Chagala Group (CGLO.L): Share placing appears crucial for bond refinancing

Price: US$1.25

Market cap: £20m

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• Placing to raise US$5.75m: On 6^th September Chagala announced a placing and open offer to raise gross proceeds of US$5.75m (US$5.5m net) at a price of US$1.00, a 50% discount to the closing price before the announcement. The funds will be used to finance the repayment of the group’s outstanding bonds and strengthen the balance sheet. The placing and offer close on 23^rd September. 

• Bonds due to be repaid in December: Chagala has outstanding KZT denominated bonds totalling US$6.6m, which are due to be repaid on 1st December 2016. In fact, the group will need to show that it has the funds available to repay the bonds by 15th October, to avoid being in default. However, the ongoing shareholder dispute has severely limited the group’s refinancing options, given the timetable of most banks’ credit approval process; hence the need for the placing and offer.

• Potential loss of revenue: Additionally, the majority of Chagala’s rental contracts and accommodation agreements require the group to be financially solvent to avoid defaulting on its leases as well. As a result, if the placing and offer do not proceed it is likely that the group would also suffer a significant fall in ongoing revenue, on top of the negative cash impact of the bond refinancing and become effectively insolvent.

• Injunction filed by TIPP Investments: Chagala announced on 19^th September that TIPP Investments has filed an application for an injunction in the High Court of the British Virgin Islands, to suspend the placing and offer until 27^th This is the date of a hearing filed by TIPP, against the company and its board. TIPP claims the placing and open offer “would prejudice TIPP’s rights as a shareholder”. This is being contested by Chagala in a hearing likely to take place on 22^nd September, the day before the placing and offer close.

• Stronger balance sheet and higher dividends post placing: However, if the group is able to proceed with the proposed placing and open offer it will have the cash proceeds to be able to repay the bonds on maturity, thereby avoiding default on the leases as well. With a significantly strengthened balance sheet it would also be able to increase the dividend payout. We are currently assuming that total dividends remain flat at US$1.2m in 2017-18, but with free cash flow of US$3m forecast for this year and £5m in 2017, even without the bonds being refinanced, we would expect to see a significant increase in the payout.

• Dividend yield could rise sharply: The shares have barely traded in the past few months, partly due to the current lack of free float and partly the ongoing shareholder dispute. However, if the fundraise were successful and the dividend payout were increased, the yield could potentially double from the current level of c.5%. However, in the absence of the placing and open offer, it is difficult to see how the group would be able to refinance its bonds and remain a going concern.