Daily ShareChat: Skellerup Group

Rubber products company Skellerup Group's fully underwritten $21.5 million rights issue will resolve its debt issues, says Forsyth Barr analyst John Cairns.

The two-for-five rights issue at 40 cents a share has meant he had reduced his valuation from 82 cents to 74 cents a share.

"Over the last two years, Skellerup has reduced debt by $41 million to $65 million through a combination of equity raising ($20.6 million), divestment of non-core businesses ($9.6 million) and working capital initiatives," Cairns says.

"However, with a 2009 gearing ratio of 48%, debt levels are still too high for the current environment and we believe that the decision to undertake a further capital raising is a positive development, reducing gearing to a clearly sustainable level of 28%," he says.

Skellerup's agri business, which includes supplying consumable products such as liners and tubing to the global dairy industry, is relatively defensive. "Despite the weak global milk price, demand for diary consumables has been relatively steady."

But global demand for the company's industrial technical polymer products remains soft, although there are some early signs of re-ordering as the amount of inventory at all levels in the supply chain has contracted, Cairns says. However, new technical product launches, such as driveshaft couplings, water-flow regulators and gas diaphragms targeting markets in Europe and the US, will enhance the company's medium-term growth profile.

BROKER CALL:  Forsyth Barr rate Skellerup Group (NZX: SKL ) as hold.

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