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Why AGA Rangemaster Group Plc & AFC Energy plc Are Falling Today

AGA Rangemaster (LSE: AGA) and AFC Energy (LSE: AFC) caught my attention in early trade today as they fell 12% and 6%, respectively. The former is unlikely to bounce back any time soon, in my view, while AFC had already recouped some its lost value before midday. 

Bidding War

After the market closed on Friday, Whirlpool announced “that, after full and careful consideration, it does not intend to make an offer to acquire the entire issued and to be issued ordinary share capital of AGA”.

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Whirlpool reserves the right to make or participate in an offer for AGA within the next six months following the date of the announcement, it added — but by then AGA may well already have new owners. 

It’s easy to speculate that there might have been problems with the take-out price and the financing mix that Whirlpool was ready to offer. 

After all, the valuation of AGA dropped today to a level that is in line with the value per share of the offer that was put forward by US-based Middleby in mid-July. Back then, the boards of Middleby and AGA announced the terms of a recommended cash deal, which was agreed at 185p for each share of AGA.

A bidding war is now unlikely. Frankly, the shares of the target look fully valued at anything above 150p a share, given that they currently change hands at a premium of 80% against their undisturbed price of 104.25p as of 16 June. 

Would you be better off investing in AFC, then?

Volatility

AFC is a great recovery play, according to a top-down approach. Based on fundamentals, the firm is delivering — but the problem is just how much you are willing pay for its forward earnings. Incidentally, no specific news pushed today the stock in a rising market today.

The shares, which traded around 10p in early January, now change hands at 35p, but only a couple of months ago they were priced at their 52-week high of 60.8p. I am concerned about thin volumes, too, and this is another element that suggests caution. 

On Thursday, AFC announced that it remained “on target to deliver on each of its two final Milestone’s at Stade, namely Milestones 10 and 11, in accordance with earlier timeframes“. The stock rose as much as 8% on the day, based on a trading update that essentially added little to the investment case.

Ultimately, you must be prepare to add volatility to your portfolio if you decide to snap up AFC stock.

Even under bullish estimates for earnings, its stock would trade on projected net earnings multiples of between 25 times and 45 times, according to my calculations. Meanwhile, its market cap of £100m implies a price-to-book value multiple of 10 times. My simple advice is to keep an eye on break-even for free cash flow, which might signal the right opportunity to buy into a sound growth story. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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