I think it is important to look at what the market is saying -
Enterprise Value = Market Capitalisation + Debt - Cash
EV E33 = $10m +18.6m - 3.4m = 25.2m
E33 will have the same EV after the rights issue.
Now let's look at the assets:
CMB is the jewel in the crown as it is one of the largest distributors of live and schucked oysters (both Sydney Rocks and Pacifics) in NSW. I think that this business has been built over the last 20 odd years and was a profitable and cash flow generative business. E33 paid $17.5m ($10.5m cash, $1.4m in shares and $5.6m in RCPS). At a price of 1 times sales it was probably fairly valued.
Troup Nursery is a key asset and they paid $3.5m ($1.0m in cash, $1.0m in shares and deferred consideration of $1.5m [covered by NAB letter of credit]). I think this valuation was too high but let's keep it as it is.
So, key asset purchases totalling $21.0m.
At an EV of $25.2m, and accepting the above values, the market is valuing the farming & other assets at $4.2m.
The amount paid for the E33 farms bought by the directors (James Garton, Mark Nagy & Guy Burnett) with payments of cash, shares, RCPS and deferred consideration was $25.0m.
By this analysis, the directors overpaid for the farming assets by $20.8m.
The market is saying that due to QX in Port Stephens and the loss of oysters at other farms (due to mortality from the floods or the oysters may never have existed if the due diligence stocktake of farms prior to acquisition was faulty) and the high running costs (group wages running at $1.2m per month) these farms are not valued as highly as what the directors paid for them.
What a great position E33 would be in if that $20.8m was still on the balance sheet.
This is all history as we know. The real question is what to do now.
Should shareholders exercise their pre-emptive rights and participate in this capital raise? Is it a smart bet or is it throwing good money after bad?
The fact that Mr Anthony Hall has effectively underwritten the rights issue is a clear indication that he sees value in E33.
E33 Price at posting:
3.7¢ Sentiment: Hold Disclosure: Not Held
