Over the past six months, shares in Victoria (LSE: VCP) have lost nearly half of their value after a botched refinancing attempt.
At the beginning of November, the company announced that it was planning to issue €450m of high-yield bonds to refinance some of its existing bank facilities, used to fund a series of acquisitions over the past few years.
Investors wanted to know why management would want to refinance bank facilities with more expensive high-yield bonds. Rumours began to circulate that the only reason why the company would damage its finances in this way is because management had fallen out with banking partners, which could hint at further problems in the business.
As investors rushed for the hills, the company pulled this bond deal and executive chairman Geoff Wilding pinned the share price collapse primarily on unclear communications. Since then, the business has been in damage-control mode, trying to reassure investors that its balance sheet can support Victoria and the group does have the full support of its banking partners.
Half-year results from the company, which were published today, show net debt at 29 September of £342.7m, representing 3.09x earnings before interest tax depreciation and amortisation (EBITDA). That’s significantly above what I’d be comfortable investing in.
Usually, I overlook any companies with a net-debt-to-EBITDA ratio of more than 2x. The half-year report also says the firm may consider revisiting its bond issuance plan in future “if appropriate.“
So overall, even though the city is expecting Victoria to report earnings per share (EPS) growth of 80% for the current financial year, leaving the stock trading on a relatively attractive PEG ratio of 0.6, I’m not buying because I’m worried about the high level of debt the company has taken on recently to fund acquisitions.
In my opinion, FTSE 250 building firm, Travis Perkins (LSE: TPK) seems to be a better buy.
Unlike Victoria, this company isn’t struggling with a large pile of debt. Net gearing was just 17.4% at the end of the last financial period. On top of this, the stock is changing hands for a relatively undemanding 10.4 times forward earnings, and supports a dividend yield of 4.3%, which is comfortably covered 2.3 times by EPS.
Unfortunately, Travis Perkins has lost around a third of its value already in 2018. Investors, it seems, are concerned about the company’s exposure to the UK consumer and the domestic housing market, both of which would suffer significantly in any economic downturn.
However, so far, group sales have remained robust with like-for-like sales increasing 4.1% during the third quarter. Obviously, at this point in time it’s impossible to tell how the company will fare over the next few years as Brexit unfolds. But I believe that the group’s strong position in the market, coupled with its portfolio of well-known brands, will help it weather any storm and come out the other side in a stronger position than many of its peers.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.