A powerful sense of déjà vu hit me as I saw Admedus Ltd's (ASX: AHZ) announcement to the market this morning. 'Waaaaaaaaitaminute,', I said. Hadn't I seen this before?
I had. Admedus just completed a capital raising 16 months ago, where it issued 1 share for every 7 already held, at 7 cents apiece. That was before the share consolidation, and now management is back diluting shareholders with another capital raising. Here's what you need to know:
- $10 million raised from 'new institutional and existing and sophisticated investors' at $0.33 per share
- A 1 for 9 renounceable rights issue to existing shareholders to raise a further $8.3 million at $0.33 per share
- The funds will be used to fund the company's ongoing operations including ramp up of manufacturing and new product development/ investment in existing research
The bear case
I and other contributors have written here and here about the company's previous heavy expenditure that failed to result in meaningful increases to sales. Sales grew, but not nearly enough to justify the expenditure. This time around management hasn't done a good job selling a raising to shareholders, nor owning up to their previous mistakes.
In their fourth quarter report exactly 12 months ago management stated that a massive increase in staff costs are 'a direct result of the Group's focus on building the infrastructure, resourcing and sales capacity required to continue revenue growth for the next year and beyond.'
Now we find the company slashing headcount by 30% in order to reduce costs enough to survive while sales ramp up. The initial decision may have been a mis-step, but there's been no explanation of why it happened nor how it will be avoided in the future. This reduces the transparency of an investment in the company and also reduces my confidence in management's capital allocation decisions, as well as their assertion that the company will have enough cash to last until it attains profitability in 2018.
It's also possible the company will need to raise additional funds in the future to fund its ongoing research, even if it does become profitable.
The buy case
The saving grace is that Admedus does have good products and is growing revenues at a decent clip (albeit from a small base). It appears as though the company needs more time for sales to grow enough to outstrip costs. There's also an attractive widening of its patch product portfolio over the next few years that could lead to new sales in other segments. The infusion business is the main engine of growth though and I'm not certain about the company's margins or competitive advantage (or lack of) in this area.
It looks attractive, and Professor Ian Frazer's vaccine work provides long-term blue sky potential, although at a guess they're around five years away from commercialisation if not more – and that's if Admedus can keep funding it.
Another plus is that Admedus is more reasonably priced at around 30 cents, which is a 70% discount to my initial purchase.
So, should you participate in the capital raising?
I'd say no, as a second capital raising in 18 months (even though I didn't participate in the first one) leaves a sour taste in the mouth. As noted above the company lacks transparency and it is difficult to actually value the business and its growth potential. I could see myself buying more shares in Admedus in the next 12 months depending on how the company progresses, but I would suggest that shareholders stay on the sideline for the time being.
