Abingdon Health (LON: ABDX) has announced a share placing to raise working capital for the lateral flow testing company. The discount to the pre-existing price is 34% to the Tuesday price, the share price drops 25% to 28.4 pence, just above the new shares issue price of 25 pence. So far so normal for such a substantial increase in share capital.
Abingdon Health is increasing the share issue substantially. The minimum issue here is going to be 15.5% of the company, they’ve also left themselves with the right to issue up to as much as 22% or so of total issuance. That’s a substantial potential dilution of current shareholders who do not take up their rights. Thus the price drop.
The real issue behind any such capital raise as Abingdon Health is doing is why are they doing it? If the market believes that the deployment of the capital is going to bring significant future profits then the share price can rise above not just the new issue price but even above that prevailing before the announcement. If, on the other hand, the general view is that this will be money wasted then the price can fall well below this new issuance one. That’s the problem with rights issues and capital raisings.
Abingdon Health manufactures lateral flow tests for a number of illnesses. Given the past couple of years we’d all expect this to have been an excellent business to be in. Abingdon did indeed gain a contract to provide a million Covid tests and delivered them. So far, so very good – making lateral flow tests and not gaining business in a pandemic would be a bad sign.
The problem is that DHSC (the Department of Health and Socal Care) doesn’t seem to want to pay for them. Not for the 1 million tests delivered nor for the supplies to make a further 9 million. The outstanding is £8.45 million by the company’s own announcement of the share issue. DHSC doesn’t seem to want to pay this, negotiations are ongoing about a partial payment and so on. The share issue is to prop up the corporate finances (more strictly, “to supply working capital”) while a final disposition is reached.
Which is where a trading opportunity arises. What is the opinion over what will be the final outcome? There is that DHSC invoice, will it be paid in full, in part, or what? But before that there’s what view will the market coalesce around given the situation for now? Is adding more capital to the company to be a waste? Or is this a valid and sensible propping up to get over a hump – the underlying business is sound, it’s just a cashflow thing?
Such opinions can go either way. Delivering something the civil service doesn’t want to pay for is not a good sign. So that general market opinion might mark down prices further. Alternatively, Abingdon Health has been highlighting this problem for some time now, including in earlier releases to the market. So, the share price might already have been marked down to cover this problem. At which point the capital raise becomes a solution to earlier uncertainty and so the price gets marked up – resolving uncertainty does tend to do that, increase share prices.
A trading opportunity, yes, but which way does the trade go?
Should you invest in Abingdon Health shares?
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