Travis Perkis: into the abyss?

We saw Travis Perkins management last week. The company is a supplier to the building and construction industry and since the acquisition of Wickes is also a player in the DIY market. Clearly not a great place to be in right now.

It was a very odd meeting, perhaps the strangest of all management meetings I have attended. In the week or so running up to the meeting there had been a raft of rumours about an iminent rights issue (the company has debt issues) in both the press and the stockbroking community. A number of broker notes had even been put out running the numbers on a rights issue.

On Thursday the company released their results - tough end markets, revenues down etc. But no rights issue announcement. Clearly some investors were rather irritated by this as the investment case in the company had become rather predicated on management sorting out the balance sheet.

Well, according to management, they had no idea that investors were expecting a rights issue. Rather they thought that their advisors and corporate brokers were merely trying to generate commissions and fees by encouraging them to come to the market (which is probably true, but beside the point here).

What made the meeting so odd was that the CFO then went on to explain why he thinks they don't need a rights issue. According to his model, they will be tracking down -25% on volumes this year, and that will keep them within their covenants. When we asked him about the sensitivites, it was stated that should they be at -30% they would be in trouble.

Now, to my mind this is more than enough evidence to support the case for a rights issue. His model was clearly based off past experience (i.e. the 1990s recession). This time around, housing valuations were more extreme at the peak and now are tracking down at a much faster rate. Therefore, the difference between -30% and -25% is, quite frankly, just noise. Management reckon they will still be able to come to the market if and when their lead indicators turn down. I think they underestimate the speed with which the share price will fall, thereby eliminating this option. Perhaps they will be OK, but its not a risk I would take right now.