Australian Listed Investment Company Report – Sep 2024

This story features Ophir High Conviction Fund, and other companies. For more info SHARE ANALYSIS: OPH

Download related file: IIR-Monthly-LMI-Update_-6-September-2024

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.

Ophir High Conviction Fund (ASX: OPH)
During the month we completed a review of the Ophir High Conviction Fund ((OPH)). OPH provides exposure to a concentrated portfolio of mid and small cap Australian and New Zealand listed securities. The Trust listed in December 2018, converting from an unlisted unit trust (“Unlisted
Fund”). The Unlisted Fund had an inception date of August 2015 and had been hard closed since March 2018.

The rationale for the listing was two fold: (1) the listed trust provides the most optimal investment structure, with a closed ended structure ensuring a stable capital base (which is particularly important in smaller cap investment strategies); and (2) the listed structure enables new and existing investors to access or top up an investment in the strategy.

The Trust is managed by Ophir Asset Management Pty Ltd, a specialist investment management business founded in March 2012 by Steven Ng and Andrew Mitchell. The Manager was founded on the basis of compounding the wealth of the founders over the long-term. This has resulted in the founders investing the majority of their wealth into Ophir funds, including OPH, providing a strong alignment of interest with investors.

A key tenet of being able to continue to deliver returns in the smaller end of the market is to limit the size of the funds to ensure the Manager can deliver outperformance over the market over the long-term.

The Manager employs a fundamental, bottom-up investment approach and seeks to provide exposure to an actively managed, benchmark unaware portfolio of securities that deliver outperformance of the benchmark over the long-term.

IIR maintained its Recommended Plus rating for OPH The Manager is highly aligned with investors, which we view as a positive, with the capacity constraints expected to benefit investors over the long-term. OPH is the only vehicle to access the strategy for new investors, which underwrites demand for the units and is expected to put a floor on the discount at which the Trust trades.

The Trust has amended the DRP, with the DRP price being the lower of the NAV per unit or market price. If the Trust is trading at a discount and the DRP price is issued at the market price, the Trust will buy units on market to satisfy the DRP. This has the benefit of not diluting the Trust and provides liquidity for any sellers, which is expected to benefit the discount over the longer-term.

From a performance perspective, the Fund has delivered on its investment objective since inception of the strategy in August 2015, outperforming the benchmark after fees. The Manager has a diligent investment process that is repeatable and combined with the active risk management process is expected to continue to deliver outperformance over the long-term.

Perpetual Credit Income Trust (ASX: PCI)
Post the end of the month we completed a review of the Perpetual Credit Income Trust ((PCI)). PCI is designed to provide investors with regular monthly income through an actively managed portfolio of diversified credit exposures by asset type, issuers, credit quality, maturities, and capital structure.

Listed in May 2019, the Trust is managed by Perpetual Investment Management Limited (the “Manager”) and its highly experienced nine person specialist credit and fixed income team led by Michael Korber. PCI is based on a core/plus’ strategy, with a core of at least 30% investment grade and a maximum 70% in high yield and loans PCI utilises an unconstrained credit strategy that seeks to generate a monthly income of RBA Cash Rate + 3.25% p.a. (net of fees), the equivalent of 7.6% p.a. based on the current RBA Cash Rate of 4.35%.

The Manager endeavours to do so through a flexible investment approach that allows active portfolio positioning in order to focus on the most attractive credit and fixed income opportunity set of Australian securities and securities issued by global participants in the Australian market. While the unconstrained nature of the strategy may, on the surface, appear to introduce greater risk, the intention is quite the contrary – it is designed to mitigate risk and be conducive to a more consistent income profile over time with limited downside risk.

The portfolio is actively managed with the Manager rotating the portfolio to attractive risk-adjusted opportunities identified including secondary market transactions, with capital preservation being front of mind for the Manager. The Trust has consistently met or exceeded its return target of the RBA cash rate +3.25% p.a., net of fees and expenses, with the Manager providing a diversified portfolio of credit exposure across sectors, security types and credit rating spectrum to achieve the target return.

IIR has maintained its Recommended Plus rating for PCI. PCI provides a differentiated investment offering in the domestic fixed income LIT market.

Investors benefit from the significant experience of the investment team in credit and fixed income markets with senior members of the team having experienced numerous market cycles. The Trust has consistently achieved its target return since listing with the investors benefiting from the predominantly floating rate exposure in an increased interest rate environment. While the portfolio is exposed to securities across the credit rating spectrum, we consider the Trust to be at the lower-end of the risk spectrum when compared to its LIT peers given it’s investment grade exposure and the nature of the direct lending exposure, which is focused on higher quality companies.

The recent capital raising will benefit investors through increased diversification in the portfolio and improved liquidity.

LMI Market News
The market news was dominated by results releases during the month.

Below provides some of the key news items and announcements during the month. We will provide a provide a comprehensive review of the FY24 results in due course.

AUI Signals Ongoing Special Dividend
AUI reported its FY24 results on 15 August 2024. As was expected, revenue and earnings was down 9.4% and 12.9%, respectively, on the prior year due to lower dividends from its resource and energy holdings. The Company declared a final dividend of 28 cents per share, fully franked, comprising an ordinary dividend of 20 cents per share and a special dividend of 8 cents per share. This takes the full year dividend for the FY24 period to 45 cents per share, fully franked, up from 37 cents per share in FY23.

This is first special dividend paid in the Company’s history and will be sourced from retained earnings which comprise special dividends received from its investments over a number of years.

The Company has flagged that it intends to pay a special dividend of an equivalent amount for the next five years, in the absence of unforeseen events. The payment of a special dividend provides the Company a way to distribute some of the retained earnings and franking credits accumulated
over time.

As at 30 June 2024, AUI had over 3 years of dividend coverage at an annual dividend of 45 cents per share in the retained earnings. Given the NPAT often covers the dividend payment the Company does has sufficient reserves for the ongoing special dividend. Income would have to decline sharply for consecutive years for the Company to eat through its reserves.

With regards to the franking account, after the payment of the final dividend, the Company has more than 1 year of fully franked dividend coverage without the accumulation of additional franking credits. The Company generates its franking credits from both taxes paid and franked dividends/distributions received from the investments in the portfolio.

The full year dividend of 45 cents per share represents a dividend yield of 4.3% (6.1% grossed-up) based on the share price of $10.47 as at 31 July 2024. The inclusion of the special dividend provides a more attractive yield proposition than some of its direct peers and the S&P/ASX 200 Index.

For more: see document attached near the top.

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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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