Shares in rare stamp and collectibles firm Stanley Gibbons Group (LSE: SGI) fell by another 12% this morning, after the group said it would raise £13m by issuing new shares.
The new shares will be issued at 10p per share, a massive 56.5% discount to Friday’s closing price of 23p.
Approximately 71% of the new shares will be sold in a placing to institutional investors. However, Stanley Gibbons is also giving existing shareholders the chance to participate by way of an open offer.
This will give shareholders the right to buy 8 new shares for every 10 shares currently held. Shareholders who choose not to participate will find that the value of their stake in the firm is heavily diluted.
After the fundraising is complete, the new shares will account for 73% of the group’s total share count. This will mean that a 1% stake in the firm is reduced to 0.27%, if no new shares are purchased.
What’s gone wrong?
Stanley Gibbons’ most urgent problem appears to be debt. At least £6m of the funds raised will be used to repay short-term loans the company has drawn on since trading started to decline last year.
A second problem is that trading has continued to worsen. Sales of rare stamps and other collectibles have slowed over the last year, and prices have fallen.
At the same time, cost savings from acquisitions have been smaller than expected. The group has also continued to plough money into developing its own eBay-like online marketplace.
Stanley Gibbons said today that the firm’s finances are “under severe pressure” and that an adjusted pre-tax loss of £1m to £2m is expected for the 2015/16 financial year.
Question over asset backing
Stanley Gibbons large stock of stamps and other collectibles means that, based on the group’s most recent accounts, the stock currently has a tangible net asset value of 90p per share. Even after the proposed fundraising, tangible net asset value per share should be 24p.
The problem with relying on this asset backing is that the value of collectibles is entirely dependent on market conditions. It seems that prices have fallen steadily over the last year.
Today’s update said that the group will work towards “a return to more disciplined buying and selling strategies which should help to improve the stock profile” over the next 12 months.
To me, this suggests that Stanley Gibbons may have paid too much for some of its current stock. I suspect that the book value of the firm’s inventories will be reduced in its next set of accounts.
Buy now or wait?
As I write, Stanley Gibbons shares are still changing hands for 20p, double the placing price of 10p. Will the placing shares pop up towards 20p, or will the shares all fall to 10p once the placing and open offer are completed?
I suspect the shares will end up falling much closer to 10p. Stanley Gibbons’ situation appears serious to me.
I plan to take a fresh look at Stanley Gibbons when the fundraising is over and we’ve seen a current set of accounts. Until then, I believe the shares are too risky to buy.