US Edition Ladbrokes
£171.4 -9.8p
Questor says Take up your rights
Here's a first. A rights issue triggered by the likes of Manchester United, Chelsea and Arsenal.
Not many companies could seriously blame too few draws in Premiership football for a £275m cash-call. But Ladbrokes had a go yesterday.
Back in August, chief executive Chris Bell was dead keen to play down talk that Ladbrokes would have to follow rival William Hill and pass the bookies' satchel round the shareholders.
He had accepted the need to "de-lever", as he put it. But, like an optimistic punter, had hoped that a run of good results – coupled with such things as lopping a third off the interim dividend – might do the trick. No such luck.
Just four draws in the first 66 Premier League matches, costing Ladbrokes £20m versus last year, has been enough to convince Mr Bell that the bookie could not simply trade its debt down.
At 3.7 times ebitda, it was not only too high for these credit-crunched times but dwarfed Hill's prettier 2.2 times. Moreover, it was the kind of ratio that gave Laddies little room for manoeuvre for talks with its banks about refinancing £380m of its debts. Admittedly that's some way off – 2011 – but better safe than sorry.
The upshot is that the cash-call brings debt below £620m and the ratio to a roomier 2.5 times, but it also highlights something else about the bookie: it's struggling.
Operating profits, ex-high rollers, fell 58pc last quarter to £22.4m, forcing Ladbrokes into more cost cuts, including a final dividend worth £50m last year. There's also a pay freeze until January 2011, capex cuts and some redundancies to come.
Whatever the unfavourable footie results, the mantra that bookies are recession-resilient is beginning to ring a bit hollow. Worse, Ladbrokes looks to be underperforming William Hill – especially when it comes to machine income in the shops, the once whizzy growth story that has now gone into reverse.
Weekly gross win from machines actually fell 1.2pc to £663. Ladbrokes is installing new games but must get a move on.
Hill's trading statement on October 22 will show if the dip in form at Ladbrokes is company-specific or industry-wide. If it's the former, Mr Bell will have some explaining to do. He's also yet to find a big idea for the group.
At yesterday's close, the shares are on a theoretical ex-rights price of just under 146p, where the prospective multiple is just over 12 times. A rebased dividend, returning next year, would give a yield of about 4.8pc.
Against that, William Hill shares are cheaper – trading on just over nine times – leaving leeway for any analyst downgrades there.
It's tempting to suggest investors sell their rights and switch into Hill's, except for one thing: after such a poor run of form, Ladbrokes' luck must improve. It's a close call, but take up your rights.
Hochschild
303p +4½
Questor says BUY
Although it is always disappointing when your stake in a company is diluted, sometimes a company has good reasons for raising funds. On balance, it appears that silver miner Hochschild's fund-raising is a positive move – despite the irritation of the fall in its share price.
On Wednesday afternoon, the group unveiled a $145m (£90m) equity placing and a $115m convertible bond offering. The placing was at 295p and the equivalent of 9.9pc of the current outstanding shares were placed.
The share price fell by 10pc after the announcement on Wednesday, although they bounced back yesterday as the market digested the news.
The company is using the funds for a number of purposes. It wants to pursue further acquisition opportunities in key mining districts and make further investments in Lake Shore Gold and Gold Resource Corporation (GRC), where it has strategic investments.
It also wants to pre-pay $85m of its $200m syndicated loan facility. The initial conversion price for the bond was set at a premium of 35pc above the 295p price of the equity placing.
The company has a 40pc stake in Canadian-listed Lake Shore Gold, valued at about $400m, but this will be diluted to 27pc after the company acquires West Timmins Mining.
The board of Lake Shore Gold has committed to looking at ways in which Hochschild can return to a 40pc shareholding in the enlarged company, and the fund-raising provides the group with the armoury to do this. Hochschild is unable to increase its holding above 40pc until November next year.
Hochschild argues that the growth prospects for Lake Shore Gold are impressive, with current production targets of 30,000oz of gold by the end of 2009, increasing to 100,000oz in 2010 and 200,000oz in 2011.
The company also has the right to increase its stake in GRC to 40pc from the current 24pc.
GRC has a current market value of about $315m.
It is another precious metals mining company with a number of 100pc-owned, high-grade development projects in southern Mexico.
The shares were recommended at 284.2p on August 23 and at 305.7p on September 9. Based on 2010 forecasts, the group is trading at a discount to FTSE 100 peer Fresnillo, on an earnings multiple of 15.1 times compared with 31.8 at its larger peer.
The stance on the shares remains buy.