This is a stock that has been presented by some as a great buying opportunity (and I must admit I actually fell for that narrative for a while), but which is in reality a bad company on the verge of bankruptcy.
For starters, a very important technical event happened today, the stock broke through the support line to an all time low. If it weren’t for the media hype, it would have happened way sooner, but now that it finally did, it pretty much shows where the stock will likely be going from now on.
Fundamentally, it’s plain and simple a bad company to invest into. I know most of my readers are from Croatia and nearby countries, but even those who are not can see how bad the company is doing just by noticing the amount of red color on this page http://www.mojedionice.com/fund/IzvFundOsn.aspx?sifSim=ddjh-R-A
What happened that caused such drastic price oscillations? Well, the company announced a secondary offering to get out of debt. Some people claimed the offering would go for 40-50kn per share, which caused a significant price rise. Until it was discovered it would go for 20kn, and that nobody in their right mind wanted to pay even that for a share that’s going nowhere fast. So the state intervened and pretty much took most of the offering upon itself, meaning the company will now be under absolute state control. And we all know how that goes. For those that don’t, a very likely scenario is privatization for 1kn for the whole company, or a complete shutdown alltogether.
Why would such a ting happen? Well, for starters, the offering is about to raise 80Mkn, 30 or so of which are already reserved for layoffs. The rest will bump the book value of shares to about 25kn, thereby reducing the debt to capital ratio from current 1500% to barely noticeable 500% or so (I believe readers will forgive me for approximate numbers, since they’re so horrible that even splitting them in half wouldn’t make much of a difference).
The only thing that goes for this company is the prospect of getting a few big business deals in the defence industry, as it has been promised a 150% offset for its APC manufacture by Patria of Finland. Another big potential deal is upgrading Kuwaiti tanks manufactured in the former Yugoslavia. Both of those prospects are, in my opinion, false. While it is true that this company was hemorrhaging less money when making those APCs than when it was not, it actually showed that even in the best case scenario the profitability of this company was near zero. And that was at a time when the company debt was only between 100% and 200% of its capital base. In other words, even if Patria gets the UAE APC job, and even if the Kuwaiti guys decide to pick DDJH as the carrier for their tank upgrade, this company wouldn’t be able to make any profit on them even if the debt was 5 times lower than it is today. On the other hand, if these deals don’t come through, the company has less than one year to live considering its current financial structure.
So what we have here is two scenarios – a bad one which results in a company surviving for a year or two without generating any profit whatsoever, and a worse one which results in the company going bankrupt any day now. This is a company that should in my opinion be avoided, both from a technical and from a fundamental perspective. I admit, miracles do sometimes happen, but it the downside of this company is significantly bigger than any potential upside, which means it is best to be avoided.