QVE and WLE looking to merge – and LIC dividend coverage update

April 05, 2024 11:44

Independent Investment Research

After WAM Leaders Limited (ASX: WLE) announced their intention to lob an underwhelming takeover offer for QV Equities Limited (ASX: QVE) in late January, the companies announced they had entered into a Scheme Implementation Agreement to merge in March. Below we take a look at some of the details of the Scheme as well as other key newsflow in the LMI sector in March.

In the attached monthly update we also take a look at the dividends/distributions declared by LICs and LITs for the half-year period to 31 December 2023 compared to the pcp and provide an update of LIC dividend coverage based on the reserves as at 31 December 2023. By and large dividends/distributions were positive for share/unit holders with 46.9% of LICs/LITs maintaining the dividends/distribution declared for the half year period and 38.3% increasing the dividend/distribution compared to the pcp. With regards to LIC dividend coverage, on average LICs had 5.5 years of dividend coverage providing a buffer for many to be able to maintain dividends in the event of market weakness, however we have seen depleted franking credit accounts impacting dividend payments with some LICs either cutting dividends to maintain a fully franked dividend or opting to maintain the dividend amount and paying a partially franked dividend. In the event of market weakness, dividends for those LICs with depleted franking credit accounts may come under further pressure.

QVE & WLE Looking to Merge

On 12 March 2024, QV Equities Limited (ASX: QVE) and WAM Leaders Limited (ASX: WLE) announced they had entered into a Scheme Implementation Agreement to merge. Under the Scheme, WLE will acquire 100% of QVE shares. If the Sheme is approved, QVE shareholders will have the option to receive WLE shares as consideration for their QVE shares, cash or a combination of both.

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. As an example, based on the most recently reported pre-tax NTA of QVE ($1.05 as at 22 March 2024) and WLE ($1.38 as at 29 February 2024), QVE shareholders would receive 0.7609 WLE shares per QVE share. Based on the WLE share price of $1.385 and QVE share price of $0.995 as at 28 March 2024, this represents a premium of 5.9%.
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 ($1.05 as at 22 March 2024), QVE shareholders would receive $1.024 per QVE share for those that elected cash consideration, subject to adjustment for transaction costs.

WLE has stated that it is the current intention of the Board to ensure that QVE shareholders that elect to receive scrip consideration will be eligible to receive the FY24 final dividend. WLE has provided guidance of a final dividend for the FY24 period of 4.6 cents per share, fully franked. QVE shareholders are also expected to receive a quarterly dividend of up to 1.3 cents per share for the March quarter. Any dividends declared will not exceed 1.3 cents per share.

QVE shareholders are expected to be given the opportunity to vote on the scheme at a shareholder meeting scheduled to be held in late June 2024.

In the event QVE shareholders voted in favour of the Scheme and 100% of shareholders opted to receive scrip as consideration, based on the latest pre-tax NTA reported, WLE would issue ~173 million new shares, increasing the number of WLE shares on issue to over 1.4 billion.

The Independent Directors on the QVE Board have resolved to vote in favour of the Scheme in the event there is no superior offer and subject to the Independent Expert concluding that the Scheme is in the best interests of QVE shareholders.

QVE has been trading at a persistent discount to NTA which has prompted the Scheme. 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 investors 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.

New CEO at Platinum Drives Changes to Portfolio Management and Investment Team Structure

Jeff Peters took over as CEO of Platinum Asset Management Limited (ASX: PTM) in January 2024 and promptly announced a turnaround program for the company to be implemented over the short-and-medium term. Short-term actions that are being implemented include:

Alignment of the expense base to current revenue conditions;
Review of existing product offerings and distribution channels;
Renewal of client communication strategy;
Examination of the investment platform; and
Review of remuneration framework.

The examination of the investment platform thus far has resulted in changes to the investment team structure and portfolio management responsibilities which directly impact Platinum Capital Limited (ASX: PMC) and Platinum Asia Limited (ASX: PAI).

The manager has moved from a co-portfolio manager model, whereby portfolio managers are allocated a sleeve of capital within a strategy to manage, to a single portfolio manager model. The exception being the International Fund strategy which will retain Andrew Clifford and Clay Smolinski as Co-Portfolio Managers. While they will remain as Co-Portfolio Managers, they will not be managing capital separately but operating on a consensus basis to manage a single pool of capital. The changes are effective immediately.

PMC - As mentioned above, Clay Smolinski and Andrew Clifford are now Co-Portfolio Managers for the strategy. Nikola Dvornak is no longer a Portfolio Manager for the strategy, however will remain with the team as a Portfolio Manager for the International Brands strategy.
PAI - Cameron Robertson is now the sole Portfolio Manager for the Asia Ex Japan strategy. Andrew Clifford’s focus is now on the International strategy. Kirit Hira remains with the team and is a dedicated resource to the Asia Ex Japan strategy.

In addition to the changes to the portfolio management structure, the structure of the investment team has changed. While resources will be available across strategies, there will be a dedicated team supporting the global strategy that will report directly to Clay Smolinski and there will be dedicated teams for the specialist and regional strategies. The change is designed to provide clarity to roles and responsibilities and will allow for remuneration structures to potentially be more aligned with direct responsibilities.

The changes are new and the Manager is in the early stages of the turnaround program so it will take some time for the dust to settle. Given the changes in the portfolio management structure there is the potential for further changes in the investment team. With a share price that continues to fall, continued outflows and a turnaround program underway, the Manager is going to have a find a way to remunerate staff to retain talent.

Frank Casarotti retires from FGG board

On 8 March 2024, Future Generation Global Limited (ASX: FGG) announced the retirement of Frank Casarotti from the Board. Frank has been a Director of FGG since the company was founded. There remains six Directors on the Board of FGG. FGG have not announced whether they will be seeking to replace Frank.

Phillip Lowe takes over as chair at FGX

On 12 March 2024, Future Generation Australia Limited (ASX: FGX) announced that Dr. Phillip Lowe, former Governor of the RBA, has been appointed as a Director of the FGX Board and will be appointed as Chair following FGX’s AGM in May 2024. Dr. Lowe will assume the role from Mike Baird who will remain on the Board as a Director.

MXT raises further capital

Metrics Master Income Trust (ASX: MXT) raised further capital in March with the Trust receiving binding commitments for 23.75 million new units from a Wholesale Investor Placement. New units will be issued at a price of $2.00 per unit, raising $47.5 million. This takes the total capital raised thus far in CY24 to $155.2 million.

As with all capital raisings, the capital raised will be invested in accordance with the investment mandate. The Managing Partner of the Manager, Andrew Lockhart, commented in the announcement that Metrics see a significant pipeline of transaction opportunities allowing for the capital to be deployed. Following the completion of the Placement, MXT will have 1.1 billion units on issue.

MGF Conversion to an ETMF Progresses

In March, Magellan Global Fund (ASX: MGF) provided an update regarding the conversion of the fund to an ETMF structure. The Responsible Entity (RE) reported that it has continued to progress the development of the Conversion Proposal. Subject to receipt of the relevant regulatory approvals and/or waivers, the RE’s current intention is to despatch an Explanatory Memorandum and Notices of Meeting to MGF untiholders ahead of unitholder meetings to be held by the end of June 2024. If the Conversion Proposal is approved, the Proposal is expected to be implemented by the end of July 2024.

The prospect of the Conversion Proposal has seen the discount to NAV narrow significantly. As at 29 February 2024, MGF was trading at a discount to NAV of 6.2%. This is in comparison to a discount of 22.9% as at 31 October 2022 and an average discount of 12.9% since restructuring the fund in December 2020.

VG1 Continues Buy Back

VG1 has continued the aggressive buy back with the company buying back 3 million shares in February and over 5 million shares in March. Since 31 January 2023, the number of shares on issue has decreased 13% to 304.4 million. The buy-back had an initial impact on the discount however while the share price has increased since the commencement of the increased buy back, the share price has not kept up with the increase in the pre-tax NTA.

There has been quite a bit of change in the shareholder register of VG1 in recent times. There are currently four substantial shareholders:

Saba Capital Management, L.P - 8.3%.
Regal Partners Limited - 6.9%. (Robert Luciano and Phil King also hold a further 5.6%).
WAM Strategic Value - 5.6%.
1607 Capital Partners, LLC - 5.3%.

Regal Partners has substantially increased its shareholding since 31 July 2023. Regal Partners have increased the number of shares held from 8.5 million to 20.9 million from 31 July 2023 to 31 March 2024. WAM Strategic Value (ASX: WAR) became a substantial shareholder in November 2023. WAR taking substantial shareholder positions in other LICs has seen these LICs become the target of a takeover by a LIC managed by the Wilson Asset Management Group. The increased shareholding of Regal Partners suggests Regal is keen to keep the assets under the Regal Funds Management umbrella.

SEC Finds Buyers After Conditional Proposal

In January 2024, Spheria Emerging Companies Limited (ASX: SEC) announced a Conditional Proposal whereby the Company would put a vote to shareholders to covert SEC into an ETMF or enable SEC shareholders to exchange shares for units in the Spheria Australian Smaller Companies Fund in the event the average daily discount to pre-tax NTA over the period 1 October 2024 to 31 December 2024 is greater than 5.0%.

While the term for the Conditional Proposal is not until the fourth quarter of CY24, SEC has found buyers since the announcement with the discount narrowing to 6.8% as at 28 March 2024.

In the event the LIC is not converted to an ETMF or shares exchanged for units in the Spheria Australian Small Companies Fund, the Board will have to consider strategies to manage the dislocation between the share price and the NTA over the long-term.