the year, once the level of uncertainty caused by current market disruptions (particularly those associated with COVID19) has settled.” I think this is a good sign that they are massively underestimating how bad this will be for their business, and I will be looking to trade profitably out of any capital raising as quickly as humanly possible.
Mayne Pharmaceuticals (ASX: MYX)
Mayne manufactures generic drugs so its not entirely clear whether or not it will even need to raise capital. Having said that, social distancing is likely to reduce need for some treatments, and economic disruption is likely to reduce the incentive of some people to visit the doctor to get optional scripts (for example, for acne treatment Doryx). Compounding that, the company was loss-making last half and has a large amount of debt, at around $390 million (against a market cap of $621m). This is the kind of basket case i would usually avoid, but which could be very interesting if it raises capital to reduce debt, thus reducing downside risk. I’d be looking for a decent discount to participate.
Reliance Worldwide (ASX: RWC)
Reliance sells pipes and the like, so is very impacted by changes in construction and renovations. Its competitor Reece has already raised capital, and with over $400m in debt, Reliance might too. It says it “expects that it will remain comfortably in compliance with all financial covenants” but it has also decided to defer its interim dividend until October. I think there is a good chance they will raise, and given their distribution network operates as somewhat of a moat, I would look to participate if I thought a quick profit was available.
Adelaide Brighton (ASX: ABC)
As with Reliance, Adelaide Brighton is leveraged to construction, but in its case it is a premier supplier of building materials such as concrete, in Australia. It has net debt of around $420m and a market cap of around $1.5br. It may not even need to raise capital, because it “has no debt facilities maturing until November 2024”. In normal times it can earn around 20c per share, albeit not reliably. I think any discounted raise is likely to be cheap enough to provide a reasonable margin of safety to this survivor, though as with all these ideas, I’ll assess it closer to the deadline, if it happens.