As we mentioned here, Maui on NFK board and possible conflict of interest
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NFK omitted details of its interest cover debt covenant when disclosing other covenants for the first time at its FY09 results presentation. We obtained this information later on and are concerned to see headroom is slim, with interest cover of 5.0x compared to the 4.5x covenant limit. This suggests a 10% fall in EBITDA will cause a breach. We think this is the real reason behind NFK’s “proactive” renegotiation of its July 2010 debt facility. The interest cover covenant seems pretty tough and in normal conditions it would be possible to negotiate a more lenient limit. Behaviour of the major banks suggests this will be difficult and expensive in the current environment. Successful renegotiation of the facility is key to reducing risk. Otherwise an equity raising may be necessary. Shortly after NFK’s results were released, New Zealand private equity firm Maui Capital took a 5% stake in the company. Maui is the same private equity group that floated NFK in 2007 and has two directors on the Board – NFK Managing Director Glenn Wallace and Non-Executive Director Paul Chrystall, who is Managing Director of Maui. Despite these strong ties, NFK announced at the time that it was unaware who purchased the 5% stake. Corporate governance could be an issue. Maui has since increased its stake to 17% via a call and put option arrangement with another substantial shareholder. This may be a blocking manoeuvre to dissuade Monadelphous (MND), which owns 12.4%, from making a takeover bid. Alternatively, Maui may intend to re-privatise the company. The best interests of NFK shareholders and Maui Capital won’t necessarily be aligned, presenting a conflict of interest for Wallace and Chrystall. Slim interest cover headroom is concerning but we draw comfort from obvious corporate interest in the company. NFK remains undervalued but is only suitable for risk tolerant investors. Hold.
NFK Price at posting:
56.2¢ Sentiment: LT Buy Disclosure: Held
