Bottom Line: Bowthorpe queries

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The Independent Online
ANY rights issue that involves raising cash for shares rated at a prospective p/e ratio pushing 20 will raise eyebrows. But doubts about Bowthorpe's call for pounds 65m are only deepened by the fact that the company has no immediate investment plan.

It has funded a string of acquisitions over the years through profit-generated cash but latterly has had to resort to borrowings. Gearing has risen to 55 per cent. The cash call will clear debt and give Bowthorpe scope to snap up more of the kind of medium-sized company it has bought to date.

However, it will be hard to reinvest the rights proceeds in the short term to earn anything like its current return on assets. Bowthorpe is forecasting a healthy 18 per cent increase in pre-tax profits for this year, but the lion's share of that gain comes thanks to exchange rate movements. With a large exposure to Germany, a question mark hangs over the strength of Bowthorpe's underlying ability to grow profits, even before the impact of the rights issue.

A thoughtful management team has produced rock-solid profits growth during the past few recession-hampered years. For that reason this rights issue deserves support.

But with more shares in issue, the company will have to work hard to squeeze out the kind of earnings growth shareholders now expect, which could hold back the shares.