Amala Foods PLC (LON: DISH) dropped 42% at one point this morning on the announcement of a deeply discounted share placing. The stock is back up again to be only 30% down at pixel time. A reasonable expectation is continued volatility in the Amala share price as the market digests the deal.
Amala is in the meat replacement food business. Plant-based foods that mimic meats that is. This is of course a highly fashionable sector to be in. The grand problem for any company here is to achieve scale. After the production of a decent product that is. Food products always are about scale, the ability to gain the necessary distribution through the big channels like the supermarkets.
Gaining scale means cash burns, run rates and a landrace to gain that scale and that distribution. That all requires capital. Which is just what Amala has gained more of this morning.
Amala’s share price was, yesterday, at 0.67 pence. Then 0.40 pence at 8 am, it has risen again to 0.48 at pixel time. The cause is a deeply discounted share placement at 0.3 pence, the announcement is here. This has raised £200,000 for the company and there’s a further £100,000 loan due in November.
Given the company’s claimed low run rate, or cash burn rate, this will finance operations until June of 2022.
The drop in the share price at Amala is partly simply mathematics, as it always is with a share placement and shareholder dilution. The company has 300 to 400 million shares in issue (depending on whether we take pre- or post- new issue) and another 70 million have just been placed. The placement price for the new Amala stock is 0.3 p, so that is a steep discount to the prevailing price of 0.67 before that issuance. There are more shares in issue, the cash price paid for the new ones is less than the market price, each and every share is not worth less.
It’s what happens next that matters of course and that’s what traders should concentrate upon. It’s possible for this to go either way. One reaction could be that if the company’s selling new stock at 0.3 p then that’s what it’s worth. Another is that the business idea – those plant-based meat substitutes – is so obviously good that with more capital inside the company it’ll clearly be worth more.
Gaining more capital to pursue a good business idea can indeed be positive for the share price that is. As with the Amala share price gaining back some of the overnight losses already this morning.
The price is likely to stabilise only once the full implications of the deal and the financing are chewed over. We should probably expect continued volatility until then.
The Amala Foods share price drop is partly just that mathematical effect of the issuance of new stock at less than market price. What actually matters after that is the general view of whether the capital raise increases the value of the company overall or not.
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