What happened to the Collins Foods share price?
Shares in Collins Foods Limited [ASX:CKF] were down almost 10% today, as the fast food operator came out of a trading halt it initiated just two days ago.
If you’re not familiar with Collins Foods, it operates over 200 KFC stores worldwide, with 194 of those in Australia. It also owns the Sizzler restaurant chain in Australia and is its franchisor for Asia.
Why did CKF shares drop?
Late last year, Collins Foods made its first foray internationally, picking up 11 stores in Stuttgart and Dusseldorf in Germany. And yesterday, it announced it was expanding further, having entered into a binding agreement to buy 16 KFC stores in The Netherlands.
As part of the deal, Collins Foods announced that it will develop another 20 stores by the end of 2021. To fund the purchase (and its future store rollout), the company undertook a $54.5 million capital raising at $5.25 — 10% below its previous closing price. That’s why the share price fell.
What now for Collins Foods Ltd?
Collins Food is clearly aiming for growth. But it can’t finance its expansion by debt alone. The company will also issue new shares — as it did with this placement — to help fund its growth.
While this placement was for institutional shareholders, the company also announced an upcoming share purchase plan for retail investors. If they don’t take part in this offer, it will dilute their current holdings.
Shares typically trade down to the issue price of the placement price, so new shareholders might use the share fall as a place to enter. But shareholders need to be aware that the company might use more share placements in the future to fund future growth, leading to another hit to the share price.
By Matt Hibbard