Today, Royal Imtech N.V. (OTC: OTC:IMTEF) reported its second quarter earnings and announced several measures to secure the company's future. As I discussed in this article, Imtech's future was at stake, because the company did not meet the requirements of its banking covenants and was under pressure to come up with a solution to deal with this acute problem. Today's press release confirmed my bearish outlook for this stock and I believe that Imtech is a perfect short candidate. In this article, I will discuss Imtech's actions to deal with its huge debt and explain why I believe this stock is a short candidate.
Imtech's starting point was that the company needed to reduce its net debt with at least €600 million ($792 million) from an expected €1,040 million ($1,370 million) to €400 million ($528 million). Based on today's earnings report, net debt was €1,037 ($1,367 million), indeed close to the market's expectation. According to the press release, Imtech will take the following steps to reduce its debt and strengthen its financial position:
- Issue equity rights for €600 million ($792 million);
- Sale of ICT division for €255 million ($336 million);
- Step down of non-cash interest by the banks;
- Covenant holiday up to Q1 2016;
- Additional liquidity buffers;
- Extension of maturity to July 2017;
- Additional restructuring measures in second half of 2014.
At first sight, the taken measures seem to be very positive. Imtech will receive enough money to reduce its net debt and restructure the organization at the same time. Further, the step down of non-cash interest by the banks ING Bank (NYSE:ING), Commerzbank AG (OTCPK:CRZBF), Royal Bank of Scotland (NYSE:RBS), Rabobank and ABN Amro will lower is interest rates and, as a result, reduce the company's interest expenses significantly (see graph below).
However, despite the positive measures related to Imtech's debt and banking covenants, the shareholders are looking at an extreme dilution of their position. According to Bloomberg, Imtech has 463.55 million shares outstanding. This equals a market capitalization of €184 million ($242 million), based on today's stock price. Imtech will issue equity rights for €600 million ($792 million) total. The rights issue is already undersigned by ING Bank, Commerzbank and ABN Amro, but still needs approval by the Extraordinary Meeting of Shareholders. This meeting will be held on October 7, 2014.
If the Extraordinary Meeting of Shareholders approves the rights issue, the current position of the shareholders will dilute. A simple math exercise learns that the current shareholders are looking at a dilution of at least 338%. This is in the highly unlikely scenario that Imtech will issue the rights for the current stock price. It is more likely that the issue price is far below the current stock price and the dilution will be much higher. Therefore, it remains uncertain whether the shareholders will approve the issue of rights or not.
Next up is the sale of Imtech's profitable ICT division. Imtech has reached an agreement with Vinci S.A. (OTCPK:VCISF) regarding the sale of the entire ICT division for €255 million ($336 million). This is a big disappointment for Imtech and a great deal for Vinci. As I mentioned in my previous article, the market valued the division around €300 million ($396 million). My concerns regarding the possibility that Imtech would be able to receive the full market value for the ICT division were in fact justified.
Another alarming element is the company's balance sheet (see sheet below). The company has still over €800 million ($1,052 million) goodwill recorded on its balance sheet. The company assessed an impairment test as at 30 June, 2014 and concluded that no impairments needed to be impaired. However, the company did make the following statement:
"However headroom is limited for our Nordic, Spain, Marine and Germany & Eastern Europe business. Adverse changes on the cost of capital, business performance or continuing uncertainty among stakeholders could have an impact going forward."
I believe that it is very likely that Imtech will have to impair a significant part of its current goodwill by the end of this year. An impairment of goodwill will lower Imtech's equity. As a result, the company will find it even harder to meet the requirements of the banking covenants by the end of the first quarter in 2016. I foresee continuing uncertainty among stakeholders, especially until the Extraordinary Meeting of Shareholders on October 7, 2014. Further, Imtech's operating performance in the second quarter did not show a clear improving image as well (see table below).
|* in millions EUR||EBITDA HY'14||EBITDA HY'13||Trend|
Shareholders will have to take a heavy dilution in case that the Extraordinary Meeting of Shareholders approves the issue of rights. In case that this Meeting will not approve the issue of rights, there will be even more uncertainty regarding the company's future. Further, the sale of the ICT division was a disappointment. Without the good performing division, Imtech will have more trouble to improve its operating margins. Finally, I foresee that additional impairments will lower Imtech's chances to meet the banking covenant by the end of the first quarter in 2016.
Based on the information in this article and my previous article, I believe that Imtech is a short candidate, at least until the company proofs that it is able to improve operations and profitability. However, in case that Imtech turns profitable again, most of the profits will not flow to the current shareholders. This is due to the heavy dilution. Therefore, it remains uncertain whether the stock price will ever recover.
One future scenario for Imtech is that the company eventually will be split up and sold in parts. The money received from the sale of the individual parts will likely flow to the banks, as Imtech's net debt is still €400 million ($528 million) after the planned reduction mentioned in this article, and not to the shareholders.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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