Chamberlin Drops 25% On Discounted Placing News – Should We Trade This?

It almost doesn’t matter what business line Chamberlin PLC (LON: CMH) is pursuing. The Chamberlin share price will be determined by purely technical factors for the next few weeks. Any trading of Chamberlin should therefore be done with those technical issues in mind.

As it happens Chamberlin is very definitely a microcap – £5 million total valuation – and involved in “specialist castings and engineering”. We hear much about how industry has been killed in Britain and yet this is something that still happens here. In fact, it’s still something we’re very good at. It’s the jobs that have gone in this area of highly skilled metallurgy, not the production.

That’s not what is going to determine the Chamberlin share price in this immediate future though. The business line is almost irrelevant. For the company has announced a placing of shares this morning. A placing that must succeed as well. As the directors say “If the Placing and Subscription do not proceed, it will not be possible to pursue the Company's strategy and the Board would be required to consider alternative options for the Company in the context of very limited resources.” This is code for if we don’t get this money we’re not sure we’ll be here much longer.

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That requirement – need, rather than it would just be nice to have more capital – is why the share offer is at a 30% and more discount to the 7.25p of Chamberlin’s share price before the announcement. That’s also why, obviously, the 25% fall in that price today on the announcement. Why would anyone pay that old full price if there are to be many more shares cheaper?

This is not though, something that is already squared away. There has to be a general meeting on 18 Feb to sign off on this. Crucially, this involves the waving of pre-emption rights for extant shareholders. Dilution with no right to top up holdings is not a happy story.

It’s also true that the placing has not been underwritten. So further damage to the current share price is in fact possible.

This is also around a 50% expansion in the equity in issue so there is significant dilution as well.

Now, it’s possible to ponder on what they want the money for. Largely, it’s a result of a disastrous time at one subsidiary (Chamberlin and Hill) with the major client cancelling the use of the company. Large losses and a requirement for a change in strategy. But also a certain lack of capital – those losses – to fund the change in strategy. What the new strategy is, well, in this short term it doesn’t really matter.

For the Chamberlin share price isn’t going to be determined by what the company will do if it gets the money, but by whether it gets the money. A 50% equity issuance, not underwritten, no pre-emption rights, 30% and more discount? There’s going to be a gap in that share price until the answer – do they get the money or not – arrives?

The next decision point is that Feb 18 GM and the Chamberlin share price is likely to be volatile as news leaks about who is going to vote how at that meeting.

Chamberlin is likely to trade purely on these technical issues for the near future.