Ellies deal to buy Bundu Power analysed
On 1 February, Ellies announced that it would be acquiring a 100% interest in Bundu Power, a company specialising in power generation and solar.
Ellies said this acquisition is its first move to reposition the business into a smart infrastructure company specialising in alternative energy, water storage, connectivity, and smart home technology.
The company stated it would pay a maximum compensation of R202.6 million for the acquisition.
On 13 June, Ellies announced that it would implement a rights offer to finance the purchase of Bundu Power.
The deal includes paying R72.6 million upfront and three additional payments in 2023, 2024, and 2025 not exceeding R130 million.
The company will finance the initial upfront payment and the first additional payment through a R120 million rights offer.
The offer would allow current shareholders to acquire 2.128 shares at R0.07 per share for every Ellies share held.
The R120 million rights offer is a significant request to shareholders when considering Ellies’ market cap of R72 million.
An investor with 1,000 Ellies shares would have an investment value of R90 at the current R0.09 share price. They would need to make an additional investment of R149 to prevent being diluted.
If not, the investors’ shareholding would be diluted to R80, an 11.11% loss, based on the breakeven share price explained below.
Daily Investor calculated the breakeven share price after the rights offer from the day of the announcement when the share price was R0.11.
From the day the announcement was made, the breakeven share price was R0.08. This post-rights offer share price would leave investors indifferent between exercising their rights offer or selling their shares.
If the share price falls below R0.08 after the rights offer, investors will lose money from exercising their rights, indicating a negative sentiment from investors toward the offer.
Bundu Power
Bundu Power generated a profit after tax of R11.2 million at February 2022 year-end. This puts the price Ellies would pay for Bundu Power at a price-to-earnings ratio of 18 times earnings.
Ellies is a loss-making company and has not shown any profits since 2021. It, therefore, doesn’t have a current, comparable P/E ratio.
However, considering the P/E ratio of Ellies during periods when it generated profits, it has an average P/E ratio of 8.26 times earnings.
Bundu Power would need to more than double its earnings level to reach the same earnings valuation.
Ellies is, therefore, expecting much greater earnings growth from Bundu Power than it has been able to generate on its own.
Ellies is going all in with the Bundu Power acquisition, but whether shareholders share the same enthusiasm remains to be seen.
A version of this article was first published by Daily Investor and is republished with permission.
Loading ...