Safestyle (LON: SFE) shares are down another 47% today. SFE shares already dropped a different 45% a couple of weeks back. This is not, as they say, a good look for a share price. The basic problem is that the company’s simply out of working capital. That’s sad and all that but a slowing market hits the cost base and suddenly bank lending limits are hit and there we are. More working capital is needed but which bank is going to want to lend into that sort of situation? So, we get today’s announcement which indicates that yes, more capital might be found. But current shareholders won’t get a look in.
The announcement: “As reported in our recent Interim Results announcement, the Group has been engaging with its stakeholders to discuss ways to strengthen the balance sheet in order to support its recovery and help facilitate future growth. As part of these discussions, the Group has also engaged with a number of third parties who have expressed interest in investing in the Group. These discussions with both existing shareholders and other third parties have been productive and remain ongoing. In order to achieve a working capital injection, which will not be in the form of an equity placing, an alternative financing structure that realises the aims stated above is currently being sought.” They need and want equity - loans won’t do it (they’d rank behind the bank loans anyway and why would anyone do that if the bank itself won’t?).
Safestyle share price from Google Finance
There’s no sweet route out of this, as we’ve said before about Safestyle: “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.”
This is reiterated in today’s announcement: “As previously updated, the Group expects its year-end net debt to be between £(5.5)m and £(6.5)m. At this point and into early January 2024, the full revolving credit facility with the Group's bank (the "RCF") will be required to support the working capital and liquidity requirements of the business. At this time, the Group remains compliant with the covenants of its £7.5m borrowing facility. However, if the losses forecast for the remainder of the year materialise, this would generate a material shortfall versus the existing covenants of the RCF in November. Therefore, under the current facility terms, access to the RCF at that time could be fully restricted.” They need more capital. Anyone willing to provide it is going to drive a hard bargain as there really isn’t any alternative. So, current shareholders in Safestyle are going to get badly diluted.
