Shares in the world’s largest can maker, Rexam, were crushed in Wednesday trade after the packaging group accompanied an in-line set of first half results with the shock news that it is passing on its interim dividend and is planning a rights issue to raise £351 million.
Rexam shares plunged more than 12% on Monday when the company confirmed talk is was considering raising funds via a rights issue to avoid a potential downgrade of its credit rating to sub-investment grade. Today the company announced a 4-for-11 rights issue to raise a net £334 million and by afternoon deals the stock was 7.5% lower at 255.5p, having closed the previous week at 323.75p.
“Given the strong cash flow performance in the first half and profits in line with expectations, we were surprised by the passing of the interim dividend and the rights issue,” Charles Stanley analyst Tony Shepard said following the announcement, noting that Rexam was well within its covenants and had plenty of short-term liquidity.
“The reason for Rexam’s volte farce is that it basically had too much debt and it feared losing its investment grade rating and being downgraded to junk status,” Shepard added, “which could have placed an additional £70 million financial cost on the group in 2011.”
Such a downgrade is so feared by the company because, as today’s results have shown, Rexam has not fared the recession as well as expected. “The recession is now expected to be deeper and more prolonged than initially believed,” Shepard noted.
Part of the cause of this delay in recovery is that underlying customer demand has started to wane, which helps explain why the company has opted to take extensive action “in order to realign the cost base to lower demand,” in Shepard’s words.
“These cost savings should leave the group well placed when an economic recovery eventually arrives and the rights issue gives the group the correct capital structure for now and the future,” Shepard summed up in his note to investors this afternoon.
Charles Stanley today stuck with its Hold recommendation on the stock.
Rexam this morning reported underlying pretax profit for the six months to June 2009 of £135 million, down 15% year-on-year, on the back of organic sales down 6%. Reported sales increased by 15% to £2.5 billion, but this figure was boosted by favourable foreign currency translation.
The interim dividend, which is to be passed, will be replaced by a new dividend policy following a review of the required capital structure.
