Laird (LSE: LRD) is unpopular with investors today as the global technology company has proposed a £185m rights issue and cancelled its dividend. Although trading has been in line with the update issued in October, Laird is seeking to bolster its financial firepower via a fundraising. While this could cause a degree of pain in the short run, could Laird eventually prove to be a sound buy?
Underlying profit is expected to be around £50m for the full year, with the company’s operational improvement programme on track. This will deliver annualised savings of at least $20m from 2018, with around $15m expected in 2017. This should help to improve Laird’s financial performance and also aid its financial position.
Encouragingly, the Wireless Systems division has been able to integrate Novero within the Connected Vehicle Solutions (CVS) business, which is expected to be profitable in 2017. However, the Performance Materials division still faces a difficult outlook and more work is needed in order to improve its financial performance.
Laird expects net debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) to be within the group’s covenant of 3.5 times for the full year. However, Laird’s headroom is somewhat limited and so a rights issue to raise £185m seems to be a prudent option to take. This should provide Laird with a net debt-to-EBITDA ratio of between one and two over the medium term, which will allow the company to invest for future growth.
In addition, the cancellation of 2016’s final dividend may be disappointing in the short run. However, it should provide the company with greater financial strength through which to improve its performance. And with dividends due to return in 2017 at 33% of earnings, rising to 50% of earnings in the medium term, Laird remains a relatively appealing income play for patient investors.
Clearly, Laird is enduring a difficult period, but other technology companies have done likewise and emerged in a stronger position. For example, Imagination Technologies (LSE: IMG) posted a loss last year and endured a challenging number of years. In fact, from 2012 to the end of 2015 its share price declined by around 77%. In 2016, however, the price has risen by 63% as its turnaround begins to gather pace.
Looking ahead, Imagination Technologies is forecast to return to profit this year and record a rise in its bottom line of 35% next year. This indicates that further share price growth is ahead. While Laird is some way off that level of performance, today’s rights issue should help to point it in the right direction. It provides the company with the financial strength to invest for future growth, as well as to reduce its risk profile. As a result, buying Laird now could be a sound move, although short-term volatility is highly likely.
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Peter Stephens owns shares of Laird. The Motley Fool UK owns shares of Imagination Technologies. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.