Imtech: The End Game Of A Squeezed Lemon
Aug. 6, 2015 8:30 AM ET
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
•Imtech is in need for an additional funding of $85 million soon.
•Negotiations with financiers are not going smooth.
•Without additional funding, Imtech will go bankrupt eventually.
•It is fair to say that the end game of this squeezed lemon has began.
•In this article, I will discuss how investors should approach this stock.
About a year ago, I wrote this article about small-cap technical service provider Royal Imtech (OTC:IMTEF). The article was named: "Imtech: A Squeezed Lemon That Is Unlikely To Recover." At the time, Imtech's future was in serious jeopardy because of an acute shortage in cash. I discussed several possibilities for Imtech to raise additional cash. However, I also concluded that these measures would only provide a short-term solution and that it was unlikely that this stock was ever to recover from its fraud scandal.
A year later, speculation regarding Imtech's bankruptcy are back again. This time, Imtech has trouble to close a deal with the banks for an additional credit line of $85 million. Imtech needs this credit line in order to continue its day-to-day activities after a trading update in which the company announced that its financial results in the first six months of this year are likely to be a disappointment. Not surprisingly, Imtech's share price fell hard in the following days.
Another indication that Imtech's future is the development of its net interest bearing debt position. In the first three months of this year, net interest bearing debt increased to $460 million from $370 million by the end of 2014. Although Imtech disclosed that talks with the financiers are in an advanced stage, a deal has not been closed yet. This makes the market question whether Imtech is able to get the required funding.
The problem for Imtech is that it was as not able to improve their operational performance in the past year. Imtech is still losing money on its operations from continuing activities. Therefore, it is unlikely that the company will improve its need for cash anytime soon. In my opinion, any deal with Imtech's financiers will come at a high price. The financiers can force Imtech again to sell more assets or issue new shares in order to bring down net debt.
In my opinion, both the sale of assets or another round of issuing new shares will not make any difference for Imtech. The company's struggle to close a deal with the financiers for an additional credit line of $85 million proves that the financiers are running out of patience with Imtech. In other words, the end game of this squeezed lemon looks like to have started and shareholders are not being considered as potential winners in this 'end game'.
As I mentioned, Imtech reported net debt of $460 million in its latest earnings report. Changes are that this amount is even higher today. Due to a drop of 80% of Imtech's share price, the company's market cap dropped to only $150 million. Imtech's total net debt is more than double its market capitalization. In case of a mandatory sale of assets or bankruptcy, Imtech needs to raise at least $610 million to repay the financiers and cover its shareholders.
I seriously doubt whether Imtech will be able to raise this amount. The company's businesses are barely making any profits and potential buyers also know about the urgency for Imtech to sell its assets. As a result, the company is not likely to receive a decent premium for its assets. In case Imtech is not able to raise more than its net debt, shareholders will be left with nothing more than a worthless investment.
Analysts of Belgium-based investment bank Petercam agree with my analyses that Imtech is unlikely to match its net debt in an exit scenario. The investment bank lowered its price target for this stock to $0.11 from $2.75 this week. This shows that the market also expects Imtech to go bankrupt eventually and that there will be no money left to compensate shareholders.
Conclusion
How to play this stock? Imtech's share price already fell 80% this year. However, the share price will fall even further in case of a bankruptcy. In my opinion, a bankruptcy or mandatory sale of assets is inevitable. Therefore, the best way to play this stock is short. Please note that this company has limited trading options in the United States and that the shares are highly volatile. However, shares listed at the mid-cap index in Amsterdam, the Netherlands are quite liquid. Further, due to high volatility its market cap is subject to frequent and significant changes.
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