Penrice Soda Holdings Limited (PSH.AX) has built up stock levels during their strategic review and with new bi carb capacity now online and all but accounted for its time to see the cash flow and earnings pop. The current rights issue will be heavily dilutive, but reduces risk and gives Penrice the room to further expand into the growing sodium bicarb business.

Monday 16 November Closed $0.805 – Looks like strong buy with possibility of picking up down towards the offer price of $0.70. Anything sub $0.85 looks cheap. [That $0.70 price doesn't look like it's going to happen, due to strong buying the last two weeks.]

As you can see I’ve taken a couple weeks to publish this. After my initial small purchase of PSH the price jumped 8% and displayed incredibly strong support at $0.87. The heavy volumes made it  seem likely an institution was buying, so I decided to wait patiently until they had finished. Well two weeks has gone by and despite the Dubai hiccup Penrice hasn’t traded below $0.86 on any meaningful quantity.

Penrice have invested heavily during the global recession, earnings will pop due to reduced costs and increased sales from the new plant. After the capital raising per share earnings will initially do down, but despite the share count jumping 72% eps is likely to only fall by 30% in 2010 and be back to current per share levels a couple years after that.

Penrice’s MD on Capital Raising excellent executive overview of Penrice’s levers.

• continue to operate within our debt covenants
• seeing continued improvement in profits and cash flows
• Under the hedging program we have in place, the NPAT impact is expected to be about $130,000 for each 1 cent movement up to 89 cents to the US dollar and $30,000 for each 1 cent movement above 89 cents to the US dollar.

Penrice 2009 Annual Report

Overview of Penrice [Click charts to enlarge]

3 Month Chart

Hunter Hall bought from Sept 25 to Nov 4 at an average price of $0.934. If, as is highly likely, HHL take up their non-renounceable 1 for 2 offer their cost basis will be $0.862.

Institutions partaking in the 7.9M placement get an average cost basis of $0.80, i.e. (2*.85+.70)/3

Equity Raising

• a placement of approximately 7.9 million shares to institutional and sophisticated investors at $0.85 per share, raising approximately $6.8 million (Placement); and
• a 1 for 2 non-renounceable entitlement offer (Entitlement Offer) to existing Penrice shareholders and to participants of the Placement at an offer price of $0.70 per share to raise up to approximately $21.3 million
• Record date for issue was Nov 5.
• Issue Closes Nov 27
• Allotment of new shares Dec 7

Offer Document

• expect to exceed $9M NPAT
• reinstate 40-50% payout dividend
• new shares 30.5M
• Weighted average number of ordinary shares on issue used
• Shares 2009 AR Note 23
• 52,963,202+7.9M+30.5M = 91.36M shares – up 72%
• FY10 earnings over $9M
• $0.1+ eps
• dividend $0.04-.05 based on 40-50% payout which is low for an Australian company and has room to go higher in coming years.
• dividend yield 5-6.3%
• I guesstimate $13M NPAT by 2011, based on p15 of offer document on the completed expansion ‘Forecast to deliver $13 million per annum increased sales and $4 million per annum EBITDA by FY2011‘. Interest will be going down thanks to the capital raising, the depreciation on the new plant will be around $.5M and tax $1M so if we’re lucky $2.5M drops to bottom line, plus new capacity from the proposed further extension and focus on costs gets $13M at a stretch. Time will tell.

One good possible outcome

• PSH gives a shot at a 10% yield in two years. $0.14 eps with payout raised to 60% gives an 8.4cent dividend.
• Possible 100% capital gain from double to $1.60 based on those FY11 eps of $0.14 and P/E of 12.
• Expectation of 100% capital gain and 10% yield in 2-4 years.

One not so good

• Global economy contracts, double dip recession starts in 2011, equities are around the same price as now after being both higher and lower over the next 3-4 years.
• Dividend is suspended again, this time for a couple years.
• Margins shrink due to increased international competition.

Business

Chemical, comprising soda ash and sodium bicarbonate and the quarry and mineral business.

Soda

“We’ve indicated returns from our soda ash business are suboptimal as a result of long-term legacy contracts that don’t meet our hurdle rate. With the recent renegotiation of a number of these contracts and further renegotiations underway, we expect to improve returns in this business. We don’t expect to achieve the hurdle return in the current year, but on the basis of the renegotiated contracts, we’re confident our soda ash returns will exceed the hurdle RONA in the medium term.”

All

“We expect the main drivers of our improved profit to be the sales from our 2009 sodium bicarbonate plant expansion and the uplift in revenue from our renegotiated soda ash contracts, although the full-year impact of a number of these contracts won’t be realised until the 2011 financial year. We also expect continuing strong sales of aggregate into the civil and construction markets in Adelaide, including the major Northern Expressway project. Operationally, we expect these commercial outcomes to be underpinned by the improved reliability of our chemical assets following our investment under the Way Forward Plan, and by a lower cash operating cost at our mine reflecting the reduction in the rate of overburden extraction.”

Another Investor’s Opinion on Penrice

The Positives

1. New Chairman announced with rights issue. David Trebeck will IMO do a great job.
2. Rights issue does set the company on a much firmer financial footing.
3. Bi carb plant upgrade should grow the business base.

The Negatives

1. The rights issue is significantly dilutive. My model suggests that on taking the full number of shares that will be in issue (Today 52,963,202 shares to new 91,361,523 shares) the EPS will drop to around 10.5c from above 14c in 2009. [I agree]
2. The Stock levels are outrageous at 2009 year end. It is moved from 14.5m in 2006 to 55.9m in 2009. That’s up by around 300% yet turnover has gone up 21% in the same period. You can blame it on Schist and development of the mine etc but in reality a company this size cannot afford it. [Totally right, inventory jumped 50% YoY to $56M, want to see that reverse this year]
3. After this rights issue I am not sure that this share can make me a lot of money. I would be a seller @90c which is a composite of 2shares @1 and 1 share @70c.
4. Dividend yield and payment of dividends has not been outlined in the announcement. [I disagree with that one, I thought this on p3 of the offer document made it clear when the said they expect to exceed $9M NPAT in FY10 and reinstate 40-50% dividend payout.]

Via HC PSH board 27/10/09

I read somewhere that the Soda plant is old.

Disclosure: Long Penrice Soda (PSH.AX) This is not a recommendation for anything, except underarm deodorant which I highly recommend people working amongst others use.  Penrice is a small cap of $53M with an EV of $140M and falling due to the capital raising, add in low volume and we’re talking WARNING WILL ROBINSON stay away unless you’re comfortable qualitatively and quantitatively analysing a stock.

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