Australian Listed Investment Company Report September 2021

This story features WASHINGTON H. SOUL PATTINSON AND CO. LIMITED, and other companies. For more info SHARE ANALYSIS: SOL

Download related file: Monthly-LMI-Update_September-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

MLT Shareholders Approve Merger with SOL & MLT Ceases Trading

On 13 September 2021, Milton Corp (MLT) shareholders voted in favour of the merger with Washington H. Soul Pattinson and Company Limited ((SOL)). During the month, the merger received the requisite court approvals with the Scheme becoming legally effective on 21 September 2021. MLT ceased trading on the ASX on 21 September 2021.

On the Implementation Date (5 October), all MLT shareholders will receive their Scheme consideration, being the new SOL shares as per the exchange ratio, and the Special Dividend which is expected to be 37 cents per MLT share. The Special Dividend has a Record Date of 22 September 2021.

The Fight is On for PM Capital Asian Opportunities Fund Limited ((PAF))

On 15 September 2021, PAF announced it had entered into a Scheme Implementation Deed (Scheme) to merge with PM Capital Global Opportunities Fund Limited. Under the Scheme, PAF shareholders will be offered PGF shares as consideration with the number of PGF shares issued based on PAF’s after-tax NTA per share divided by PGF’s after-tax NTA per share on the determined calculation date. Based on the after-tax NTA’s as at 10 September 2021, the Offer represented a 23.8% premium to PAF’s closing price immediately prior to the announcement. PGF currently have a 19.9% shareholding in PAF.

On 28 September 2021, WAM Capital ((WAM)) submitted an off-market takeover bid for PAF, rivalling the PGF merger proposal. The proposed bid represents an implied value of $1.147 per share, a 9.8% premium to the share price at the close of the day prior to the announcement. Under the WAM proposal, PAF shareholders will receive 1 WAM share for every 1.99 PAF shares or 1.975 in the event the break fee is removed. WAM’s offer is subject to a minimum acceptance of 50.1% and a no PAF NTA fall condition of more than 5% and a no market fall condition of more than 5%.

PAF is engaging with both parties to see whether either of the parties are prepared to improve their offers.

FSI to Issue Convertible Notes

On 31 August 2021, Flagship Investments Limited ((FSI)) announced the Company is seeking raise $20m through the issue of listed, redeemable, unsecured convertible notes (Notes). The Notes will have a face value of $2.70 (in line with the pre-tax NTA) and will pay an interest rate of 5.50%p.a, paid quarterly, until the first step-up date of 30 September 2024 at which point the interest rate will increase to 6.50%p.a if the 2-year BBSW [bank bill swap rate] is above 1.2832%. If the BBSW is not above this rate, the interest payment will remain at 5.50% until maturity. The Notes will have a maturity date of 1 October 2026, if not converted or redeemed prior.

The Offer opened on 7 September 2021 and closed on 24 September 2021. The Notes are expected to commence trading on the ASX on 4 October 2021, with the ticker FSIGA.

Noteholders may convert some or all of their Notes into FSI ordinary shares during the Conversion Period, which commences on the second anniversary of the Initial Issue Date and ends 10 days prior to the Maturity Date. Notes will be converted on a one-for-one basis.

The Board intends to participate in the Offer, intending to invest $5.2m, with Manny Pohl expected to invest the lion’s share of the Board’s investment.

FSI believe the issue of the Notes provides the ability to increase the size of the portfolio without being dilutive to existing shareholders.

KKC Seeks to Narrow the Discount

The Manager and Responsible Entity of KKR Credit Income Fund ((KKC)) have announced the implementation of initiatives to narrow the discount to NAV. The trust has announced that it will be: (1) undertaking an on market buy back in FY22 with no stated minimum or maximum number of securities to be purchased; (2) establishing an unlisted credit fund with similar objectives to KKC that has the ability to purchase units in KKC; and (3) continue with improved unitholder engagement and education.

KKC has struggled to narrow the discount to NAV with the trust trading at a discount for most of its listed life. The Manager has undertaken a number of initiatives to narrow the discount including restructuring the underlying investments, unit buy backs, improving unitholder engagement and increasing the frequency of distributions from quarterly to monthly.

At 31 August 2021, KKC was trading at a discount to NAV of 13.1%, the largest discount of the fixed income peer group. At the unit price as at 31 August 2021, KKC offered a distribution yield of 5.0%.

Future Generation Investment Company ((FGX)) Announces Bonus Options Issue

On 3 September 2021, FGX announced the issue of Bonus Options to shareholders on a one-for-one basis. The options will have an exercise price of $1.48 and can be exercised at any time up until the maturity date of 28 April 2023. The options will be listed under the code FGXOA. The options are intended to be issued on 4 October and commence trading on the ASX on 5 October 2021. Options that are exercised on or before 17 November 2021 and shares held at the dividend record date of 22 November 2021 will receive the fully franked interim dividend of 3cps.

The exercise price is in line with the pre-tax NTA of the Company at the time of the announcement and represents a premium of 3.5% to the closing price at the close of the trading day before the announcement. Assuming 100% of shares on issue are held by eligible shareholders on the Record Date (1 October 2021), the maximum number of options that may be issued is 401.26m and if all options are exercised the Company would raise $593.9m.

Cadence Capital ((CDM)) Proposes Global Demerger

CDM’s $6m investment in DeepGreen (an unlisted company that was preparing for IPO) is currently valued at approximately $85m, ~14x the initial investment. The uplift in value comes after DeepGreen merged with Sustainable Opportunities Acquisition Corporation to create The Metals Company, which has subsequently listed on the NASDAQ with the ticker TMC.

The uplift in valuation has seen the position become a substantial position in the portfolio at approximately 20% of the portfolio. With a position of this size, any movement in the value of the position will cause significant volatility in the portfolio value. Further to this, CDM’s shares in TMC are subject to escrow arrangements with the manager not able to exit its position until the shorter of 180 days post listing or if TMC shares trade at or above US$12 for 20 trading days within a 30 day period.

As an early stage investor, CDM has been issued with Warrants, whereby CDM receives ‘earn out’ shares at no cost upon certain price targets being met by TMC. The earn out shares will be issued across eight tranches and the shares vest if the share price trades above the strike price for 20 out of 30 trading days. The tranches of Warrants and potential value to CDM are outlined in the investor presentation released on 20 September 2021.

Given the significant potential value that exists in the TMC position, CDM are proposing a demerger of the position from the CDM portfolio into a separate LIC. The new LIC would invest only in global securities and would initially comprise solely of the TMC position and $15m cash. The demerger would eliminate the stock concentration risk in CDM and allow shareholders to choose the level of exposure to the TMC position. We await further details regarding the demerger.

Templeton Global Growth ((TGG)) Shareholders Approve Merger with WAM Global ((WGB))

TGG shareholders have voted in favour of the merger with WGB with the merger now subject to court approvals. If the requisite approv­als are obtained, TGG shares will be suspended from trading on 20 October 2021.

In addition to voting in favour of the merger, shareholders voted in fa­vour of TGG’s offer to buy-back shares from those shareholders who do not want scrip consideration for the merger. The buy-back will remain open until 6 October 2021. Under the offer, TGG will buy-back TGG shares for a cash amount equal to the after-tax NTA per share.

SNC 1 for 4 Entitlement Offer

Sandon Capital Investment Limited ((SNC)) is seeking to raise up to $27.9m through a 1-for-4 Non-Renounceable Entitlement Offer. The Offer opened on 15 September 2021 and closed on 29 September 2021.

Under the Offer, eligible SNC shareholders could acquire 1 new SNC share at a price of $1.01 for every 4 shares owned. Shares issued under the Offer will be eligible for the fully franked final and special dividend of 3.75 cents per share to be paid in December.

Eligible Shareholders who exercise their Entitlements in full will be able to apply for additional shares in the Top-Up Facility at the Offer Price. If there remains any shortfall (including after shares to be issued under the top-up facility) the Directors of SNC reserve the right (in their absolute discretion) to issue all or any of the shortfall through a placement to eligible professional and sophisticated investors at the same price and on the same terms as the Entitlement Offer.

Dividend Stocktake

Dividends are often an important consideration for those investing in LICs. As such we have done a stocktake of dividends and yields post the completion of the FY21 reporting season. Strong earnings were reported in FY21 on the back of the market rebound post the initial COVID-19 shock in March 2020. LICs took the opportunity to top up their profit reserves for future dividend payments.

Note we have only included LICs in the below analysis as LITs act as a pass through vehicle with all realised capital gains and income to be distributed in any given year. LITs cannot hold earnings on balance sheet. This is a key differentiator between LICs and LITs. The company structure allows LICs to retain earnings and allocate earnings to profit reserves for future dividend payments. This allows for a LIC to smooth the dividend stream.

Why are profit reserves and the level of dividend coverage important? If you are reliant on dividends as an income stream, the level of dividend coverage in combination with the pool of franking credits is important as these are key indicators as to the sustainability of the current dividend. In the event the profit reserves or retained earnings for a LIC become depleted, this may put in jeopardy their ability to maintain or pay a dividend in future periods.

It is important for investors to understand a LICs individual dividend policy. For example, BKI Investment Company ((BKI)) seeks to payout the majority of income earned in any given period to shareholders. As was experienced in 2020 when companies in the portfolio cut dividends, the income received by the portfolio was reduced and dividends were cut as a result. In the case of BKI, the profit reserves are not a key focus with the level of dividends being paid by the underlying companies in the portfolio being a more important indicator of dividend income.

Below we take a look at a number of metrics for the LIC sector, including: (1) Dividends declared for the FY21 period (excluding special dividends); (2) The percentage change in the dividends declared from the FY20 period (excluding special dividends); (3) The dividend coverage ratio based on the most recently released financials, the shares on issue as at 31 August 2021 and assuming maintenance of the FY21 dividends declared; (4) Net and grossed up dividend yield based on the dividends declared for FY21 and the share price as at 31 August 2021; and (5) The premium/discount to pre-tax NTA as at 31 August 2021.

As a whole, LICs have good dividend coverage with an average dividend coverage ratio of 6.2x. Whilst not included in this report, we note that the pool of franking credits is also important with LICs seeking to provide fully franked dividends. Many LICs will only pay dividends to the extent they can be fully franked to provide the maximum tax benefits to its shareholders. 96.4% of LIC dividends declared for FY21 were fully franked.

A number of LICs are paying attractive dividend yields compared to the broader market, particularly on a grossed up basis. A reminder that the grossed up yields are based on the dividends declared for the FY21 period. Some of these dividends declared are yet to go ex.

For the Australian Shares – Large Cap category, LICs typically had relatively healthy dividend coverage levels. FSI had the largest increase in dividends declared. We note if you were to include the special dividend of $0.0225 paid for the FY20 period, the percentage increase declines to 5.9%. We have included MLT in the above, however, note that the company ceased trading in September after the approval of the merger with SOL.

A number of companies in the category saw a reduction in their dividends given the impact of the COVID-19 market shock in 1H’FY21, which saw a number of ASX-listed companies reducing or suspending dividends. This had a flow on effect to a number of the large cap managers.

After trading at a significant premium for a number of years, Djerriwarrh Investments ((DJW)) is trading at a double digit discount. DJW’s share price has declined and the discount to pre-tax NTA expanded as a result of the company cutting dividends over the last few years, resulting in a substantially reduced yield. Given the key objective of the company is to provide an enhanced yield, this saw shareholders seeking yield elsewhere. The ability of the company to stabilise and change the trajectory of dividends will likely result in the company narrowing the discount.

The Australian Share-Mid/Small Cap category typically had healthy dividend coverage ratios. We note the grossed up yields in this category are generally attractive when compared to both the ASX All Ordinaries Index and the ASX Small Ordinaries Index. LICs such as WAM Research ((WAX)) and WAM Microcap ((WMI)) are offering attractive yields despite trading at significant premiums to pre-tax NTA, however, there are also a number of LICs trading closer to pre-tax NTA and at discounts also offering attractive yields with strong coverage ratios.

LICs in the Australian/International Blended category offered attractive grossed up dividend yields with strong dividend coverage ratios, all with greater than 4 years coverage. We note Hearts & Minds Investments’ ((HM1)) dividend policy is to pay an annual dividend following the realisation of the previous year’s conference portfolio.

Many LICs providing exposure to international portfolios offer an attractive proposition for those seeking access to an international portfolio with the added benefit of franked dividends. 94% of LICs in this category declared fully franked dividends for the FY21 period. PGF, WQG, WGB, PIA, PMC, PAI, EAI and PAF all offered grossed up dividend yields of greater than 5% as at 31 August 2021. This compares to the Vanguard MSCI Index International Shares ETF ((VGS)), which provided a grossed up dividend yield of 1.8%. The category as a whole had healthy dividend coverage ratios.

With regard to the remaining categories, a number of LICs didn’t declare dividends in FY21. Of note is L1 Long Short Fund ((LSF)), which commenced dividend payments in FY21 after reporting strong returns. The company took the opportunity to supercharge its profit reserves with a whopping 18.5x dividend coverage based on the FY21 dividend declared. This provides plenty of room for dividend growth over time. At 30 June 2021, LSF had 9.3 cents per share in franking credits, providing the company with sufficient franking credits for multiple years based on the FY21 dividend declared.

Global Value Fund ((GVF)) and WMA also have an attractive grossed up yield. With respect to WMA, the ability of the company to continue to pay a dividend will depend on income received by the portfolio and the levels of cash held given the illiquidity of the underlying investments.

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.

Supervision and reporting lines: Analysts who publish research reports are supervised by, and report to, Research Management. Research analysts do not report to, and are not supervised by, any sales personnel nor do they have dealings with Sales personnel

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.

No promotion of issuers’ transactions: Research analysts may not be involved in promotional or marketing activities of an issuer of a relevant investment that would reasonably be construed as representing the issuer. For this reason, analysts are not permitted to attend “road show” presentations by issuers that are corporate clients of the Firm relating to offerings of securities or any other investment banking transaction from that our clients may undertake from time to time. Analysts may, however, observe road shows remotely, without asking questions, by video link or telephone in order to help ensure that they have access to the same information as their investor clients.

Widely-attended conferences: Analysts are permitted to attend and speak at widely-attended conferences at which our firm has been invited to present our views. These widely-attended conferences may include investor presentations by corporate clients of the Firm.

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.

INDUCEMENTS AND INAPPROPRIATE INFLUENCES

IIR prohibits research analysts from soliciting or receiving any inducement in respect of their publication of research and restricts certain communications between research analysts and personnel from other business areas within the Firm including management, which might be perceived to result in inappropriate influence on analysts’ views.

Remuneration and other benefits: IIR procedures prohibit analysts from accepting any remuneration or other benefit from an issuer or any other party in respect of the publication of research and from offering or accepting any inducement (including the selective disclosure by an issuer of material information not generally available) for the publication of favourable research. These restrictions do not preclude the acceptance of reasonable hospitality in accordance with the Firm’s general policies on entertainment, gifts and corporate hospitality.

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.

IIR, its officers, employees and its related bodies corporate have not and will not receive, whether directly or indirectly, any commission, fee, benefit or advantage, whether pecuniary or otherwise in connection with making any statements and/or recommendation (if any), contained in this Report. IIR discloses that from time to time it or its officers, employees and related bodies corporate may have an interest in the securities, directly or indirectly, which are the subject of these statements and/or recommendations (if any) and may buy or sell securities in the companies mentioned in this publication; may affect transactions which may not be consistent with the statements and/or recommendations (if any) in this publication; may have directorships in the companies mentioned in this publication; and/or may perform paid services for the companies that are the subject of such statements and/or recommendations (if any). However, under no circumstances has IIR been influenced, either directly or indirectly, in making any statements and/or recommendations (if any) contained in this Report. The information contained in this publication must be read in conjunction with the Legal Notice that can be located at http://www.independentresearch.com.au/Public/Disclaimer.aspx.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms