Time for Wilson & Century Australia to get together?

If I had to bet on a couple of corporate re structures to occur in the next year or two, they would be for WAA to merge or takeover another investment company to gain size, and CYA to be rolled into a re-branded entity to assist in the market fully valuing assets on hand and the tax losses on the balance sheet.

In fact, the two may well get together. I started writing this prior to a recent bonus option issue from WAA, but I still think even after allowing for that WAA should look to further increase scale in other ways also. Geoff Wilson’s funds continue to creep up the register of CYA to 31.4%. Earlier in the year they had a tilt at CYA and then Perennial came on the scene with a poor alternative. The Wilson offer was taken off the table, possibly as they earmarked the new WAM Leaders Fund to be involved and Perennial complicated matters at the time.

For anyone who wants to have exposure to the ASX200 the CYA portfolio doesn’t deviate from it too much. Therefore, it offers a better alternative to index funds I believe, since there is a good chance the discount to NTA will close in the next year or so, maybe even very soon. The issue can be getting filled though, I have only got a small position recently. You can possibly buy it with patience at a discount of 6-7% to the pre-tax NTA. That is not including the potential tax assets of nearly 11 cents or another 13% of the current share price.

If one of the Wilson funds merge CYA funds into them, they would probably take over CYA at the pre-tax NTA and therefore get the cream of the tax assets and of course more AUM fees in the longer term. So CYA shareholders could see an immediate 6-7% pickup (if you can buy at that size discount) from discount compression. WAM, WAX, WLE & WAA have been trading at premiums to NTA of more than 10% generally. So someone like WAA could make a scrip bid offering new shares at the WAA NTA for example in exchange for CYA shares at their pre-tax NTA. So if this type of re structure occurred I think you could likely sell your new scrip at a 10 % premium to NTA. That could mean a 16% uplift just due to this type of corporate restructure, could beat holding a passive ASX index fund.

The issue is possibly the ASX may fall in value quite a bit during this time! As I have shown I am not that great picking the direction of the major stock indices. No matter what you think about equity market valuations I always advocate that you need some exposure in the portfolio, so CYA may be a smart option. A more sophisticated investor who might already own a very high weighting to equities overall and didn’t want to increase further, could possibly sell the SPI against the CYA shares and try to bet purely on capturing that 16% potential move I described above.

Personally I am not super bullish on the CYA portfolio, but found myself still a bit underweight equities exposure generally. So I recently bought mostly at 82.5 cents where I estimate the pre-tax NTA (ex recent dividend) may have been above 88 cents. At least I am getting a bit more exposure with the index having pulled back around 4 or 5 % off the recent highs seen in late July.

If the ASX levels were more attractive I would probably own a fair few more CYA shares, however I thought the corporate appeal was enough to justify a small holding even at these levels. As shown this year equities sometimes go higher than I think! Back to WAA itself this stands out as too small a portfolio for the Wilson stable. The recent bonus issue could assist but is not really the ideal way to increase AUMs. Even if all the bonus options eventually get exercised, the fund still has room to get bigger. It does join sometimes with WAM & WAX taking on some activist targets but ideally it needs scale itself to build stakes as the other 2 funds have different style mandates. The small size also makes the management expense ratio quite high even though their solid performance can justify it. It just feels like they always have plenty on their plate and not sure which way to increase their scale here. As mentioned above CYA might be a good way to enter into a then larger WAA. Other small investment companies that Wilson has stakes in include KBC, HHY & AIQ. I have discussed these before and are worth keeping an eye on.

Of course I could be way off the mark with the above. Yet the tax assets and the current discount probably make CYA a reasonable hold regardless.

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