Eco Investor August 2017

Pre-Profit Securities

Redflow Raising Leaves out Retail Investors

Redflow is raising up to $14.5 million at a very low 10 cents per share but the offer is not available to its retail investors. The shares were trading at 16 cents before the capital raising, and the last time they were 10 cents was three years ago.

The capital will be raised in three tranches. There is a placement to sophisticated and professional investors to raise up to $10.5 million in two tranches of $5.82 million and $4.68 million, with the second tranche needing shareholder approval. And, also subject to shareholder approval, executive chairman Simon Hackett will convert notes to $4 million worth of shares.

Directors Howard Stack, David Knox, Richard Aird and Bruce Brown will also be issued shares at the rock bottom price of 10 cents each. It seems everyone is getting rock bottom shares except the company's retail investors, many of whom have long supported the company. But now their only role is to approve everyone else loading up cheaply.

It will be interesting to see how they respond and if their royalty is affected. Certainly they will remain very loyal to the battery technology, but some may have second thoughts about the board. The shareholder meeting is on 25 August.

The board did not say why it excluded its retail investors. It only issued a vaguely worded paragraph that does not say anything of substance - "In structuring the capital raising, the Board balanced various considerations including the cash position of the Company, the availability of capital, timing and complexity of the raising, market feedback and professional commercial advice. Ultimately, the Board concluded that the current capital raising structure was in the best interests of shareholders as a whole. The Board values the continuing support of shareholders..."

Redflow's 2015-16 annual report had 5,400 shareholders with parcels of 100,00 shares or less.

For my own part, I voted my small holding in favour of the first tranche, as it is good to bring in new capital and hopefully new investors; and I voted in favour of the chairman converting his loan at 10 cents per share as he has proven his financial commitment to the company.

I voted against all the other resolutions. The second tranche, or at least part of it, should have been offered first to current retail investors and the shortfall then offered to other investors. And I voted against the approval of shares to the other directors. Some deserve the shares, but they all should have given more acknowledgement to their long term retail supporters, and at the least they should have given a better reason why they excluded the retail investors.

The cash is for working capital and to implement projects from the strategic review, which are seen as critical to the future of the company.

The company said the process of disengaging from its former manufacturing location in Mexico is substantially complete. Manufacturing will resume in south-east Asia toward the end of the calendar year.

Its new manufacturer is MPTS, which Redflow said has a track record of manufacturing similar componentry, a lower cost and highly competent labour pool, strong skills in precision manufacturing, and a location closer to the markets for the batteries. MPTS will deliver an immediate 10 per cent reduction in per-unit manufacturing and delivery costs, it said.

On the sales front, Redflow had an improving June quarter with revenue of $758,000. This compares with $234,000 in the March quarter, $308,000 in the December quarter, and minus $64,000 for the September quarter last year. Thus revenue for 2016-17 was $1,267,000. Revenue for the previous full year, 2015-16, was $909,000.

Redflow's share price has been trending down since June last year when it had a five year peak of 68 cents. Sales need to head up much more strongly, or 10 cents per share may start to look expensive. (ASX: RFX)







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