Collins Foods Drops 9% on Capital Raising

Collins Foods Ltd [ASX:CKF] owns various restaurants in Australia, Germany and across Asia. Their major business is the fast-food restaurant KFC. In the first half of FY17, CKF generated $249.6 million from their KFC restaurants. This represents around 88% of total revenues.

This morning, CKF shareholders watched their share value drop 10.7%, to $5.27.

What happened to Collins Foods?

This morning, CKF announced that they had successful raised $54.5 million from institutional investors. The placement was oversubscribed at an issue price of $5.25 per share.

The proceeds will go towards funding the acquisition of 16 KFC restaurants in the Netherlands.

CKF CEO Graham Maxwell said:

We are delighted with the strong level of support for the Placement shown by both Collins Foods’ existing shareholders as well as a number of new investors.

The Netherlands Acquisition accelerates our European strategy following the recent German acquisition, providing critical scale and, via the Development Agreement, an exciting opportunity for the company to deliver significant growth in this market.

What now for CKF shares?

It’s great to see that CKF is sticking to what they do best, running the KFC chain. The company will likely add to their profits, due to the acquisitions. But you need to consider whether the capital raising was worth it.

By issuing more shares, CKF shareholders are now entitled to a smaller fraction of future earnings. So how much more will (now diluted) shareholders receive by acquiring 16 additional KFC restaurants?

According to an update on 23 March, the Netherlands acquisition generated revenues of €46.6 million. At an exchange of AU$1.41 to each euro, that works out to be AU$65.7 million in revenues.

For simplicity, let’s apply CKF’s overall net profit margin of 5.46% to their KFC restaurants. That means the 16 Netherlands-based KFCs could potentially add $3.59 million to net profits.

These are just ‘back of the envelope’ calculations. But it gives you a rough idea of how to think about CKF’s latest share issue.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

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Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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