Case Studies - Corporate Capital Raising | Company Capital Raising
BBY's highly professional team has extensive experience in solving multiple problems for its corporate clients.
In the following case studies, BBY solved numerous capital raising issues, delivered M&A outcomes, strengthened the share registers of the companies concerned and assisted shareholder communications.
BURU ENERGY LTD (BRU)
BBY’s top-ranked Senior Energy Analyst identified the potential of BURU Energy at the time it was spun out from Australian Worldwide Exploration Limited, AWE.
Scott Ashton produced his first comprehensive report on BRU on September 1st 2008 titled "Unleashing the Canning – Exploration Success Could Deliver Huge Upside", with a potential valuation of A$3.21ps. The price at the time was A$0.30 and BRU’s market cap was A$48.6M.
BBY was the only broker to initiate comprehensive company research on what BBY was convinced was a compelling story, with BRU "providing a cheap entry point to a leveraged Canning basin exploration oil play with large upside potential."
Immediately after initiation, BBY conducted over 100 one-on-one meetings with potential investors across Australia and in overseas investment markets, highlighting BRU’s compelling investment case.
Scott Ashton has since released over a dozen notes on BRU, rating the stock a "Strong Buy". BRU has continually re-rated and BBY’s support has been unwavering, at times broking around 60% of the stock on a month-by-month basis, and acting as broker to the Block Trade of over 13% of the company in July 2011.
BBY clients have reaped the rewards of our insights and efforts with the BRU story, with some clients realising a gain approaching 1000% since initiation (March 2012).
BBY’s target price has also climbed with a "Strong Buy" and price target of $5.00 per share supported by a DCF valuation of A$4.70 per share.
As of June 2012, BBY clients who bought in to Buru at the coverage initiation price of $0.30 would see returns of over 940%.
COALWORKS LTD (CWK)
In late 2007, Coalworks was introduced to BBY through a corporate relationship. CWK had a vision to be a leading energy producer in Australia, building an inventory of coal assets in world-class coal provinces and bringing them into production and profitability.
After the completion of the company’s A$2.5M Pre-IPO (managed by BBY), CWK was able to drill its first major project, Oaklands North, and deliver a large JORC resource. BBY then acted as underwriter to CWK’s IPO which listed on the ASX in May 2008, raising A$25M. BBY introduced CWK to global institutional and high net worth investors that were aligned with CWK's visions.
Following the IPO, BBY was appointed CWK’s Corporate Adviser as it developed its portfolio of coal assets to include Vickery South and Ferndale, and continued to market the company via roadshows and presentations.
In December 2010, BBY raised ~A$30M via a placement to global institutions. As part of the placement, Nathan Tinkler’s Boardwalk Resources took a 19.9% position. In conjunction with the placement, BBY also acted as adviser to CWK on a A$25M 50/50 JV with Boardwalk Resources Ltd (BWK) to develop its Ferndale coking and thermal coal project.
CWK then announced that it planned to spin off its non-core assets the Hodgson Vale and Ashford projects into Orpheus Energy Limited (OEG), who will also focus on near-production Indonesian coal opportunities. BBY assisted OEG in completing a A$3.45M Pre-IPO was the lead manager to the Orpheus IPO listedo on the ASX.
Over the course of 2010, the share price of CWK gained approximately 200% and was a stellar stock market performer.
CREDIT CORP GROUP LTD (CCP)
BBY’s record of making the right calls is evidenced in its analysis of Credit Corp Group Limited (CCP) since initiating coverage on the stock in November 2007.
BBY identified CCP’s many strengths during the early days of its coverage, several of which proved to be essential in the infancy of the debt purchasing industry, as well as indicating a strong likelihood of growth given the rise in non-performing secured debt for sale from banks, a result of high interest rates that saw banks coveting to minimise the reporting of this liability on balance sheets. CCP held a dominant position in this market, owing to its focus being on these debt purchases which differed from the flood of short term collection agency businesses in the industry.
Early on, BBY sought to highlight some company’s downfalls, and around August 2008 BBY published a ‘Corporate Turnaround Road Map’, which listed milestones that could potentially serve as upside catalysts for the stock. From this point onwards, CCP started to behave in line with the milestones identified by BBY on the Road Map, and in August 2009 BBY placed a BUY recommendation on CCP once this strategy was truly visible. CCP endeavoured to start lowering debt levels which has continued over time, an impressive feat given that the company has simultaneously upped its acquisition of debt purchases. Additionally, CCP has developed a highly efficient debt collection platform, resulting from the recruitment of specialized staff (a difficult task in a tight labour market). Today, BBY ignites this platform as one of CCP’s Core Competencies.
The company’s effort in improving its business holistically eventually saw CCP regaining earnings momentum. Since late 2008, the market has witnessed an overall bullish share price movement - from lows of A$0.47/sh in late 2008 to A$8.13/sh in late 2012, a 1,629.8 per cent rise in share price. We reiterate BBY placing BUY and STRONG BUY recommendations on the stock from August 2009. Remarkably, this movement occurred at a time of slowing consumer credit growth, low interest rates, and temporary threats such as the National Consumer Credit Protection Bill 2009.
Recently, the BBY Industrials team placed an UNDERPERFORM recommendation on CCP despite strong 1H13 earnings. This was a consequence of questioning CCP’s capability in sustaining this strong performance. At the same time, the re-rate was a result of CCP’s need to increase purchasing activity in its new market (the US), and the fact that growth sourced from here means the company must bide time to experience its rewards.
EXCELSIOR GOLD LTD (EXG)
With bullish share price momentum since late 2010, Western Australian gold explorer Excelsior Gold Limited (EXG) was recorded as one of the top 20 highest performing stocks on the ASX for 2012.
Receiving minimal coverage and focus in the Materials space, BBY recognised the exploration potential of EXG’s Kalgoorlie North Gold Project, and commenced MONITOR coverage in August 2012. As EXG continued to demonstrate exploration success with the discovery of significant extensions to its Zoroastrian deposit, and provided further evidence the deposit could underpin a standalone operation, BBY upgraded its coverage to STRONG BUY in January 2013, with a price target of A$0.45 per share (NPV of A$0.58 per share).
In August 2012 EXG’s stock was priced at A$0.13 per share, and has risen approximately 85 per cent since BBY’s first report on the stock at this time. In its initiation report, BBY highlighted the latent potential of EXG’s tenement package, management’s experience and knowledge of the local geology, and the company’s substantial drill database, all factors which have helped EXG lift its resource base, with the increases at a discovery cost of less than A$10/oz. The ongoing success at low discovery cost has been the predominant driver of EXG’s share price.
In August 2012, BBY recognized the A$0.13/sh share price could be supported by a toll treatment of the open-cut Zoroastrian (only 174koz of EXG’s 869koz in resources), and the potential for corporate activity given the prospectivity of its tenements, and proximity to the under-utilized processing plant at Paddington. In its January report, with the share price at A$0.24/sh, BBY maintained the view that the 429koz Zoroastrian deposit can become a company maker. With the increase in size and average grade at 2.89g/t, BBY has become increasingly confident in Zoroastrian’s potential to support its own processing plant, with modest initial A$60M capital requirements, which could be partly funded by toll treatment of satellite deposits.
Risks include currency and gold price movements, and there is potential for unforeseen regulatory delays involving permitting infrastructure relocation. Our target price is at a discount to our valuation given BBY’s assumptions in the absence of a published PFS; we expect the gap to close as PFS data is published. Catalysts and near-term news flow for the stock will be ongoing drilling and resource updates, and delivery of its pre-feasibility study in the June quarter 2013, as well as any potential corporate activity which could include toll treatment agreements, JV development agreements, or asset sales.
FORTESCUE METALS GROUP LTD (FMG)
BBY Research is very proud to have been the first group to initiate coverage of the Fortescue Metals Group (“FMG”), placing a “Strong Buy” on the future mining behemoth from day one. At that time, (January 2005), FMG had a market capitalisation of under A$600M.
In the same year, BBY secured around US$100M for FMG through two convertible notes in January (A$40M) and February (US$70M) through our large offshore institutional clients.
FMG reached a significant milestone in Q3 2005, when it topped the A$1B market capitalisation level, with the help of a strong US share register introduced by BBY. The following year, BBY and our equity partners Jefferies International, secured US$400M from Leucadia National Corporation (a NYSE listed company with a market capitalisation of approximately $6B) and in 2007, BBY was a Co-Manager to a placement for FMG that raised A$504M.
Since then, BBY has hosted several global FMG roadshows and featured FMG at a number of its annual Conferences including in Dubai, which attracted significant strategic offshore investors to the register.
Since listing, FMG's stock price has increased by over 40,000%, the best performing stock this millennium.
As of June 2012, BBY clients who bought in to FMG in January 2005 would see returns of over 1,600%.
G8 EDUCATION LTD (GEM)
BBY initiated coverage on the Australian child care services provider, G8 Education (GEM) in March 2011. The report captured GEM’s potential to provide promising returns and value to shareholders with its disciplined and cost-focused management, led by Managing Director Chris Scott, who also grew S8 Limited through successful acquisitions.
A stock with minimal coverage in the market and a relatively small market capitalization, BBY identified GEM’s impending success from day one. The rationale for this optimistic view was underpinned by several factors:
- Management formed by S8 Limited, an organization of great scale which achieved a high CAGR in EPS terms of more than 50% for six years;
- Operations within markets that have robust demand for childcare and firm support for the industry from government (Australia and Singapore);
- A fragmented industry, providing opportunity for GEM to grow through acquisition.
BBY saw risks early on regarding external factors beyond GEM’s control in the company’s operating environment. Risks included high labour costs and a labour shortage in the Australian market, worsened in April 2011 when the Australian childcare workers union demanded a 50% pay-rise. These impacted the stock and resulted in a bearish share price movement throughout 2011, resulting in several downgrades to GEM’s 12 month price target. Simultaneously, a legal battle regarding the acquisition of Cherie Hearts in Singapore distracted investors from the strengths of management, with its track record of successful growth.
Since late 2011, an influx of positive milestones has resulted in an upside to GEM’s share price, prompting a confident view of the stock by BBY. Strong Buy’s, Buy’s and Target Price upgrades have been awarded since, most recently a target price of A$2.20 per share, from the target price of A$1.15 per share set on initiation. The presence of the Singapore court case deteriorated and light shone on positive earnings results. Investors also began to recognize management’s ability to increase occupancy in both Singapore and Australia, partially sourced from government family friendly policies. Management also led several acquisitions of childcare and early childhood learning centres, adding 16 well-sized centres to its portfolio in September 2012, secured financing facility and witnessed a successful capital raising.
Given the context of a tough market, GEM has sought to shine through as an absolute “gem” with its rising share price, earnings and investor confidence, supported by strong government incentives and support for the childcare industry which the firm operates in.
As at January 2013, from our recommendation change to BUY from UNDERPERFORM in October 2011, those who bought GEM at this time for A$0.50/sh have seen a 227% increase in share price.
LINC ENERGY LTD (LNC)
Linc Energy was referred to BBY by a corporate client in late 2005. From the onset, BBY’s Corporate Finance team was impressed by the Group’s plans and clear vision in developing their Underground Coal Gasification and Gas to Liquids technologies.
In May 2006, Linc (LNC) was successfully listed on the ASX as a result of BBY marketing roadshows conducted across Australia, Asia and North America. The listing raised A$22M via an IPO, funded from highly supportive institutional and high net worth investors.
BBY’s support and that of our clients has proven to be well-justified. LNC has been a stellar performer on the ASX and became the best-performing stock on the ASX in 2008. That same year, BBY won the prestigious “Corporate Deal of the Year” award from the Australian Stockbrokers Association for the October 2007 A$29.23M LNC placement at A$0.76. In July 2008, LNC was trading at A$4.63, which gave LNC shareholders who participated in the placement a return of 509% in only several months.
In 2008, BBY was LNC’s Corporate Adviser during the successful acquisition of Sapex Limited by Scheme of Arrangement.
BBY acquired 19.9% of Sapex shares on the secondary market and later on negotiated with the Sapex board to make a full offer for the outstanding shares. BBY was the Lead Manager for the $100m placement to complete the acquisition.
BBY has also since raised over A$270M for LNC in six capital raisings, including an August 2009 A$57.4M placement and a A$20M Underwritten Share Purchase Plan, where we successfully introduced a new register of large strategic investors from Australia and offshore.
SWICK MINING LTD (SWK)
BBY’s reputation of making the right calls is evident in our insights regarding the journey of Swick Mining Services (SWK).
BBY initiated coverage on SWK in June 2012, placing a STRONG BUY recommendation on the stock, and consistently maintaining it since. BBY clients have reaped the profuse rewards of this call, as share prices have rallied since initiation, jumping from $0.29 to $0.38 in late March 2013 – a 31% increase.
SWK is a provider of underground drilling services using proprietary mobile rigs, and is uniquely positioned in the market as they design, develop and use its own underground diamond drillings rigs as opposed to relying on third party products from suppliers. The overall result is; lower capital costs, a higher reliability rate and higher drilling rates than its competitors. Recently, the company has also entered the growing world of robotics, with the purpose of developing its own rigs, improving safety and simultaneously reducing labour costs.
SWK’s underground drilling business targets low-cost Brownfield production related contracts, shielding itself from volatile Greenfield exploration expenditure. June 2012 saw BBY commend the company’s revenue being heavily tied to gold and copper/gold production - commodities which had a positive price outlook. Company focus has been directed to these commodities since making its nickel contracts and focus redundant.
These competencies are the reasons why BBY has unswervingly backed SWK’s story.
Moving away from optimistic stock news, BBY’s confidence in SWK has also been maintained by milestone company achievements, including increased improvements in rig utilization, particularly in its North American operations, expected to develop further. SWK has also seen growing ROIC, further progression in drilling and productivity rates relative to competitors, as well as having small exposure to steel making materials, meaning that the stock will avoid large falls if demand for steel slows.
In strengthening its call, BBY has actively compared SWK to similar companies such as its Canadian counterpart, Orbit Garant. It has been shown that by being leveraged to exploration spend, as opposed to production in brown-field operations like SWK, has made Orbit Garant a poor performer.
Outlook for SWK remains bright; BBY is praising the firm on cracking the North American market with a contract win with Nyrstar, for actively pursuing opportunities in Europe and SWK’s continual investment in R&D, which has the aim of using technology to double metres per man hour. The concurrent slowing in gold prices also prompted BBY’s Industrials Team to identify low C1 cash costs (<US$1000/oz) at the mines where the stock has rigs. Although current contracts held can easily be cancelled on short notice, BBY assures that SWK is favorably positioned and that closing down production due to cost concerns is highly unlikely given the favourable cash costs of production.