Australian Listed Investment Company Report September 2021

This story features ARGO GLOBAL LISTED INFRASTRUCTURE LIMITED, and other companies. For more info SHARE ANALYSIS: ALI

Download related file: LMI-Monthly-Update_August-2021

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. Also known as Listed Investment Trusts or Listed Managed Investments.

For comprehensive comparative data tables for LICs please see attached.

LMI Market News

IIR Initiates Coverage on Argo Global Listed Infrastructure Limited ((ALI))

Argo Global Listed Infrastructure Limited is a Listed Investment Company (LIC) that listed on the ASX in July 2015. Argo Service Company Pty Ltd (ASCO), a wholly-owned subsidiary of Argo Investments Limited ((ARG)), is the Manager of the Company and has appointed Cohen & Steers as the Portfolio Manager. Cohen & Steers is a global investment manager in long-life assets, including infrastructure, real estate securities, natural resource companies, commodity futures and fixed-income securities.

ALI seeks to provide investors a total return, consisting of capital growth and dividend income, from a diversified long-only portfolio of global listed infrastructure securities. The Portfolio Manager will seek to outperform the benchmark over the long-term, however, given the nature of the underlying investments we expect any alpha generation to be moderate. The portfolio will be actively managed and comprise 50-100 securities.

IIR has initiated coverage on ALI with a Recommended rating. The full report can be found on the IIR website.

IIR Initiates Coverage on Magellan FuturePay (Managed Fund) (Chi-X: FPAY)

FPAY is an exchange traded managed fund (ETMF) that is seeking to provide investors predictable, monthly distributions that grow with inflation, with the potential for capital growth and protection in down markets. The Fund will be managed by Magellan Asset Management Limited, who is also the Responsible Entity (RE) and Market Maker of the Fund. The Fund will seek to achieve its objective through an investment in a portfolio of securities that represents a blend of the Magellan Global Plus strategy (50%- 60%) and the Magellan Core Infrastructure strategy (40%-50%), in combination with a reserving strategy whereby cash will be directed to a discretionary trust (“Support Trust”). The Support Trust will be used to support distribution payments if the portfolio performance is insufficient to meet the ongoing distribution requirements.

IIR has initiated coverage on FPAY with a Recommended rating. The full report can be found on the IIR website.

Reclassification of WLS to Absolute Return Fund

Given the change in the investment strategy and the change in the company’s name to reflect the new strategy, we have reclassified WCM Global Long Short Limited ((WLS)), previously Contango Income Generator Limited (CIE), as an Absolute Return Fund. As the name suggests, WLS now provides exposure to a long/short portfolio of global equities.

PGF Dividend Uplift Offers Attractive Yield

On 12 August 2021, PM Capital Global Opportunities Fund ((PGF)) announced a final dividend for FY21 of 5.0cps, fully franked, a 100% increase on the FY20 final dividend. The Company also announced that due to its strong profits reserve position, it intends to maintain a minimum dividend of 5.0cps for both the interim and final dividend for FY22, representing a full year FY22 dividend of at least 10cps. As at 30 June 2021, the Company has 5 years dividend coverage at 10cps.

The increased dividend announcement represents a significant uplift in yield. Based on the share price at the close of 19 August 2021, the full year dividend declared for FY21 represented a dividend yield of 4.8%. The forecast FY22 dividend would represent a yield of 6.4%, fully franked, which is strong for a global equity focused LIC.

MHH Unitholders Approve Transition to ETMF

Unitholders of Magellan High Conviction Trust have voted in favour of the transition from a Listed Investment Trust (LIT) to an Exchange Traded Managed Fund (ETMF). MHH was removed from the ASX on 30 August 2021 and the ETMF commenced trading under the ticker ((MHHT)) on 31 August 2021.

There is no change to the investment strategy, distribution policy or fees associated with the Trust. The Trust will continue to invest in a concentrated portfolio of Magellan’s highest conviction ideas and aim to deliver a target cash distribution yield of 3%p.a.

Sandon Capital Declares Special Dividend and Further Aligns Interest with Shareholders

Sandon Capital Investments Limited ((SNC)) has declared a fully franked special dividend of 1cps in addition to the full franked FY21 final dividend of 2.75cps. The Board anticipates paying an interim FY22 dividend of 2.75cps, fully franked, subject to the Company having sufficient profit reserves, franking credits and it is within prudent business practices. This would represent a 10% increase on the FY21 interim dividend. SNC currently has 32.1cps in profits reserves and more than 9cps in franking credits.

In addition to this, the Manager (Sandon Capital Pty Ltd) announced that from FY22 onwards, the Manager intends to invest at least 50% of the after-tax proceeds of performance fees earned from SNC in SNC shares. Shares will be purchased on-market and will be acquired after the payment of the relevant performance fee where SNC’s share price is trading at a discount to its after-tax NTA. The Manager and entities associated with its directors and shareholders currently have in excess of $7.3m invested in funds managed by Sandon Capital Pty Ltd, including 2.1m SNC shares.

GCI Taps Wholesale Investors

During the month, GCI raised $62.1m through a placement of 30.92m new units to wholesale and sophisticated investors at a price of $2.01 per unit. The placement was done using the Trust’s available placement capacity under the ASX listing rules with the placement representing no more than 15% of the Trust’s issued capital and therefore unitholder approval was not required.

Capital raised will be used to invest in line with the Trust’s investment strategy. The Manager believes the placement will benefit existing GCI unitholders by providing additional scale to expand the portfolio and therefore improve portfolio diversification, as well as provide greater liquidity for unitholders. The placement was at a slight discount to the closing unit price of $2.04 on the trading day prior to the offer (6 August 2021).

The Manager and the RE are considering an Interest Purchase Plan (IPP), which will be available to all eligible unitholders.

MOT Seeks to Raise up to $152m through Institutional Place­ment and Unit Purchase Plan

On 26 August 2021, Metrics Income Opportunities Trust ((MOT)) announced they are seeking to raise $52.86m through the issue 26.04m new fully paid ordinary MOT units at a price of $2.03 per unit to wholesale investors. In addition to this, the Trust announced a Unit Purchase Plan (UPP) to existing eligible unitholders to acquire up to $30,000 worth of new units at a price of $2.03. The Trust is seeking to raise up to $100m through the UPP. Applications in excess of this amount may be scaled back on a pro rata basis. The UPP is scheduled to open on 6 September 2021 and close on 30 September 2021.

The offer price of $2.03 is in line with the NAV at the time of the announcement with the UPP providing unitholders the ability to acquire units at a discount of 1.9% to the unit price at the close on the trading day prior to the announcement (25 August 2021).

The funds raised through the institutional placement and the UPP will be invested in accordance with the investment mandate and target return of MOT.

WAM Leaders Raises $277.2m from Entitlement Offer

On 11 August 2021, WAM Leaders Limited ((WLE)) announced the 1 for 5 Entitlement Offer closed fully subscribed, raising $277.2m. More than 80% of the funds were raised from existing shareholders with the remainder raised via the Shortfall Facility and additional placement. The Board will issue an additional 25m shares through the Company’s placement capacity under the ASX Listing Rules as a result of demand under the Shortfall Facility with shares to be offered at the same price as the Entitlement Offer. The capital raising takes the gross assets of WLE to in excess of $1.5b.

WCM Global Growth Increases Final Dividend 25%

WCM Global Growth Limited ((WQG)) reported a net operating profit after tax of $48.4m for FY21. The investment portfolio delivered a return of 26.8% for FY21 with total shareholder returns of 35.6%.

The Company declared a final dividend for FY21 of 2.5cps, fully franked, a 25% increase on the FY20 final dividend. This represents a full year dividend of 4.5cps, a 12.5% increase on the FY20 full year dividend. The Board has announced it expects to deliver an increased dividend for the next two dividend payments, with a FY22 interim dividend of 2.75cps and a final FY22 dividend of 3.0cps. These dividends are anticipated to be fully franked. The increased dividends will be subject to the Company having sufficient profit reserves and franking credits and be subject to corporate, legal and regulatory considerations.

In February 2021, WQG issued Bonus Options on a 1 for 3 basis. The options have an exercise price of $1.50, which represents a discount of 7.4% to the share price at the close on 19 August 2021. The options have an exercise period that runs until 31 August 2022. Shareholders that exercise their options by COB 17 September 2021 and continue to hold the shares for the relevant record date will be eligible for all the above mentioned dividends.

WAM Reports Record Operating Profit and Maintains Final Dividend

WAM Capital Limited ((WAM)) announced a record operating profit before tax of $343.3m for FY21 on the back of strong portfolio performance. WAM’s investment portfolio (before expenses, fees and taxes) increased 37.5% in FY21. The Company maintained the final dividend of 7.75cps, fully franked, taking the full year dividend to 15.5cps, fully franked. This in line with the full year dividend for FY20.

As at 31 July 2021, WAM offered the most attractive yield for domestic equity LICs with a dividend yield of 7.01%, despite trading at an 11.6% premium.

SEC Targets Dividend Yield of 4% of NTA p.a and Moves to Quarterly Dividends

SEC declared a final dividend of 5cps, fully franked, for FY21, taking the full year dividend to 8.5cps, fully franked, a 54.5% increase on the FY20 full year dividend. The dividend uplift was a result of the strong performance in FY21.

The Board has set a target dividend yield of 4% of NTA p.a for FY22. The Board has also announced an increase in the frequency of dividend payments from semi-annual to quarterly with dividends of 1% of NTA per quarter.

VG1 Declares Significant Uplift in Final Dividend and VG8 Announces Inaugural Dividend

VGI Partners Global Investments Limited ((VG1)) announced a significant uplift in the final dividend for FY21, with a final dividend of 5.5cps, fully franked. This compares to the previous final dividend of 1.5cps. Based on the share price as at the date of the FY21 results announcement, the FY21 full year dividend represented a yield of 3.1%. After providing for the FY21 final dividend, the Company has over 5 years of dividend coverage in the profit reserve at a full year dividend of 11cps.

VG8 declared an inaugural final dividend of 5.5cps, fully franked. After providing for the FY21 final dividend, the Company has 3 years of dividend coverage in the profit reserve at a full year dividend of 11cps.

In May 2021, both VG1 and VG8 announced a dividend yield target of 4%p.a. The final dividends reflect the new dividend yield target.

Spotlight – Antipodes Global Investment Company Limited ((APL))

Antipodes Global Investment Company Limited has announced they have entered into a Scheme of Arrangement with Antipodes Global Shares (Quoted Managed Fund) ((AGX1)), for the exchange of APL shares for units in AGX1, subject to shareholder and court approval. AGX1 is an existing Exchange Traded Managed Fund, also known as an Active ETF. APL is the third LIC/LIT this year to complete or announce their intention to restructure/convert to an ETMF. We note that APL’s offer is a little different to other restructure announcements given that a new ETMF will not be created, APL shares will be exchanged for units of an existing ETMF.

Key Details of the Scheme

If shareholders vote in favour of the Scheme, APL shares will be exchanged in AGX1 units and APL will be wound up after the investment portfolio has been transferred to AGX1. The exchange rate will be based on APL’s post-tax NTA (after transaction costs) relative to AGX1’s NAV at the time of implementation. The Company estimates transaction costs will be less than $0.003 per share. As at July-end, APL shares would be exchanged at a value of $1.201 per share (post-tax NTA minus the estimated transaction costs), representing a 7.7% premium to the share price at 31 July 2021.

The investment management agreement (IMA) between APL and the Manager will be terminated if the Scheme is approved. The Manager has agreed to forego termination fees even though the IMA has over five-years remaining. We view this as a positive for shareholders but also appropriate given the portfolio is being transferred to another vehicle managed by the Manager.

The investment strategy for APL shareholders will change to some degree if the Scheme is approved, with AGX1 having a long only international equity strategy. Therefore APL shareholders will be transitioned from a long/short strategy to a long only strategy. The APL portfolio shares the same long positions as AGX1 so the long exposure will be essentially the same. This is highlighted by the top 10 holdings for the two vehicles as at July-end, tabled below. While the strategy will be different, the management fees and performance fees are the same for the two vehicles..

If approved, the transition to an ETMF will likely result in some shareholders seeking to exit. Given the open-ended structure of an ETMF, the liquidity of the underlying portfolio of investments is important as this determines the timeliness with which redemptions can be met. We do not envisage liquidity being an issue with over 70% of the portfolio invested in stocks with a market cap of more than $25b and over 50% of the portfolio invested in stocks with a market cap in excess of $100b.

We note that the transfer of APL’s assets to AGX1 will significantly increase the size of AGX1. As at 31 July 2021, APL had a post-tax NTA value of $584.1m compared to AGX1’s FUM of $26.3m.

Key Differences Between LIC and ETMF Structures

There are some key differences between a LIC and an ETMF structure. One of the key differences is a LIC is a closed-ended structure while an ETMF is an open-ended unit trust. Under the LIC structure the capital is “captive” with liquidity achieved through a secondary market. In an ETMF, units can be created and redeemed with the size of the fund changing as units are created or redeemed.

ETMF’s are required to appoint a market maker that provides liquidity to unitholders. As such, ETMFs should trade around the NAV of the fund, eliminating the premium/discount at which LICs can trade.

The LIC structure allows for the payment of franked dividends and the company can use the balance sheet to put aside income and capital gains to pay out as dividends over time. Under the ETMF structure, income and capital gains generated in any given year are required to be paid out as distributions. Given the trust structure is a “pass through” structure, no franking credits can be paid although any franking credits earned will be passed through to investors. Franking credits are typically low from an international portfolio.

Below, we provide a comparison of the historical dividends of APL and AGX1 and the level of franking credits attached as well as a comparison of the rolling 12-month dividend/distribution yield of the two vehicles to 31 July 2021. The AGX1 distribution is much more volatile and will depend on the performance of the portfolio in any given year. The LIC structure offers the opportunity to pay out dividends in a more consistent manner.

Further to the above, the governance between the two structures differs with the LIC having a dedicated Board with independent representation that provides oversight of the company’s operations. Under an ETMF structure, a Responsible Entity (RE) is appointed. The RE of AGX1 is Pinnacle Fund Services, an affiliated services firm to Pinnacle Investment Management, a significant shareholder of the Manager of APL.

Why is APL Seeking to Wind Up LIC

The Company is offering the exchange to the ETMF primarily to address the discount to NTA that the Company has been trading at. The Board has implemented a number of initiatives in an attempt to narrow the discount, but the initiatives have had little impact. As shown below, APL has traded at a discount to pre-tax NTA for most of its history, with an average discount of 8.1% since listing to 31 July 2021 (based on month-end data). We note that this has been an issue for the International Diversified LIC/LIT category as a whole, as shown in the below chart.

After obtaining shareholder approval in November 2020, the Company implemented a Conditional Tender Offer (CTO) in an attempt to address the discount, however, the CTO has not had the desired effect, which has seen the initiative suspended and the Scheme offered as a superior initiative to eradicate the discount to NTA.

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.

INDEPENDENCE OF RESEARCH ANALYSTS

Research analysts are not directly supervised by personnel from other areas of the Firm whose interests or functions may conflict with those of the research analysts. The evaluation and appraisal of research analysts for purposes of career advancement, remuneration and promotion is structured so that non-research personnel do not exert inappropriate influence over analysts.

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Evaluation and remuneration: The remuneration of research analysts is determined on the basis of a number of factors, including quality, accuracy and value of research, productivity, experience, individual reputation, and evaluations by investor clients.

INDEPENDENCE – ACTIVITIES OF ANALYSTS

IIR restricts research analysts from performing roles that could prejudice, or appear to prejudice, the independence of their research.

Pitches: Research analysts are not permitted to participate in sales pitches for corporate mandates on behalf of a Broker and are not permitted to prepare or review materials for those pitches. Pitch materials by investor clients may not contain the promise of research coverage by IIR.

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Other permitted activities: Analysts may be consulted by Firm sales personnel on matters such as market and industry trends, conditions and developments and the structuring, pricing and expected market reception of securities offerings or other market operations. Analysts may also carry out preliminary due diligence and vetting of issuers that may be prospective research clients of ours.

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DISCLAIMER

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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