A busy month for listed managed investments

We also take a look at what’s driving the discounts for the two largest LICs on the ASX - AFI and ARG.

June 05, 2024 14:27

Independent Investment Research

It was a busy month for LMIs in May with capital raisings, meetings confirmed for restructure and acquisition proposals and amendments to investment strategies. In this edition of the LMI Monthly Update we take a look at the key news items in May as well as provide key data points as at 30 April 2024. We also take a look at what’s driving the discounts for the two largest LICs on the ASX, AFI and ARG. Key news items for May include:

1) Whitefield Industrials Limited (ASX: WHF) Announces Full Year Results

On 14 May 2024, WHF released its Full Year Results with the Company having a March year-end. The Company reported Investment Revenue from Ordinary Activities of $24.7 million, up 13.1% on the prior year and Net Profit After Tax of $20.4 million, an increase of 13.5% on the prior year. After the impact of preference share dividends, the Net Profit After Tax was $19.8 million, up 14.0% on the prior year.

Investments that contributed to the increased dividends and distributions received from the portfolio included the major banks, insurers, energy retailers, Computershare, Helia Group, Super Retail Group and Carsales.

The Company declared a final dividend of 10.25 cents per share, fully franked, taking the full year dividend to 20.5 cents per share, in line with the prior year. 20% of the dividend value is attributable to the LIC Capital Gains Discount which may entitle shareholders to additional tax benefits.

The dividend declared for the period is above the EPS for the period of 17 cents per share. The Company has a healthy level of retained profits and capital gains reserves that provide the ability to pay a dividend in excess of the EPS.

2) Scheme Booklet Distributed for QVE Acquisition by WLE

During the month, the Scheme Booklet for the proposed acquisition of QV Equities Limited (ASX: QVE) by WAM Leaders Limited (ASX: WLE) was distributed to QVE shareholders. Under the terms of the Scheme, WLE will acquire 100% of the QVE shares with consideration for QVE shares being WLE scrip and/or cash.

Scrip Consideration: The number of WLE shares received for QVE shares will be based on the pre-tax NTA of the companies on the Calculation Date.
Cash Consideration: For cash consideration, QVE shareholders will receive cash equal to a 2.5% discount to the QVE pre-tax NTA per share on the Calculation Date after adjusting for transaction costs. Based on the most recently reported pre-tax NTA of QVE ($1.00 as at 31 May 2024), QVE shareholders would receive $0.975 per QVE share for those that elected cash consideration, subject to adjustment for transaction costs.

A scheme meeting is scheduled for 28 June 2024. If QVE shareholders vote in favour of the Scheme, the Calculation Date is scheduled for 4 July 2024 with an Implementation Date of 15 July 2024.

In the event the Scheme was approved and 100% of QVE shareholders elected WLE scrip as consideration, based on the half year financial accounts as at 31 December 2023 and the share price as at 31 December 2023, WLE would issue a maximum of 167.5 million shares. On a pro forma basis, the net assets of the combined group would increase 13.2% to $1.97 billion. The profits reserve on a pro forma basis would increase $1.1 million to $398.4 million. QVE shareholders are expected to be eligible for the FY24 final dividend declared by WLE. WLE has provided guidance of a final dividend of 4.6 cents per share. Based on the number of shares under this scenario provided in the Scheme Booklet and a full year dividend of 9.2 cents per share, the combined group would have over 3 years of dividend coverage in the profits reserve.

QVE has been trading at a persistent discount to NTA which has prompted the takeover offer. The offer provides the opportunity for shareholders to redeem capital at a small discount to the pre-NTA (subject to adjustments for transaction costs) for those that are looking to exit or transition into WLE shares with scrip consideration reflecting the pre-tax NTA.

For those seeking to remain an investor, the exposure WLE provides is substantially different to that of QVE. WLE focuses on ASX 200 stocks with a heavy weighting to top 100 and top 20 stocks. This compares to QVE, whose mandate is focused on providing exposure to ASX Ex 20 stocks. As such, as a WLE shareholder, QVE shareholders will have a very different market exposure with the portfolio potentially enhancing exposure to stocks already in an investor's broader portfolio.

The investment style of the Managers is also substantially different. The Investment Manager of QVE, Investors Mutual, has a fundamental, bottom-up approach to stock picking with a focus on value. The Manager has a long-term investment horizon and the portfolio has low levels of turnover. WLE on the other hand has a highly active approach with the investment process combining top-down and bottom-up analysis with investment decisions primarily driven by the identification of a catalyst that will result in a re-rating of a stock.

Investors should take the time to understand the differences in the mandates and investment approach of QVE and WLE when making a decision regarding the Scheme.

3) QRI Announces UPP

On 14 May 2024, Qualitas Real Estate Income Fund (ASX: QRI) announced a Unit Purchase Plan (UPP) providing unitholders the opportunity to acquire up to $30,000 of units at $1.60 per unit. This represented a discount of 2.3% to the 5-day VWAP of the unit price prior to the announcement. The UPP opened on 16 May 2024 and was scheduled to close on 31 May 2024. New units are scheduled to commence trading on 11 June 2024.

Capital raised from the UPP will be invested in accordance with the mandate. The Manager will waive the management fee on any uninvested capital raised under the UPP until first deployment.

QRI unitholders have benefited from the rising interest rate environment and the transition to a floating rate loan structure across the portfolio. This is highlighted by the improved distribution yield received over the last two years to 30 April 2024.

4) FOR Unitholders Vote to Delist

At a Unitholder Meeting on 13 May 2024, unitholders of Forager Australian Shares Fund (ASX: FOR) voted in favour of delisting and operating the fund as an unlisted fund.

Units will be suspended from trading after market close on 11 June 2024 and the fund will be removed from the official list on 14 June 2024. An exit fee will be applied to redemptions for the 6 months post delisting. The exit fee will start at 6% and reduce by 1% per month. The transition exit fee will be charged by the Responsible Entity but will be retained in the assets of the Fund for the benefit of unitholders. The exit fee is designed to reduce a run-on in exits from the Fund in the initial months of the transition period.

If the unit price trades at a discount less than the exit fee, investors that are seeking to exit the fund should consider selling on market before the units are suspended from trading. For those investors looking to remain in the fund, units can still be acquired at a discount to NAV at the date of this report.

5) MEC Shareholders Vote In Favour to Refresh Buy Back

At an Extraordinary General Meeting (EGM) on 17 May 2024, shareholders of Morphic Ethical Equities Fund Limited (ASX: MEC) voted in favour of refreshing the buyback of up to 20% of shares on issue. The Company received approval for an increased buyback in the previous year with almost all the capacity used up by the Company. The Chairman in his address, commented that the buyback had been successful in reducing the discount. This is true with the buyback providing some stability to the share price however we note the NTA has come down towards the share price which has contributed to the reduction in the discount.

The Chairman also announced that due to the poor performance of the portfolio in the FY24 period to 30 April 2024, the Company has generated very little franking credits. As such, the Company has resolved to reduce the dividend for the March quarter to 1.5 cents per share, substantially using all its franking credits. This is a reduction from the previous quarterly dividend of 3.5 cents per share. Future dividends will be paid at the maximum level of franking credits up to 3.5 cents per share per quarter.

6) BTI Invest in Venture Startups International Pty Ltd (Updoc)

During the month, Bailador Technology Investments Limited (ASX: BTI) announced it had made a $20 million investment in Venture Startups International Pty Ltd (“Updoc”). Updoc was launched in 2021 and is a digital healthcare platform that connects consumers to registered health practitioners via a telehealth offering. The platform can be accessed via a one-off transactional model or a monthly subscription model. All consultations are delivered digitally increasing convenience for consumers while reducing the cost of treatment and providing flexible work opportunities for medical professionals. Since its inception, Updoc has served over 200,000 consumers and is considered a leading player in the telehealth market.

BTI’s investment is the first external capital used by Updoc. The capital invested by BTI will be used to continue to invest in building the technology, accelerate the development of the product roadmap and support continued expansion.

After a number of successful exits by BTI, the Company has a sizable cash balance to deploy. Prior to the Updoc investment, the Company had $96.5 million in cash.

7) GCI Wholesale Placement

On 28 May 2024, Gryphon Capital Income Trust (ASX: GCI) announced a Placement to Wholesale Investors. The Trust raised ~$50 million through the issue of 24.9 million units at $2.00 per unit. With the completion of the Placement, the Trust has 335.6 million units on issue. The Placement comes after the Trust raised a total of $135 million in March 2024 from an Entitlement & Short Offer and a Placement to Wholesale Investors with an insatiable appetite for alternative fixed income products continuing.

8) VG1 Amends Investment Guidelines

On 14 May 2024, VGI Partners Global Investments Limited (ASX: VG1) announced an update to the investment guidelines for the Company. The update to the guidelines comes after a period of review by the Manager. The below table details the changes to the guidelines which will take effect from 1 July 2024.

The changes will provide additional diversification to the portfolio with an increase in the number of stocks typically held. There is also an increase in the maximum gross exposure from 150% to 200% of the portfolio NAV.

9) MGF Restructure Proposal Progresses

During the month, Magellan Global Fund (ASX: MGF) distributed the Unitholder Booklet and PDS for the proposed conversion of the units from a closed-ended fund to a listed open-ended fund.

If the conversion is implemented, MGF unit holders will have their units redeemed and be issued with new open class units (ASX: MGOC) at a conversion ratio based on the respective NAV of each unit class on the conversion calculation date. Given the discount to NAV at which MGF units have traded, we are expecting the proposal to be supported by unitholders.

10) INES Changes Investment Strategy

On 15 May 2024, Intelligent Investor Ethical Share Fund (Managed Fund)

(ASX: INES) announced it will be making changes to the investment mandate to allow up to 30% of the portfolio to be invested in overseas-listed stocks. All stocks will still be required to pass the Manager’s ethical screen.

The rationale for the expansion to international exchanges is two-fold:

1) the number of ASX-listed business that pass the Manager’s ethical filter is shrinking due to the impact of acquisitions and private equity; and

2) the growing dominance of index funds is bidding up the price of quality stocks making it difficult to access stocks at an attractive value.

Given these factors the Manager is seeking to expand the portfolio to stocks on international exchanges primarily to be able to seek to maintain the long-term returns of the portfolio when compared to the benchmark.

11) Pengana Global Private Credit Trust Secures Minimum Commitment

Pengana Capital Group confirmed during the month that the Pengana Global Private Credit Fund (expected ASX Code: PCX) had exceeded the minimum subscription threshold of $100 million. The offer period is set to close on 6 June 2024.

With the minimum subscription amount secured it would appear the IPO is going ahead. Units are expected to commence trading on 20 June 2024.