Investors are keeping their ear to the ground when it comes to profit warnings this confession season but there's something else they should be keeping a close eye on – and that's capital raisings!
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is close to multi-year highs along with a host of other stocks like the Magellan Financial Group Ltd (ASX: MFG) share price, Afterpay Touch Group Ltd (ASX: APT) share price and Macquarie Group Ltd (ASX: MQG) share price even though the broader market is on the backfoot in the past few days.
This is the perfect time for some companies to be using their strong share prices to raise capital, particularly for acquisitions that can give the bidder the next leg up in earnings growth.
Impact of capital raisings on share prices
Investors should pay attention to this because cap raises often depress the share price of the company going cap in hand to the market. This is because these companies have to sell new shares at a discount to their current market value.
Naturally, companies raising new funds can't be put in the same boat as those issuing a profit warning and investors should more fretful of the latter given the recent examples of Flight Centre Travel Group Ltd (ASX: FLT) and Blackmores Limited (ASX: BKL).
However, companies trading on a high should be closely watched to see if management has the propensity to make an acquisition.
A likely candidate
One company that should be put high on this list is construction services group NRW Holdings Limited (ASX: NWH).
The NWH share price has not only more than doubled in the past year to hit $2.94, which is its highest since 2012, but Deutsche notes that there could be two potential targets that could fall into management's lap.
"It is rare the planets align where a company's valuation multiples are at historical highs, it trades at a significant premium to peers, its outlook and execution are excellent and there are two motivated sellers of businesses that make strategic sense to acquire," said the broker.
"However, in our view, this is the place where NWH finds itself."
The first business that makes strategic sense of NWH to acquire is the mining services division of Downer EDI Limited (ASX: DOW), while second is the national contract-mining, maintenance and civil-construction business from BGC Group.
BCG Group announced in February this year that it had started looking at options for its BCG Contracting business.
There is no word that NWH is even sniffing around these businesses and I am certainly not suggesting investors read too deeply into this speculation.
Nonetheless, it's interesting food for thought and something investors should keep an eye on.
