Please do not read these comments as advice for making decisions on the below stocks.
My financial goals and circumstances may be totally different to yours and my decisions could be totally irrelevant. And readers cannot be sure I have a clue what is going on anyway, or what my track record is!
Before I begin on some notes I made on some of my holdings (warning – this is a long post of individual stock comments), I thought I would just point out a link to an article about the latest offering from Magellan.
It is pleasing to see an article that goes quite in depth about many considerations a prospective investor should have. I would be happy if I could have come up with such a well written piece myself!
LICs vs ETFs
I think it challenges the idea that LICs (or Listed Trust in this case), are always a product for time poor investors who want a relatively simple passive approach and leave things up to the experts. The prospectuses can make very lengthy reading, and the variations of features and structures of the LIC sector seem to be expanding, not getting any simpler.
Sometimes I wonder whether products are to help the time poor investor, or capitalise on the fact they may not have time to read a prospectus, aiming to lock in generous long term fixed revenue streams for the manager. (Not referring to this float, just a general comment).
Anyway, here is the link.
I also note that another new global offering (VGI Global Partners) charges performance fees on any positive investment performance, rather than over a typical equities benchmark.
International LICs and performance
I see that in recent years other new international LICs began with plenty of marketing enthusiasm and initially traded at a premium to NTA, only to then trade at wide discounts as the marketing hype had worn off. It seems many investors love a shiny new prospectus and the upbeat articles from most of the financial media pre-IPO, but can get bored and impatient quickly at times once they are listed for a year or two. It will be interesting to see how the new international LICs that were launched in 2017 trade a year or two down the track, compared with potentially picking some of the older ones now or in the ensuing months instead.
RESULTS ROUND UP
Anyway, now to reporting season. For a change, I may have got through it without too many battle scars (touch wood).
I will firstly go over some stocks I have mentioned previously on the blog that I no longer hold. In the case of AGS & NAM I may have exited too hastily as the prices seem a bit better now than my sell levels. If one day I ever get around to do a bit of a post mortem again on how the blog stocks have fared I will make sure I use my lower sell levels rather than today’s higher prices.
Note below is certainly not all my holdings, and there may be others I have mentioned on the blog where simply I don’t have much to add to what I have said not that long ago.
AGS – I have sold these at a bit above 8.6 cents. Occasionally I have done ok about of these small opportunities in the mining space, where activists take positions in shell companies and push for a capital return and other opportunities. MEL was an example in my first year blogging, but looking at the price after I sold maybe I was just lucky there. Over the journey I am not sure this has been a great hunting ground for me so perhaps that is also a small factor playing on my mind in selling AGS.
I did receive a capital return quickly, but management were also reasonably quick in spending a decent chuck of the remaining cash on an acquisition which hasn’t fared so well. Phoenix Capital and Sandon are still major holders and I normally find their investment style interesting, so perhaps I have been impatient here. But the share price fails to respond as management seem to do a lot of work on their presentations to the market. I think my sell level was still below the cash backing, and they have other assets as well. Their cash commitments are about to be stepped up though, and I originally went in this hoping more of the capital might come back to shareholders. This has had a share consolation as well as a capital return so the result may be a bit confusing, but I believe I lost 7% here after holding for nearly a year.
WMI – I have sold WMI at $1.22, after picking them up in the IPO at $1.10 in what was most likely always to be a short-term trade of this nature. The premise was mainly that WMI represents closer to what the original WAM capital was during its first 5-10 years of a LIC, and achieved great performance numbers. That is, hunting a lot at the smaller end of the market. Growing AUMs now has changed WAM to have to move up the scale in terms of the size of companies it looks at. Considering this, for WAM to trade at a 25% plus premium to NTA and WMI to trade close to NTA seemed like an anomaly. I was also comfortable with the microcap sector in the short term after recent underperformance, and thought there may be some follow through buying on the companies WMI gets set in from fans of the Wilson investing methodology. They could run a bit higher but by and large the reasons for the trade have played out, and felt was time to exit WMI.
NAM – I have held this since the beginning of the blog where I think the shares were in the low 30s at the time, having bought even lower. There were enough murmurings at the time about dismantling the co-op structure yet the price was stagnant near the low of the range. Over the last year the operations of NAM have been brighter, and finally they are going through the process of the corporate restructure. This has been foreshadowed for some time now so I felt the catalyst I identified has pretty much taken place. I am reluctant to keep hoping for further gains now this is widely known and things are travelling ok for them, as they have a very cyclical history. I sold at about 44 cents.
FGG – I have started accumulating this and some of the rationale was discussed in my recent blog post. This is a stock that in an ideal world, perhaps I would see my initial purchase underwater and I can slowly accumulate a large holding. I see it as potentially being a holding you can have a relatively high weight in your portfolio and not stress about it. Eight years into a bull market that kind of sounds good as you must hunt hard and wide these days to come up with bargains in the market.
APW – This may be taking shape as I suspected when I commented about the situation after the wind-up vote failed in the first week of this year. Whilst the wind-up vote fell marginally short (adjusting for the prospects of the AIMS vote potentially being disallowed), it may have come close enough to tempt activists to try and accumulate a few more percent.
Since the vote AIMS have bought back near 1%, but Sandon Capital is a new player on the scene having slowly accumulated 5%, whilst Samuel Terry Asset Management has crept up by another percent. The top 20 in the latest annual report to me indicates if anything, more shareholders would be against management than compared with when the vote took place.
I continue to hold, and note with the business itself that while their Brisbane exposure has been disappointing, Melbourne looks ok and generally their unlisted holdings have done well this year. I have read some sales results in the St Kilda Road market near an AIMS property that has sounded robust.
I was tempted to dig deeper in the annual report about the issue of waiving the RE fee, yet at the same time reimbursing of fees for reasonable and proper costs, but fear my stress levels may rise.
TTS – The Tatts result was received well by the market, although having said that the shares were weak in the lead up. The result contained some one-off weaknesses such as higher expected win rates, and loss of race meetings due to weather. I still hold as the merger approval is not yet finalised. Whilst that is the case there remains a small chance of another proposal.
AJA – This turned out roughly as planned when I purchased earlier in the year. Sometimes I ponder whether a bit more of a premium to stated values could have been achieved, or less costs leakage in the deal, but overall this outcome was about what I was aiming for when buying. The only disappointment is the unfavourable exchange rate movement, as I bought when AUD/JPY was 84. I will likely keep holding and note a couple of weeks back the Weiss group went substantial. Not sure if that is a simple wind up arbitrage as a short-term play or they believe somehow there is time for a better deal to be put forward.
SVWPA – I was giving myself a pat on the back having written about this security in December last year after picking them up below $72. They look like they will hit $80 and they have paid some good income along the way. I wrote the earnings of the group look to have clearly bottomed but now I notice that the shares have surged in the same period, making me wonder if I am not so clever after all and should have bought the shares instead! In reporting their results, they announced they would sell WesTrac China, and beat market guidance. This gives them plenty of balance sheet flexibility. They have said they will look at acquisitions and / or capital management, I prefer the latter and will keep holding.
ILU – A strong result and outlook that was well telegraphed, hence a muted reaction. The price has been very strong in the last year and it is possible the stock just needs to go sideways for a while and digest all the profit taking selling, so I continue to hold.
SSM – No longer a hold for me but I thought I would comment. I finished selling my position a bit above $1.30 so that may well be an error. The strong result was no surprise but the large increase in dividend and relatively upbeat comments have been received well by the market. Looking back at my notes over the last year, it could be a case of missing an opportunity to sit on a stock for many years, and not incur the CGT liability. Effectively getting a tax-free loan from the government can have a powerful compounding effect if you can find a well-managed company where the share price increases by 5 to 6-fold. I also probably have a bias that precludes me from sticking with such situations that I need to work on perhaps. At various stages of holding I even realised about this bias, and thought to get around this I would remain a holder whilst the stock was above the 200-day moving average. This could keep me in the stock, whilst mentally thinking of the value at that 200-day moving average level, so I wouldn’t think of the large position as being so risky. Sticking to that would have kept the whole position alive at this point and would have made it a large one. Besides that, I could have approached the current strong cash flow of the company and dividend stream to also assist in holding this for longer without being too concerned of a large retracement. Live and learn perhaps.
REF – Not too many surprises as they did offer market guidance not that long ago. They have announced another small bolt on acquisition since I last wrote about REF which is good to see. Strangely in my opinion, albeit not huge volume, the price has moved a lot higher since. The ASX never ceases to amaze me how sometimes buyers step in after dividend announcements. At a guess that could be it, because the 25% rise occurred in the next day after it was announced the previous afternoon. It is strange I guess to see a company with a share price of 7.3 cents declare a 1 cent fully franked dividend. Yet in the case of REF should have come as no surprise. Anyway, it remains a hold to me as despite the jump I think it is too cheap to sell. As I write it has gone ex the one cent fully franked dividend and liquidity is lower than normal. Although some volume went through at 9 cents today ex dividend. Effectively that is like 10 cents compared with 7.3 cents when I last posted not long ago on the stock.
MAH – Quite solid turnover followed their profit results. The reporting seemed quite upbeat, and the guidance still makes the stock appear cheap. The situation has panned out as I expected when I wrote about this in March, at the time when they were still fending off the bid from CIMIC and trading at 15.5 cents. Now the stock is at 18.5 cents, giving them a market cap of approximately $400 million pro-forma the AMNT transaction. They have cash of over $50 million on the balance sheet, with the share price not much higher than the reported NTA of the company at 17 cents. Guidance is for underlying EBIT of $40-$50 million. With upbeat comments on the tender pipeline and that we are past a recent cyclical downturn in this industry these metrics are not that demanding I feel. The company has disappointed over the years so investors may be a little skeptical, but I think it is worth me holding and hopefully we can see some further gains if they can manage to deliver on what they have put out in this presentation. As I am getting this blog post together I see an announcement where Forager may have done some selling. I am too tired to look it up again but guessing if this is the case it is minor for them as recently they have sounded bullish. They did have a very large weight to their fund in MAH so I would perfectly understand if they wanted to reduce, even whilst being optimistic on the prospects. Let’s not forget Forager reduced their SSM position at under $1.
PAI – Just announced their first dividend as only a small one cent one, but significantly they have recouped prior tax losses and now able to pay more fully franked dividends in the future. They may one day eventually pay dividends at a yield closer to what we expect from PMC now over time. They just unfortunately kicked this LIC off before they had a little bit of a lean run on performance. Eventually some higher dividends with PAI may re-rate the shares a bit higher with retail investors.
COG – It has been a roller coaster ride since discussing COG on the blog almost 18 months ago. Initially the price was 10.5 cents and I witnessed it move all the way up to 18 cents in late 2016, where quite a bit of volume change hands, and wished I had been clever enough to sell then. I sold half my position after they reported their half yearly results in February this year at 15 cents. Bearing in mind my position had got larger than I first planned from participating in rights issues. I am certainly pleased that I did lighten my position then, not because of any concerns I have now, but rather it would have been stressful to see a large position in the portfolio decline by 44% from peak. Having a lower weight to this certainly meant when I saw it hit 10 cents not long ago it didn’t concern me so much.
Some nagging doubts I had in February were the pace at which they were making acquisitions, and some of the dilutive raisings taking some gloss off the merits of this expansion. At 15 cents, and with the change of the reporting from abandoning the LIC structure with at the same time accounting for acquisitions, it made it a more difficult task to get some transparency on likely future earnings and valuation. The company didn’t help with delaying the investor presentation on the half yearly results and an average presentation at that. I know that major holders NAOS and Sandon have been at management to improve shareholder communications and I can see after the latest full year results this has had an impact. The shares traded much stronger on the day of the release moving from 10.5 cents to 12 cents, but I will likely keep holding whilst the stock is around these levels.
I didn’t have concerns of the future growth potential, but especially at around 12 cents don’t see the prospective valuation too demanding. I have been encouraged to see them recently walk away from an acquisition post due diligence, and to see in the presentation some signs they will seriously consider a dividend policy next year after completing the proposed existing acquisition. It is also pleasing to see an improved effort in shareholder communications with this result. From listening to other shareholders, I had a slight concern that management may have had the ability, but perhaps were rushing into expanding and didn’t respect the shareholder base with communicating the story. If the stock happened to fall back to 10 cents then I have some comfort in continuing to hold and wait to see how the dividend policy may play out. I think 18 cents was a stretch last year in hindsight though so may not be looking to see that high in the year ahead.
JYC – In a tough sector this set of results was a comforting read. All facets of the business seem to be doing well and have good growth prospects for the future. Management seemed quite confident they can deliver good growth over the next few years. It looks like the raw profit numbers may have been held back to some extent due to it spending money on expanding Lloyds auctions. i.e. for a good reason and allows for plenty of potential for the next year ahead. They have a strong balance sheet and even when the special dividends cease, I still see the stock is offering a good solid dividend stream. The FY18 result should look even better. Momentum with the Bedshed business is underpinned by recent new stores and prospective new franchisees. Kitchen connection refers to considerable forward orders, and efficiency gains by making use of property for admin and warehousing. Expectations may have been high already for this result and the shares are illiquid, so weakness wouldn’t shock me, as the current EPS figure does not highlight the true worth of the business in my opinion. I think this will be one to probably stick with until they report in a year’s time, to hopefully see very likely profit growth reflected in the headline EPS figure for 17/18.
UOS – Typical no-frills but sound results release with limited commentary on outlook. I have asked them if we will ever see any type of investor presentation accompanying the results, and not holding my breath on this. I really am not too fussed with this though, as if you keep delivering there shouldn’t be a need to make fancy presentations. I see that the REIT they own has undergone audited valuations that point to a slight improvement if anything. Like many property markets in the world, KL is not without its risks, but I can’t see any reason for UOS shares to be discounting future problems like the current share price arguably implies. Some current projects just completed or nearing so that I witnessed still seem to be popular.
EAI – I mentioned in my last blog post for the first time that I was a holder of EAI. Equities to me in this region stand out for relative value when compared with the US. I believe Ellerston has proved themselves as a good manager across many products and this LIC seems far more reasonable with its fees compared to the latest offerings in the sector. I fully understand the discount is not quite as large as at first glance because of options outstanding, but looking further out the options may not be too dilutive and eventually when they are in the background other investors may be more willing to look at this. If am wrong and management don’t do a good job here then some activists may eventually look at this. This will never be a large dividend payer but some may be pleased that they announced stronger intentions today, transferring money to the dividend profit reserve waiting for more franking credits to build.
TGG – Kind of a boring holding but has done an ok job for me, as I picked it up last November when the discount to NTA was wider. Still holding but if it begins to trade much stronger and closer to NTA there may be more interesting ideas to switch into soon.
Ok that ends my reporting wrap for now. Once again maybe a little bias to selling rather than many fresh buy ideas, simply a function of the complacency in markets after about an 8-year bull run I guess. Now a little tired after all my rambling above, so don’t be too surprised if the blog goes quiet again for a month or two! Enjoy the weekend, I am trying to take an early one!