Australian Listed Investment Company Report Aug 2023

This story features REGAL INVESTMENT FUND, and other companies. For more info SHARE ANALYSIS: RF1

Download related file: IIR-Monthly-LMI-Update_-3-August-2023

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 Reaffirms Recommended Plus Rating for RF1

During the month, IIR reaffirmed its Recommended Plus rating for Regal Investment Fund ((RF1)). RF1 provides exposure to a selection of alternative investment strategies managed by Regal Funds Management Pty Ltd (“Regal” or the “Manager”) and associated managers. Regal is a specialist investment manager that was founded in 2004 and forms part of Regal Partners Limited ((RPL)), an ASX-listed asset manager that comprises four alternative investment management businesses with $5.5 billion assets under management (AUM) at 30 April 2023. RF1 listed on the ASX in June 2019, raising $281.8 million through the issue of 112.7 million units at $2.50 per unit. Since listing, RF1 has grown to a market cap in excess of $530 million with 204.6 million units on issue.

The primary objective of RF1 is to produce attractive risk-adjusted absolute returns over a period of more than five years with limited correlation to equity markets. The Manager considers attractive returns to be 15%-20%p.a. over the long-term. The Fund does not have a sufficient track record as yet to determine whether it will achieve this objective over the long-term, however, to date the Fund has delivered on this objective. We note that historical returns for the Fund will not represent future returns given the recent addition of several strategies. At listing, the Fund provided exposure to 5 alternative investment strategies. The Manager has added to the selection of strategies the Fund is exposed to with the Fund providing exposure to 8 alternative investment strategies at 31 May 2023. The allocation to strategies will be determined by the Investment Committee with the Manager able to adjust the allocations to the strategies depending on prevailing market conditions or other factors it considers relevant in order to achieve the Fund’s investment objective.

A copy of the report can be accessed via the IIR website (www. independentresearch.com.au) or from the issuer.

IIR Reaffirms Recommended Plus Rating for WQG

During the month, IIR reaffirmed its Recommended Plus rating for WCM Global Growth Limited ((WQG)). The Company provides exposure to WCM’s Quality Global Growth strategy (“WCM QGG strategy”), which has a track record dating back to April 2008. The strategy provides exposure to a concentrated portfolio of global listed quality growth companies. The primary performance objective of the portfolio is to outperform the benchmark (MSCI All Country World ex-Australia Index with gross dividends reinvested (AUD)) by more than 3%p.a, before fees and taxes, over rolling 3-year periods with lower volatility than the benchmark index. While the strategy has not achieved its objective of generating lower volatility than the benchmark index, it has consistently outperformed the benchmark index over rolling 3 year periods and has outperformed by more than 3%p.a. in 72.6% of rolling 3-year periods.

The Manager has a fundamental bottom-up stock selection approach with a focus on identifying those companies that have a durable and growing moat, a culture that supports and sustains the moat, an attractive thematic, and an attractive valuation. While actively managed, WCM has a long-term investment horizon which results in the portfolio having a low to moderate level of turnover.

A copy of the report can be accessed via the IIR website (www. independentresearch.com.au) or from the issuer.

IIR Initiates Coverage on WCM Quality Global Growth Fund (Quoted Managed Fund) ((WCMQ))

During the month, IIR initiated coverage on WCMQ. WCMQ is an exchange traded managed fund (ETMF) that listed on the ASX in September 2018 with 8.9 million units on issue at $5.00 per unit. As an open-ended vehicle, funds under management (FUM) will grow and decline depending on the net flows of the Fund. At 30 June 2023, WCMQ had grown to 44.7 million units with FUM of $328.6 million. The portfolio is managed by WCM Investment Management (“WCM” or the “Adviser”), a Californian based investment management firm specialising in global and emerging market equities with US$77.0 billion AUM as at 31 March 2023.

The Fund provides exposure to WCM’s Quality Global Growth strategy (“WCM QGG strategy”), through an ETMF vehicle. As detailed above, the WCM QQQ Strategy provides exposure to a concentrated portfolio of global listed quality growth companies and has consistently outperformed the benchmark index over rolling 3-year periods.

Similar to the strategy offered through the LIC vehicle ((WQG)), WCMQ provides exposure to a global equity strategy that is managed by an experienced and robust investment team that utilise a disciplined and unique investment process that has delivered consistent outperformance of the benchmark over the long-term. The Fund provides investors differentiated exposure to the benchmark index providing the potential for diversification for an investors broader portfolio. The ETMF structure provides secondary market liquidity with the benefit of a market maker, which allows investors to enter and exit the Fund in close proximity to the net asset value (NAV) and therefore unitholder returns are largely similar to the portfolio performance on a net basis. The Fund has grown at a strong pace since listing in September 2018, which is a positive for the longevity of the vehicle combined with reducing unitholder concentration risk and in the long run potentially reducing costs associated with the market making activities of the Fund.

A copy of the report can be accessed via the IIR website (www. independentresearch.com.au) or from the issuer.

D2O Raise Capital to Fund Acquisition of Water Entitlements

During July, Duxton Water Limited ((D2O)) announced they had entered into a purchase and leaseback agreement for Australian water entitlements with Treasury Wine Estates Limited ((TWE)). D2O will acquire 4,770 megalitres of water entitlements for cash consideration of $39.1 million. The acquisition comprises 2,799 megalitres of High Security entitlements and 1,971 megalitres of High Reliability permanent water entitlements in NSW and VIC. As part of the transaction, D2O has negotiated a long term leaseback with TWE for 3,816 megalitres. The acquisition will increase D2O’s water entitlements portfolio by 6% and increase the Company’s annualised leasing revenue by $1.4 million per annum from 1 July 2023.

The acquisition is to be funded by an Institutional Placement and a Non-Renounceable Entitlement Offer to eligible shareholders. The Company has completed the Institutional Placement raising $7.25 million (before costs) through the issue of 4.83 million new shares at $1.50 per share. The offer price represented a -10.1% discount to the share price on the date prior to the announcement being made and a -27.2% and -16.7% discount to the pre-tax and post-tax net tangible asset valuation (NTA), respectively, as at 30 June 2023.

The Non-Renounceable Entitlement Offer seeks to raise up to $44.2 million (before costs) through the issue of shares on a 1-for-4 basis at $1.50 per share. The Offer was scheduled to close on 1 August 2023. The Offer was partially underwritten to $25 million, resulting in the Company raising at least $32.25 million (before costs) through the Institutional Placement and Entitlement Offer.

Further to the above, shareholders will receive one bonus option for every four shares held in the Company at the Bonus Option Record Date, being 3 November 2023. The Bonus Options will have an exercise price of $1.92 per share and an expiry date of 10 May 2025. The Options will be listed on the ASX under the code ((D2OO)). Funds raised from the Bonus Options will be used to expand the Company’s portfolio of water entitlements or reduce debt.

FPC Opt Out of Buy-Back

On 13 July 2023, Fat Prophets Global Contrarian Fund Limited ((FPC)) announced that the Company will not proceed with the next tranche of the Equal Access Buy-Back which was scheduled to commence on 1 October 2023.

The buy-back was approved by shareholders at the AGM held on 1 November 2021. Under the buy-back, FPC shareholders who elected to participate received units in Fat Prophets Global High Conviction Hedge Fund ((FATP)) upon buy-back of the shares. The buy-back was implemented in an attempt to address the discount to NTA at which the company had traded by offering shareholders the option to effectively trade their shares for units in the recently created actively managed ETF, FATP, which has substantially the same investment strategy.

LSX Invests $1m in Alto Metals

On 24 July 2023, Lion Selection Group Limited ((LSX)) announced they had agreed to invest $1 million in Alto Metals ((AME)). Alto is progressing the Sandstone Gold Project in WA, Australia. The Manager believes “Alto is strongly exposed to the positive thematics of gold price, gold project growth and potential development, and gold project consolidation.” The Company’s gold exposure now includes Alto and Great Boulder Resources ((GBR)).

LSX has a substantial cash holding of $77 million post the exit of its Indonesian investments. The Manager stated they have made detailed assessments of a number of investment opportunities and have observed the price of its target investment universe weakening, providing greater purchasing power for the Company.

MEC Announces Changes to Dividend Policy

In our last LMI Monthly Update we reported on Morphic Ethical Equities Fund Limited ((MEC)) exploring options to address the discount at which it has been trading.

On 4 July 2023, the Company announced a change to the dividend policy, with the Board intending to declare dividends, in total, equivalent to the value of the Company’s current total Profit Reserve before the expiry of the initial term of the Investment Management Agreement (IMA), which is due to expire in May 2027, unless extended.

The Company has advised the size of the quarterly dividend is expected to be calculated based on dividing the outstanding Profit Reserve as the end of each quarter by the number of remaining quarters before the expiry of the IMA. At 30 June 2023, the Company had a Profit Reserve in excess of 45 cents per share.

The Company intends to pay quarterly dividends for the September quarter 2023 and the following 14 quarters until the end of the initial term of the IMA of 3 cents per share. This dividend amount may increase in the event of further accruals to the Profit Reserve. The Company has sufficient franking credits to fully frank three more quarterly dividends at 3 cents per share, without the generation of any new franking credits. The Board will consider how to apply accrued franking credits at the time it declares a dividend.

The new dividend policy announced, results in a significant uplift to the current quarterly dividend of 1.5 cents per share. The dividend payment of 12 cents per share equates to a forward net dividend yield of 11.1% based on the share price of $1.08 at 2 August 2023.

No doubt the Company would have been hoping for a better reaction from the market with the announcement having little impact on the discount with the Company trading at an -11.4% discount to pre-tax NTA based on the NTA at 28 July 2023 and the closing share price at 2 August 2023.

There is significant pressure being applied to the Company to address the discount. We expect there to be accelerated newsflow surrounding MEC over coming months in the event the Boards attempts to narrow the discount are unsuccessful.

PL8 Maintains Monthly Dividend for September Quarter

Plato Maximiser Fund Limited ((PL8)) announced that it will be maintaining the monthly dividend of 0.55 cents per share for the September 2023 quarter. Dr. Don Hamson commented “Rising interest rates and inflation have increased uncertainty but we still expect to receive solid dividends from a diversified portfolio of Australian companies. One of the benefits of a closed-end listed investment company focused on income, such as PL8, is the ability to manage capital amidst uncertainty so as to provide regular dividend distributions over time.”

Based on the closing share price on 2 August 2023, the Company has a net trailing 12-month dividend yield of 5.28% (7.54% grossed-up). The Company continues to trade at a substantial premium to pre-tax NTA.

WAR Declares Final Dividend

During the month, WAM Strategic Limited ((WAR)) declared a final dividend for FY23 of 2 cents per share, fully franked. This takes the full year dividend to 3.5 cents per share, a 16.7% increase on the full year dividend declared for the FY22 period.

The Company also announced its intention to increase the full year dividend to 4 cents per share, fully franked, for the FY24 period (interim and final dividend of 2 cents per share), subject to no material adverse changes in market conditions or the investment portfolio. The guidance comes on the back of the growth in the Profits Reserve, with the Company having a Profits Reserve of 8.9 cents per share as at 30 June 2023, before the payment of the final dividend for FY23. After the payment of the final FY23 dividend, this represents dividend coverage of 1.5 years based on a 4 cents per share dividend before any further accruals to the Profits Reserve.

During the month, the Company increased its stake in ((QVE)) with the Company now holding 14.9% of the QVE shares on issue. The Company continues to have significant cash holding available to take advantage of investment opportunities as they arise.

SEC Announces Quarterly Dividend of 2.8 Cents Per Share

Spheria Emerging Companies Limited ((SEC)) announced a dividend of 2.8 cents per share, fully franked, for the quarter ended 30 June 2023. The increase comes after the announcement in May to pay dividends on a quarterly basis that represent 1.25% of the post-tax NTA at the end of each quarter, subject to available profits, cash flow and franking credits. This was an increase from the previous dividend policy of 1% of the post-tax NTA.

The dividend of 2.8 cents per share represented an increase of 27.3% on the dividend for the March 2023 quarter. We note given the dividend policy the dividend amount will vary depending on the movement in the post-tax NTA.

[For LIC FY23 results released to date see attached.]

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.

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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.

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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.

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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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