It quickly became clear that a host of companies would have to raise emergency cash if they were to stand a chance of weathering the coronavirus storm. WH Smith is the latest in a growing list of companies to shore up their financial position, in the retailer’s case using a combination of debt and equity capital. It almost goes without saying that the group is using a placing of new stock to institutional investors to raise its money, rather than offering shares to all-comers, including existing holders.
Perhaps understandably in the present climate, speed is everything and the cost and timing of a rights issue is simply prohibitive. That doesn’t make the diluting effects of the fundraising any easier to swallow for those that cannot take part.
WH Smith opened its first high street shop in central London in 1792 and its first outlet in a travel location, Euston station, in 1848. Some 228 years after its creation, it operates as two divisions: on the high street where it has 576 stores, and in travel with just over 440 shops in stations and airports and more than 600 in similar locations overseas.
Re-engineering its business model to give it exposure to the previously booming travel sector — for snacks, magazines and books on the go — means that from an investment perspective WH Smith is no longer a pure-play high street retailer. In normal times it generates 70 per cent of its trading profit from travel.
These are not normal times. Travel and trading restrictions since the onset of Covid-19 mean that, with the exception of 205 shops containing post offices and 140 outlets in hospitals, the British shops are shut. Most of its travel locations, including international ones, are also closed. It has furloughed staff and qualifies for rent concessions under the government’s emergency aid package for business.
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In order to fund itself until trading can resume, WH Smith is raising £270 million, including for working capital. First, it has arranged new lending facilities worth £120 million. Then, because the loans are contingent on it issuing fresh equity, the company is raising a further £150 million through a placing of new shares equivalent to up to 13.7 per cent of its existing equity capital.
Shareholders will remember that it is less than six months since WH Smith pursued a similar, also diluting, placing of new stock exclusively to institutional investors. In mid-October, it raised £155 million in a placing of new shares worth 7 per cent of its then issued capital to part-pay for its £312 million acquisition of Marshall Retail Group, the US travel retailer.
It is telling that the placing then was at £21.50 a share. Yesterday, WH Smith shares were valued at £10.94, an 84p or 8.3 per cent gain on the day but a price that means they have almost halved since.
The arrival of Covid-19 is a bitter blow but assuming the virus is contained over the coming months, it should not be life-threatening. WH Smith said yesterday that it is estimating that this month alone it will lose about £114 million of revenues, a drop against the same month last year of 90 per cent, and £39 million of operating profit. It is assuming that revenues for the next four months will be down by as much as 85 per cent, knocking operating profits by about 45 per cent. Given that last year’s rent bill was £212 million and capital expenditure £59 million, it would also seem that it is putting itself in a position to fund its spending requirements into the future.
Shares in WH Smith are cheap, changing hands for less than ten times earnings and carrying a dividend yield of 5.7 per cent, assuming the payout this year is flat. Hang on for better times.
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ADVICE Hold
WHY Revenues and profits will be hit hard, but this enduring retailer should survive and recover quickly
Costain
Costain embarked on its attempt to raise up to £100 million from investors last month, days before the government began putting the country into lockdown.
While the civil engineering group looks in retrospect to have moved early to shore up its finances, it hasn’t yet finished raising the money.
Its fundraising is fully underwritten by HSBC, Investec and Liberum, but the next few weeks will nevertheless be a nerve-testing time for the company as it finds out whether investors are prepared to give it the financial support it needs.
Costain began life as a builder in Liverpool in 1865 and is a specialist in infrastructure. Unlike some of its peers in the construction sector, Costain is not weighed down by debts, in fact, it is cash positive.
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Nevertheless, with the government a key customer, it has to live in a world that has changed dramatically since the demise of Carillion in January 2019. Now contracts are only awarded to those with the healthiest of balance sheets.
It was with this in mind that the company started in early March to raise up to £100 million through an equity issue. It may yet be a rights issue but it is more likely to be a placing, possibly with a portion made available to other shareholders.
Covid-19 has also changed things for Costain. Work on Crossrail, the preparations for HS2 and the Thames Tideway have all been paused.
While critical work such as keeping roads open and utilities working is continuing almost as normal, construction work, accounting for 30 per cent of its revenues, has been halted and it has furloughed part of its workforce.
While the government has given the go-ahead to HS2, it has not instructed work to start on the high-speed rail project, which is bound to be unsettling for Costain and its investors.
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The shares, at 341p when this column recommended buying them almost exactly a year ago, were up 1¼p, or 3.9 per cent, at 36p yesterday. With the final dividend cancelled, shareholders should disregard any yield, but the stock trades at an absurdly cheap 2.6 times last year’s underlying earnings.
Don’t give up.
ADVICE Hold
WHY Debt free and well placed to capitalise on infrastructure
