The Capitol Health Ltd (ASX: CAJ) share price has plunged more than 12% to 14.5 cents today after the diagnostic imaging company announced its first-half profit results, along with details of a $38.5 million capital raising.
Highlights from the profit result included:
- Revenue up 3% to $80 million
- Core radiology EBITDA down 15% to $9.3 million
- Core radiology EBITDA margin down 253 basis points to 11.6%
- Borrowing costs jumped 45% to $3.4 million
- Net profit after tax remained flat at $2.2 million
- No interim dividend was declared
Key details of the capital raising:
- Institutional placement of 250 million shares at an offer price of 14 cents per share
- 25 million additional shares to be issued via a share purchase plan to raise another $3.5 million at an offer price of 14 cents per share
- Shares on issue are expected to increase by around 53% to 798.1 million shares.
- Net debt expected to reduce from $88 million to $51.7 million.
The announcement of the capital raising is undoubtedly disappointing news for investors and the scale of the capital raising means many retail investors will find their holdings significantly diluted. Despite this, today's news should not come as a total surprise as the writing has been on the wall for sometime that additional capital was going to be needed to strengthen Capitol Health's fragile balance sheet.
On top of the capital raising, the company is also pursuing asset sales worth around $4 million to further pay down debt and improve cash flow.
Turning to the operational side of the business, Capitol Health did note that trading conditions have improved over recent months with underlying growth returning to the diagnostic imaging market for two consecutive quarters. Encouragingly, the improved momentum has continued into January and the company is optimistic for a much improved second-half performance.
Outlook
On the back of more favourable operating conditions and an improved regulatory outlook, Capitol Health re-affirmed its recently issued FY17 guidance for operating revenue of $162-$165 million and core radiology EBITDA of $19.5-$21.5 million.
Is it a buy?
Although Capitol Health looks like it is moving in the right direction from an operational point of view, I still think it may be a little premature to buy shares in the company right now.
Today's capital raising announcement means the company will need to dramatically improve profitability before investors will see the benefit of this from an earnings per share or dividend per share perspective.
