While the world is fretting about a potential double dip recession in the US and loss of momentum in Europe even before austerity measures are kicking in, it should be clear to everyone the Australian economy will be battling its own little rough patch in the months ahead. Apart from an anticipated impact on government budgets and RBA interest rate policies, a significant loss in economic momentum also has the nasty habit of putting extra pressure on companies whose balance sheet is weak and vulnerable. This increases the risk for a nasty negative spiral, one that has in the past seen the likes of Clive Peeters disappearing from the stock market, while others such as Hastie Group ((HST)) survived, but at a significant loss for shareholders who where unaware or waited too long to exit.
In recent times investors have once again received multiple warnings that recessionary trading circumstances outside the mining and energy sectors can and will bring out worst case scenarios when profit growth remains absent and debt covenants come under threat for being breached. But it's not that companies who operate under more buoyant trading conditions are by default immune from such dangers. For example, infrastructure and mining services provider AJ Lucas ((AJL)) asked the ASX in late May for a temporary suspension of its shares while the company was negotiating a solution for its debt problems. At the time, it was estimated the suspension would only last up to six weeks. After six weeks, on the first of July, the board issued a statement it was investigating a significant capital raising, which would dilute shareholders in significant fashion.
It has been silent since, and we are now 12 weeks after the initial suspension and there is no sign of any such capital raising. Usually what happens under such circumstance is the bad news simply gets worse as staff grows ever so worried, suppliers are asking for extra guarantees and shorter payment arrangements (if not upfront), while fees from lending arrangements increase further and the company loses out on potential new contracts and revenues. In other words: things are only getting worse while no solution is being announced.
No wonder thus, analysts at JP Morgan declared on Monday the chances for the announced capital raising actually taking place are becoming more remote by the day and investors should brace themselves for asset sales instead. AJ Lucas is the largest supplier of drilling services to Australia's coal and coal seam gas industries as well as one of Australia's largest builders of long distance gas pipelines so there won't be a shortage of interested parties for the company's assets, but similar as to what happened with the recapitalisation of Hastie Group last year, investors who still own shares in the company must by now be really worried about what will remain of their original investment post the upcoming "solution", which to date remains the subject of market speculation and far from a certainty.
In the meantime, the ghost of Hastie Group is haunting shareholders in AJ Lucas. Hastie shares reached as high as $4.90 in December 2007. They had sunk as low as $1.00 when a recapitalisation had become unavoidable. Today the shares are one of many penny dreadfuls in the Australian share market with the price of the shares ranging in between 12c-16c. It's probably a fair assumption those shareholders who remained loyal throughout the company's battle for survival have now all but given up on regaining what went lost during the process of keeping Hastie out of the corporate graveyard.
AJL Price at posting:
$1.35 Sentiment: Hold Disclosure: Held
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