Monthly Listed Investment Trust Report – Feb 2024

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A Listed Investment Company (LIC) is a listed investment vehicle that offers investors access to a diversified portfolio of shares in other companies also listed on the stock market.

Note: For comprehensive comparative data tables for LICs and ETFs please see attached.

By Claire Aitchison, Head of Equities & Funds Research

LMI Market News

Welcome to the first LMI Monthly Update for 2024. This edition will take a look at the market news for both December 2023 and January 2024.

As a bit of house keeping to kick things off, we have reclassified some of the LICs. We have removed the Australian/International Mixed Classification, which previously included four LICs – CDO, CDM, CAM and HM1. CDO, CDM and CAM have been reclassified as Mid/Small Cap Australian Equities and HM1 has been reclassified as International Diversified.

WLE Seeks to Pick QVE Up at a Discount to NTA
On 31 January 2024, WAM Leaders Limited ((WLE)) announced its intent to make an off-market takeover bid for QV Equities Limited ((QVE)).

Under the offer QVE shareholders will receive 1 WLE share for every 1.4675 QVE shares held. Based on the WLE share price as at 30 January 2024, adjusted for the December quarterly dividend of 1.3 cents per share, the implied value of the offer is $0.95. While this represented a premium to the share price, the implied value represents a discount to both the pre-tax and
post-tax NTA.

WAM Strategic Limited ((WAR)) is currently the largest shareholder of QVE, with WAR increasing its stake in QVE to 14.9% during 2023. While the premium to the share price should be welcomed by WAR shareholders, the fact that WLE is trying to pick up QVE at a discount to NTA should be a concern to WAR shareholders.

In addition to the announcement of the intention to make an off-market takeover bid, WLE proposed entering into an agreement to acquire 100% of QVE shares via a scheme of arrangement. The QVE Board rejected this offer. In the response to the WLE offer, QVE stated that it will be commencing a formal review of strategic options for QVE with a view to maximising value to shareholders.

The Company noted that the review is consistent with the Company’s regular evaluation of opportunities to create shareholder value.

VGI and RG8 Increase Buy-Back Program
In December, both VGI Partners Global Investments Limited ((VG1)) and Regal Asian Investments Limited ((RG8)) increased the capacity of the buy-back programs. The Companies can now buy-back up to 25% of shares on issue under the programs.

Both VG1 and RG8 have traded at sizable discounts for a prolonged period of time. The increased buy-back capacity is the latest in a number of initiatives implemented by the Companies to address the discount. The discount narrowed for both Companies in December, however long-term attractive risk-adjusted performance will be the primary contributor to a sustained improvement in the discount to NTA.

QRI Raises $41 Million
In December 2023, Qualitas Real Estate Income Fund ((QRI)) raised $41 million through the issue of 26 million units to wholesale and institutional investors. New units were issued at $1.60 per unit.

The Trust took advantage of trading back around par value after trading at a discount for a period of time to expand the unitholder base and increase the size of the Trust. The capital raised is to be invested in CRE loans in line with the Trust’s investment mandate.

In its recent monthly update, the Trust informed the market that in December the Manager refinanced a number of fixed rate loans to variable rate resulting in 99% of the portfolio now exposed to floating rate loans.

The move to floating rate loans now aligns the portfolio with the target yield objective.

The Trust paid a monthly distribution of 1.22 cents per unit for the month of January 2024. The increasing interest rate environment and the transition of the portfolio to variable rate loans has seen the distributions increase 27.4% for the current financial year period compared to the pcp.

MXT Raises $304 Million
Metrics Master Income Trust ((MXT)) has raised $304 million in recent months through a number of placements. In December 2023, the Trust raised $196.4 million through a placement to institutional investors. In January 2024, the Trust completed the Unit Purchase Plan (UPP) announced in December 2023. The Trust raised a total of $76.2 million via the UPP. In February 2024, the Trust announced it had raised a further $31.5 million through a placement to wholesale investors. New units issued under the placements were issued at $2.00 per unit.

The capital raised will be distributed to the three underlying wholesale funds that MXT provides exposure to. IIR recently published a review of MXT which is available on the IIR website for those that seek further information on the vehicle.

GCI Seeking to Raise up to $97.3 Million through Entitlement Offer
On 29 January 2023, Gryphon Capital Income Trust ((GCI)) announced it is seeking to raise up to $97.3 million through a 1-for-5 non-renounceable Entitlement Offer to eligible unitholders. The Offer includes an oversubscription facility, in which eligible unitholders that apply for units under the Offer in full may also apply for additional units in excess of their entitlement.

Any units not taken up by eligible unitholders may be offered to new investors.

The Offer is scheduled to open on 8 February 2024 and close on 23 February 2024. New units will be issued at $2.00 per unit, in line with NAV. GCI, like many of the fixed income LITs, is taking the opportunity to raise capital with the Trust trading at a small premium. This provides an opportune time for the Trust to expand.

The Trust is undertaking the Offer for the following reasons:

-Provide additional scale to expand the Trust’s participation in the RMBS/ABS market;
-Improve liquidity for unitholders; and
-Reduce operating costs on a per unit basis.

If the maximum new units are issued under the Offer, the units on issue will increase 20% to 291.8 million.

MGF Buying Back Options and Make Decision to Proceed with Conversion to Open Class Units
On 7 December 2023, Magellan Global Fund ((MGF)) announced that the Manager will acquire up to 500 million options (MGFO) on market at 10 cents per option ahead of the option expiry on 1 March 2024.

The number of options to be acquired increased throughout the month of December, with the Manager now seeking to acquire up to 750 million options. From the announcement on 7 December 2023 and the market close on 27 December 2023, the Manager had acquired 647.2 million options. The options have been a significant point of contention throughout 2023.

MGF stated that its decision to acquire the options on market was to manage its potential exposure to the options given the commitment to fund 7.5% of the exercise price.

MGF has also announced that it has decided to proceed with the conversion from closed-end units to open-ended units. The conversion is expected to be completed in Q2’2024, subject to the Manager’s assessment that it remains in the best interests of unitholders. The restructure is aimed at addressing the discount at which the vehicle has traded. Moving to an ETMF structure will provide unitholders the ability to exit and enter the fund at NAV.

AFI’s 1H’FY24 NPAT Down 8.3% but Interim Dividend Up 4.5%
Australian Foundation Investment Company Limited ((AFI)) released its 1H’FY24 results on 24 January 2024. NPAT was down 8.3% on the pcp to $150.1 million. The decline was primarily due to a decline in dividends/distributions received from companies in the portfolio with declines in dividends received from BHP, RIO and WDS.

Despite the decline in NPAT, the portfolio performed quite strongly over the period, with the portfolio (represented by the pre-tax NTA including dividends) up 8.0% for the 1H’FY24 and up 14.3% for the 12-months to 31 December 2023. The portfolio finished the year strongly buoyed by the market’s strong finish to the year.

The Company declared an interim dividend of 11.5 cents per share, fully franked, a 4.5% increase on the interim dividend paid for the FY23 period and the largest interim dividend paid in the Company’s history.

In it’s outlook statement, the Company stated that the investment team remain cautious. The Company stated “Cost inflation is easing but remains elevated, while consumer sentiment is weakening, and household savings rates are starting to decline amid the higher cost of living. It is also not yet entirely apparent that the recent moderation in interest rate expectations is justified.

Geopolitical factors, which have had little negative impact on the market more recently, may still have a role to play in investor sentiment as we move into this calendar year.”

The Company focuses on quality companies and will continue to take advantage of attractive buying opportunities presented by market weakness.

AMH Declares 1 Cent Per Share Interim Dividend
AMCIL Limited ((AMH)) released its 1H’FY24 results on 30 January 2024. Income from operating activities was down 5.3% to $5.2 million, with the decline largely a result of a decline in dividends/distributions received from the investee companies. This flowed through to NPAT which was down marginally on the pcp (-0.6%) to $4.1 million.

The Company declared an interim dividend of 1 cent per share, fully franked, in line with the interim ordinary dividend for the FY23 period. The change in the dividend policy in 2021 has allowed the Company to provide a more regular fully franked dividend.

The portfolio performed well over the period, with the portfolio (represented by the pre-tax NTA including dividends) increasing 9.2%, taking the 12-month return to 31 December 2023 to 18.6%, significantly outperforming the Australian market in 2023. After being a drag on the portfolio throughout 2023, the recovery in the share price of the largest position in the portfolio, CSL, assisted with the portfolio performance combined with the strong performance of a number of the companies in the portfolio including JHX and GTK.

MIR Increases Interim Dividend 14.3%
Mirrabooka Investments Limited ((MIR)) released its 1H’FY24 results on 18 January 2024. Total revenue for the period increased 9.7% on the pcp to $6.6 million, however lower nets gains on the trading portfolio and a loss from options saw income from operating activities down 18.9% and NPAT down 18.3% on the pcp to $6.78 million and $4.6 million, respectively.

Despite the decline in NPAT, the portfolio significantly outperformed the market over the 12-months to 31 December 2023, with the portfolio (represented by the pre-tax NTA including dividends) up 20.0%, with the portfolio being the best performer in its peer group over the 12-month period on an absolute return basis.

The Company declared an interim dividend of 4 cents per share, fully franked, a 14.3% increase on the ordinary interim dividend for the FY23 period.

In its outlook statement the Company stated that the team are cautious given some of the stock valuations in the portfolio and if market buoyancy persists the valuations will be heading for extremes, which will likely result in the investment team looking for opportunities that present more attractive long-term value.

Option Income Improves for DJW in 1H’FY24
Djerriwarrh Investments Limited ((DJW)) released its 1H’FY24 results on 22 January 2024. The Net Operating Result, which excludes the impact of open option positions was up 2.6% on the pcp to $21.3 million.

NPAT, which takes into consideration the open option positions, was down 40.7% on the pcp to $21.7 million. The decline in NPAT was driven by a large net unrealised loss on open option positions. We note that the positions are yet to be realised and therefore the loss may not be realised, however if these losses are realised this could impact the Net Operating Result for FY24.

The Company declared an interim dividend of 7.25 cents per share, fully franked, in line with the interim dividend in the FY23 period. The interim dividend largely reflects the Net Operating Result per share for the period.

On the back of the strong market performance towards the end of the year, the Company increased call option coverage to 39% by the end of December, entering the 2H’FY24 with a good amount of option premium in the book.

BKI NPAT Down in 1H’FY24 but Interim Dividend Up
BKI Investment Company Limited ((BKI)) released its 1H’FY24 results to the market on 16 January 2024. Ordinary revenue was down 3.7% to $34.95 million, slightly above the $33 million forecast provided at the AGM.

A smaller contribution from special investment revenue saw total revenue decline 9.0% to $36.11 million. The Company reported NPAT of $34.43 million for the period, down 6.4% on the pcp.

The Company declared an interim dividend of 3.85 cents per share, fully franked, the highest ordinary interim dividend paid in the Company’s history. At the AGM the Company stated that it intended to at least maintain the ordinary dividend of 7.7 cents per share, fully franked, for FY24, barring any significant unforeseen market disruptions.

NCC Issues Bonus Options
In December 2023, NAOS Emerging Opportunities Company Limited ((NCC)) announced the issue of Bonus Options with 1 Bonus Option issued for every 5 NCC shares held. The Options have an exercise price of $0.67, equivalent to the pre-tax NTA prior to the announcement, and will expire on 31 December 2026. The Company issued 14.6 million Options.

The Company issued the Bonus Options with the intent of growing the size of the Company.

NCC’s portfolio performance was weak in 2023 with the pre-tax NTA (including dividends) falling 9.2% over the 12-months to 31 December 2023. This compares to the ASX Emerging Companies Accumulation Index which returned -0.4% for the period and the benchmark (S&P/ASX Small Ordinaries Accumulation Index) which was up 7.8%. The poor relative performance when compared to the benchmark index in the short-and-medium term has contributed to the Company trading at a sizable discount to pre-tax NTA.

In the event the portfolio value improves, the discount will likely remain with the options potentially putting a cap on the share price until the options expire.

Independent Investment Research, “IIR”, is an independent investment research house based in Australia and the United States. IIR specialises in the analysis of high quality commissioned research for Brokers, Family Offices and Fund Managers. IIR distributes its research in Asia, United States and the Americas. IIR does not participate in any corporate or capital raising activity and therefore it does not have any inherent bias that may result from research that is linked to any corporate/ capital raising activity.

IIR was established in 2004 under Aegis Equities Research Group of companies to provide investment research to a select group of retail and wholesale clients. Since March 2010, IIR (the Aegis Equities business was sold to Morningstar) has operated independently from Aegis by former Aegis senior executives/shareholders to provide clients with unparalleled research that covers listed and unlisted managed investments, listed companies, structured products, and IPOs. IIR takes great pride in the quality and independence of our analysis, underpinned by high caliber staff and a transparent, proven and rigorous research methodology.

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This publication has been prepared by Independent Investment Research (Aust) Pty Limited trading as Independent Investment Research (“IIR”) (ABN 11 152 172 079), an corporate authorised representative of Australian Financial Services Licensee (AFSL no. 410381. IIR has been commissioned to prepare this independent research report (the “Report”) and will receive fees for its preparation. Each company specified in the Report (the “Participants”) has provided IIR with information about its current activities. While the information contained in this publication has been prepared with all reasonable care from sources that IIR believes are reliable, no responsibility or liability is accepted by IIR for any errors, omissions or misstatements however caused. In the event that updated or additional information is issued by the “Participants”, subsequent to this publication, IIR is under no obligation to provide further research unless commissioned to do so. Any opinions, forecasts or recommendations reflects the judgment and assumptions of IIR as at the date of publication and may change without notice. IIR and each Participant in the Report, their officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any opinion contained in the Report is unsolicited general information only. Neither IIR nor the Participants are aware that any recipient intends to rely on this Report or of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether opinions or recommendations (if any) contained in this publication are appropriate to their investment objectives, financial situation or particular needs before acting on such opinions or recommendations. This report is intended for the residents of Australia. It is not intended for any person(s) who is resident of any other country. This document does not constitute an offer of services in jurisdictions where IIR or its affiliates do not have the necessary licenses. IIR and/or the Participant, their officers, employees or its related bodies corporate may, from time to time hold positions in any securities included in this Report and may buy or sell such securities or engage in other transactions involving such securities. IIR and the Participant, their directors and associates declare that from time to time they may hold interests in and/or earn brokerage, fees or other benefits from the securities mentioned in this publication.

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