The Motley Fool

Should you buy into the desperate Webjet capital raise?

Even the most beaten down shares from the COVID-19 pandemic can find buyers if priced low enough.

It appears shares in Webjet Limited (ASX: WEB) will emerge from its trading hibernation soon as it officially kicks off its deeply discounted capital raising.

The embattled online travel agent went into a trading halt two weeks ago as it scrambled to secure enough interest for its $275 million capital injection.

Big discount

The new shares are priced at $1.70 – a whopping 55% discount to its last traded price. But desperate times call for desperate measures.

The group needs the cash to keep the lights on after global air travel fell from the sky. Governments around the world have clamped down on travellers to control the coronavirus outbreak.

The question is whether shareholders should participate in the partially underwritten entitlement offer, which is expected to bring in $174 million to $231 million.

Why investors should buy new shares

I think shareholders should if they can as they are unlikely to be able to buy the shares this cheap again – at least not in the foreseeable future.

While most shares will fall to the capital raising offer price or even below, I suspect Webjet will remain comfortably above for a few reasons.

First, the offer is so deeply discounted that I think its unlikely to crash below that level unless investors believe the stock is in a near-term terminal decline. But no one would participate in the cap raise if they did, so it’s a moot point.

Other reasons to support Webjet

Further, there is more demand for new discounted Webjet shares than there is supply, reported the Australian Financial Review.

If this is true, there will likely be buyers lining up to buy the stock if it slumps close to $1.70. I am also not sure if there will be many willing sellers at that price level.

I am also glad to see that Webjet doesn’t need to use plan B to raise fresh capital. There were fears Webjet may need to use convertible notes issued to private equity firm KKR to get its capital raise away. Con notes are generally bad news.

Finally, companies that have successful raised new capital or debt have seen their shares surge higher. Its relief that the companies have access cash to pull through the coronavirus recession that is driving interest.

The Cochlear Limited (ASX: COH) share price and Qantas Airways Limited (ASX: QAN) share price are just two examples.

Foolish takeaway

If Webjet can successfully close its cap raise (and all indications are positive), the group will move to a $140 million net cash position.

“This provides Webjet with pro forma available liquidity of $470million as at 29 February 2020 based on unaudited management accounts including undrawn revolving credit facilities, which is expected to represent sufficient liquidity to the end of 2020, even assuming severe travel restrictions continue,” said the company in a statement to the ASX.

But management is deferring its interim dividend which was meant to be paid this month. It will decide in October if it will pay this dividend.

While that isn’t good news, it’s a small price to pay to ensure that Webjet can make it through to the other side of the crisis.

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Motley Fool contributor Brendon Lau owns shares of Webjet Ltd. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited and Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.