WH Smith, Asos and Hotel Chocolat are tapping investors for cash – should you buy or sell?

Analysts view pre-emptive cash raising for harder times ahead as a savvy financial move

Businesses are feeling the pressure of the coronavirus lockdown and, with sales stopped and costs mounting, many have turned to investors for help.

Listed companies have an easy solution when they are short of cash – they can ask their shareholders to buy more shares and shore up their balance sheets. In the past month, 32 companies have raised £2.7bn from markets, according to broker Peel Hunt, including the likes of WH Smith, Asos, Hotel Chocolat and Auto Trader.

Share auctions are typically not open to DIY investors, but can change the outlook for the companies involved. They also leave investors with a choice to make. Is this a signal to buy more shares in the companies they already own? Or should a call for cash be seen as a warning sign and time to exit?

Fundraising can create a stronger company, but can also be a signal of an impending collapse and a last-gasp attempt at survival.

Oliver Brown of RC Brown, a wealth manager, said investors must study the books and find out whether a company is raising money to bolster its balance sheet or to avoid bankruptcy. If the former, it is more likely it will come out of any recession in a stronger position if helped out with additional funds.

Some businesses that have come to market have done so because they suffered dramatic drops in revenues but are nonetheless high-quality companies. WH Smith, Hotel Chocolat and SSP Group, which operates food outlets such as Burger King and Starbucks, fit into this group and have raised close to £420m, according to Mr Brown.

“These companies are not suddenly going to go bust. But management made the sensible decision to raise money. The situation is manageable if they do this early on,” he said.

Asos raised money and told investors it was seeing strong demand for its products. This is a double boost for prospective investors as it puts the company in a stronger financial position while it also prospers during the lockdown.

There is a second factor that investors should consider, according to Nicholas Hyett, of broker Hargreaves Lansdown. The first stocks to raise money will have a first-mover advantage. “Investors still have cash and are willing to support companies through a temporary downturn. However, as time goes on, cash and patience will diminish and latecomers will find it more difficult,” he said.

Charles Hall, of Peel Hunt, said there was not enough demand from investors for all companies to raise money, so investors should be increasingly selective. The worst decision would be to back a stock that fails to raise enough to survive.

Mr Brown said any stock that was already in financial trouble before the consequences of the lockdown became apparent would likely fall into the category of struggling fundraiser. He said Aston Martin, which is in talks to sell 20pc of the company, might fit into this group. “It has a lot of debt and car sales were under pressure before the virus hit,” he said.

Companies listed on the main London stock market, excluding the Alternative Investment Market, can only raise up to 20pc of their value via fundraising. This would generally not be enough to rescue a business that was in severe distress, Mr Brown said.

Existing shareholders will suffer when their investments seek more cash as it dilutes the value of their shares and they end up owning a smaller piece of the company. However, the company should be worth more and be financially resilient.

“Pre-emptive stock raises should generally be positive. That could be key to survival in some of the harder hit industries,” Mr Hyett added.