Safestyle (LON: SFE) shares are down 45% this morning. SFE shares have fallen because the trading environment is getting worse. As Scancell indicated back in July in fact, but they’ve got worse again since then. The remedial actions taken over the summer worked for that period but as conditions are continuing to get worse there will now be a loss - predicted of course - for the year.
As we’ve said many a time there’s an art to reading corporate announcements. A very useful starting guide is to start at the end. For that’s where the information management don’t want to have to tell us will be. For example, today: “Our best estimate is that, whilst we expect demand levels will pick up versus current levels in line with seasonal trends, we believe it is likely to be below previously expected levels. Consequently, the Board now expects the Group's revenue for 2023 will be between £140m - £142m and consequently, underlying loss will be in the range of £(9.5)m - £(10.5)m. On the above basis, year-end net debt is expected to be between £(5.5)m and £(6.5)m. The Group has debt facilities of £7.5m and was in a net cash position of £1.5m as at the end of its August reporting period. The trading outlook and timing of working capital outflows for the year to go are the primary cause of the expected year-end net debt position. The Group intends to engage with stakeholders to strengthen the balance sheet in order to support its recovery and help facilitate future growth.”
Well, if trading deteriorates in a highly competitive industry then this is what will happen. Revenues will fall below costs and so losses arrive.
Safestyle share price from Google Finance
But that tip into loss isn’t, in fact, what is really killing the share price today. It’s that “engage with stakeholders to strengthen the balance sheet”. For if we run through those numbers again they are, currently, predicting that they’ll be at about their banking limits by year end. Which wouldn’t be a good position for the slow time of the building trade, mid-winter. So, what they’re really saying there is that we’re going to try and raise more capital.
Or at least, they’re going to try to raise more funding. Maybe the banks will extend larger facilities - although that’s unlikely into a shrinking business. Possibly they might get away with a bond issue tho’ that is also unlikely. What this probably means is that they’re at least going to think about a rights issue. Given that the Safestyle share price is 84% down over the past 6 months that would, of course, be rather dilutive.
That’s the real reason for the 43% fall today - the likelihood of a rights issue. It’s not certain, but the probability has risen significantly