The broker has got off the fence – it previously rated the shares as a ‘hold’ - and recommended its clients sell the shares after Countrywide flagged up a material reduction in profit estimates and the need to raise new capital.
The broker has slashed its forecast for 2018’s earnings before interest, tax, depreciation and amortisation (Ebitda) by 35% to £32.4mln.
Shares in Countrywide were down 5.6% at 51.9p following the downgrade, valuing the entire company at around £131mln.
Management has previously targeted a net debt/EBITDA ratio of 1.5-2.0 and based on that Numis thinks the company will need to raise around £143mln (net) – or £153mln gross - in what looks like an inevitable rights issue.
Numis’s back of a fag packet estimate is that the new shares will be offered at a 30% discount to the current share price.
“FY2017 net debt stood at £192mln, and given low H1 [first half] EBITDA we think it will have risen to c.£200mln - suggesting net debt/EBITDA of 6.25x in FY 2018. Accordingly the group ‘is looking to put a long term capital structure in place’, with an intention to reduce debt by at least 50% through equity finance. Oaktree (c.30% shareholder) has stated that it is supportive and Countrywide will give more details at its interims,” the broker said.
Numis said a right issue would lay to rest balance sheet conc3erns but it reckons profits would need to more than double from this year’s projected level to make the shares look attractive following the rights issue.
In anticipation of a discounted rights issue, the target price has been reduced to 38p on a pre-rights basis.