Local investors take front-foot approach

01/04/2009 - 22:00

THE number of capital raisings and the amount raised by Western Australian companies in the March quarter has pleasantly surprised market observers.

Local investors take front-foot approach

THE number of capital raisings and the amount raised by Western Australian companies in the March quarter has pleasantly surprised market observers.

KPMG executive director Adrian Arundell sees the investor support, particularly for the many sub $1 million deals, as a heartening sign.

"For people to be stumping into these small things, that's an encouraging sign and that's a typical Perth sign," he said.

"If you're in Sydney and you're trying to raise $50,000, good luck.

"Whereas in Perth, there seems to always be a portion of people spending, or a portion in WA, that will go to speculative capital raisings."

The front-foot approach taken by investors could be drawn from the state's history of listing small companies and perhaps be reflective of the bullishness of the WA investor environment, Mr Arundell added.

However, while WA investors may like to take a punt, the overall investor mood has slumped to its lowest level in more than four years.

Research by the Investment and Financial Services Association and CoreData has shown investor sentiment fell 10 per cent in the March quarter to a reading of minus 22.3 points.

This compares to a reading of minus 20.3 points in the final quarter of 2008, and is a long way from the positive 14.4 points recorded late in 2007.

While investor sentiment is pushing major market indices to lows not seen in years, the balance sheet of consumers is in very good shape, according to Commsec chief economist Craig James.

"If only their confidence levels start to improve then they're going to be taking up discretionary spending again," Mr James said.

However, with pockets of optimism starting to appear and the S&P/ASX 200 benchmark index rallying 17 per cent over the past three weeks, investors are taking another look at opportunities.

"People's risk preferences have altered somewhat, but we've seen a nice little bounce in the markets and people who have been lessening their exposure to the share market now should be giving consideration as to whether that's the right strategy," Mr James said.

For people looking to invest or re-enter the market, consideration should be given to the timeframe of the investment, the company's debt position, peer comparison and tax rules.

At the moment, Mr James said banking stocks had the potential to outperform, while it may be a bit early for mining and energy stocks unless there was more confidence about an economic recovery.

For companies on the hunt for cash, Gresham Advisory Partners special adviser Jenny Seabrook said they should first take a good look at their share register to decide what kind of raising should be executed.

"You try and look after the existing shareholders first and make sure they're not significantly diluted," Ms Seabrook said.

"You need to find out who are the dominant brokers in the stock - who could act as underwriters for all or part of the issue - and to understand the share register and then estimate the demand expected for the proposed new securities from existing shareholders, and from potentially new shareholders.

"By doing that you should be able to work out which of the [capital raising] alternatives you need to use to achieve your desired outcome."

Raising capital with an institutional component would provide some guarantee of funds, whereas the retail component may create some uncertainty.

"Because it's harder to get a feeling for retail shareholders demand, corporates and their advisers have tended to favour the placement, share-purchase-plan route, where the outcome in terms of amount raised and potential dilution is easier to judge in advance (especially if the placement/institutional component is underwritten). But this has the downside of diluting retail shareholders," Ms Seabrook said.

"Smaller resource companies that know their registers very well may do a rights issue just because, given the size of their registers, the relative size of individual's holdings, and the closeness of their brokers to the investors in the stock, they can more easily predict what their shareholders appetite to invest is likely to be in those circumstances."

The share price for a rights issue should be at quite a discount to the traded price whereas a placement is usually closer to the current share price, Ms Seabrook said.

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