Aim-listed green company TEG is one of the biggest fallers of the day after a deeply discounted fundraising.
The company, which develops organic composting and energy plants, has raised £3.8m with a placing and open offer at 10p a share, after running into cashflow problems. These related to overdue payments from three existing sites in Manchester and a fourth plant to be constructed in Bolton. The new shares will represent around a third of the enlarged share capital.
The news has sent the shares down 11.25p to 12.25p but house broker Ambrian was trying to look on the bright side:
The cashflow implications of [these issues] make it very difficult for a company like TEG to continue expansion. This is especially so given the importance of demonstrating a certain level of free working capital when bidding for projects. Therefore, it is not surprising that management has decided to raise extra capital to reduce the pressure these externalities are having on the growth prospects of the company. We also note the directors have taken a 15%-20% pay cut in order to assist the company until the above issues have been resolved.
Although the price of the placement was at a significant discount, we would be surprised if the stock continues to trade at this level. We believe the additional capital ensures that the company can continue to build upon its assets in the short term, and thus reduce the risk of the growth element of the business model. Moreover, we forecast that its existing operating assets will generate over £900,000 in gross profits in 2011 alone, and are worth significantly more than 10p a share.
