Over the next 10 days, share purchase plans (SPPs) for the NAB, Ramsay Health Care, Lend Lease and Newcrest will close. Raising in excess of $1 billion from the retail market, shareholders face a binary choice: to participate and stump up the cash, or to throw the offer document in the bin.
The share purchase plans follow placements to institutional investors and are structured in accordance with the ASX listing rules. They have the following common features:
- Allow retail shareholders to subscribe for up to $30,000 of new shares;
- Shares are priced at the lesser of:
a) The institutional placement price; or
b) The weighted average trading price of the company’s shares on the ASX in the five days leading up to the SPP close, less a further discount of 2%; - Fixed (initial) offer size;
- Available in fixed application amounts: $1,000; $2,500; $5,000; $7,500; $10,000; $15,000; $20,000; $25,000; or $30,000;
- Close on a nominated date/time;
- Payment in full required, usually by BPay (no application form required);
- Directors usually reserve the right to increase or decrease the offer size, and apply a scale-back on the terms they think appropriate in the event of over-subscription;
- New shares commence trading on the ASX about 7 days after the offer closes;
- Only Australian and New Zealand resident shareholders can apply; and
- Participation is entirely voluntary.
Here is our view on what to do.
1. National Australia Bank (NAB)
Offer size: $500m
Offer price: No higher than $14.15
Closes: 5.00pm, Friday 22 May
NAB’s SPP follows an institutional placement of $3 billion held in late April to boost NAB’s capital position. Together, the initiatives will take NAB’s CET 1 (Common Equity Tier 1) ratio to 11.20%, comfortably above APRA’s “unquestionably strong” benchmark of 10.50%.
Like other major banks, NAB has been hit by the COVID-19 pandemic and booked a charge in the half year ending 31 March of $807m to provide for future losses. Overall, credit impairment charges increased by 158.6% to $1,161m, with cash profit falling by 51.4% to $1,436m. Profit before large and notable items (including a write-down of capitalised software) was $2,471m, down 24.6%. NAB reduced its interim dividend from 83c per share to 30c per share.
If you have the cash and are comfortable in increasing your exposure to the banks, we support participating as:
- The maximum issue price of $14.15 is 8.5% lower than the current market price of $15.46 (as at 15/5/20);
- Traditionally, investing in bank shares at a discount to book value has been a sound strategy. NAB’s adjusted book value at 31 March (adjusted for the $3 billion institutional placement) was $17.13 – the subscription price is thus 82.6% of book value;
- According to consensus estimates (source: FN Arena), the major brokers have a target price for NAB of $18.28 per share. It is trading on a multiple (PE or Price Earnings ratio) of 13.3 times forecast FY20 earnings, but only 10.6 times forecast FY21 earnings;
- The brokers forecast total dividends of 68.3c for FY20 (30c has already been paid) and 100.6c for FY21. At $14.15, this puts the stock on a prospective yield of 7.1%; and
- New CEO Ross McEwan is in the driver’s seat at NAB and over the next few years, should improve NAB’s competitive position and standing with customers.
The major risk for NAB is that the impact of COVID-19 (bad debts, fees forgone, reduction in lending volumes) is materially worse than the Bank has provided for, resulting in lower cash profits or even a net loss. In a worst-case scenario, the Bank needs to raise more capital to remain solvent.
The offer size of $500m could be insufficient to meet expected investor demand. While the Board can (and may) increase the size, a scale back of applications is the most likely scenario. The Board has said that if a scale back is applied, it may have regard to your pro-rata shareholding of existing NAB shares (that is, if you own more NAB shares, you may get a bigger allocation than a shareholder who owns fewer shares).
2. Ramsay Health Care (RHC)
Offer size: $200m
Offer price: No higher than $56
Closes: 5pm, Wednesday 20 May
The purpose of the capital raisings is to strengthen the balance sheet and provide Ramsay
with increased financial flexibility. The SPP follows a $1.2bn institutional placement at
$56.00 per share.
Ramsay has been hit by the Covid-19 pandemic with non-urgent surgery (and associated hospital visitations) ceased in its major operating regions. It is making its facilities and capabilities available to support public health systems in the global response to COVID-19.
In addition to strengthening the balance sheet through these capital raisings, Ramsay has suspended the payment of ordinary dividends and is limiting or deferring discretionary expenditure and capex.
In regards to the SPP, we support participating as:
- The maximum issue price of $56.00 is 12.7% lower than the current market price of $64.13 (as at 15/5/20);
- Ramsay is the leading private hospital operator in Australia, France and Scandinavia, and over many years, Management has a demonstrated a strong track record in growing the company and delivering for shareholders;
- According to consensus estimates (source: FN Arena), the major brokers have a target price for RHC of $64.20 per share. It is trading on a multiple (PE or Price Earnings ratio) of 33.7 times forecast FY20 earnings and 31.4 times FY21 earnings, and while these are high, they are not out of line with historic multiples that RHC has traded at; and
- Governments are easing restrictions, with an early return to some elective surgery in Australia.
While RHC should be considered as a “long term investment”, the major risk to Ramsay in the short term is that Covid-19 delays the further easing of restrictions on private surgery, and/or a second wave of infections causes restrictions to be re-applied, placing further financial pressure on the company. There is also a strategic risk developing from Governments’ more active involvement in the health care system, which could increase support for nationalisation or increased regulation of private hospitals.
3. Lend Lease (LLC)
Offer size: $200m
Offer price: No higher than $9.80
Closes: 5.pm, Tuesday, 26 May
Lend Lease surprised some market participants when it announced a $950m institutional placement at $9.80 per share. To strengthen its balance sheet and support future growth, it will have $3.95bn of liquidity (cash and committed undrawn bank facilities) post completion and anticipates a gearing ratio of 10% to 15% at 30 June.
It hasn’t yet determined whether a final dividend will be paid from Lend Lease Corporation but expects to pay a final distribution from Lend Lease Trust.
The company says that it has a development pipeline of $112bn, and it is continuing to deploy its core strategy of an integrated business model in targeted gateway cities. It will continue to increase the group’s exposure to investments and funds under management.
Supporting participation in the SPP are:
- The maximum issue price of $9.80 is 12.0% lower than the current market price of $11.14 (as at 15/5/20);
- According to consensus estimates (source: FN Arena), the major brokers have a target price for LLC of $15.89, 62% higher than the SPP price. It is trading on a multiple (PE or Price Earnings ratio) of 10.7 times forecast FY20 earnings and 11.3 times forecast FY21 earnings.
With so much of the development and construction portfolio located outside Australia, Lend Lease is a challenging company to get a strong feel for. The brokers are positive on Lend Lease (mostly buy or outperform ratings), while the market is a little more circumspect. Our inclination is to pass on this SPP (or to sell on the ASX to buy back in the SPP – see below).
4. Newcrest Mining (NCM)
Offer size: $100m
Offer price: No higher than $25.60
Closes: 5pm, Wednesday 27 May
Unlike the other companies above, Covid-19 is not the reason for the capital raise. Rather, Newcrest is raising capital to purchase the Fruta del Norte financing facilities and to fund future growth options. Fruta del Norte is a gold mine in Ecuador that Newcrest has a 32% equity share.
A $1.0bn institutional placement representing about 5.1% of Newcrest’s existing capital was completed at $25.60 per share. US$460m (approx. A$720m) is being used to purchase the financing facilities, which will give Newcrest an economic exposure to approx. 400,000 ounces of gold from the Fruta del Norte mine between 2020 and 2026.
Analysts largely welcomed the deal, considering it to be “accretive” and “fair value”.
Investing in Newcrest, Australia’s leading gold miner by market capitalisation, is for the gold bulls as it is a leveraged form of taking exposure to the metal. The gold price has been steadily rising, supported by record low interest rates and money supply expansion as Central Banks effectively “print” money.
Additionally:
- The maximum issue price of $25.60 is 15.3% lower than the current market price of $30.23 (as at 15/5/20);
- According to consensus estimates (source: FN Arena), the major brokers have a target price for NCM of $28.57. (It should be noted, however, that target price forecasts for gold companies are highly dependent on the underlying gold price forecast).
Another option
If you don’t want to increase your exposure or don’t have the cash, another way to play SPPs is to sell some or all of your shares on the ASX in advance of the closing date, and then replace those sold shares at a lower price in the SPP. This is a higher risk strategy and requires a bit of “guessing” as to the extent of overall shareholder interest and the possibility and materiality of any scale-back.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.