About this Report As part of our ongoing commitment to being a trusted partner for our clients, Providence reviews a number of products each month, searching for investment opportunities that fit our clients’ individual requirements. Being an independent company, each opportunity is assessed solely on its merits regarding risk and return. True to Providence’s promise of transparency and independent analysis, each month we share the basis of our decisions with our clients in this Monthly Activity Report.
- Acceptances – 3
- Declines – 10
- Presentations – 5
Acceptances
- National Australia Bank entitlement.
National Australia Bank offered a 2:25 retail entitlement offer to raise $5.5bn to put NAB in a strong capital position arising from regulatory change, including the Financial System Inquiry and the separation of NAB’s UK banks. The offer was for new NAB shares at $28.50, which represents a significant discount of 17.5% at the time of offer. We believe this represented a compelling discount for existing shareholders, we have participated in full on behalf of Providence clients.
- BHP Billiton and South 32 demerger.
BHP recently demerged a number of its businesses that it now deems non-core. These businesses included alumina, aluminium, coal, manganese, nickel, silver, lead and zinc. The demerger involved issuing 1 security in South 32 for each security held in BHP Billiton. As a result, the current holding in portfolios of both South 32 and BHP Billiton when combined, is equivalent to holding BHP Billiton pre the demerger. We believe the separation of these two businesses is positive for both companies making shareholder returns and improving efficiency their key targets. Furthermore, the assets of South 32 will no longer have to compete for capital with the major producing assets in the BHP portfolio, namely Iron Ore, Copper and Petroleum. As such, capital required to improve efficiency and/or make acquisitions is likely to be more readily available for the new entity.
- Century Australia rights issue
We received a 1:5 retail entitlement offer from Century Australia, to raise $11.5m, which would be used for further investments consistent with their strategy of investing in undervalued Australian companies. The offer would provide existing shareholders new CYA shares at $0.846 per share, versus April-15 NTA of $1.01, over a 16% discount to NTA backing. We believe this represented a compelling discount for existing shareholders, and have participated in full.
Declines
- Bank of Queensland Capital Notes
Bank of Queensland recently offered a $150m capital note offer, through an over the counter convertible note. The product offered an indicative margin of 435 bps over 6 month BBSW, an optional exchange date of May 2020, mandatory conversion May 2022, along with the now normal capital trigger event and non viability trigger event risks. We have declined in this offer as the structure being OTC would restrict clients to large $500,000 wholesale amounts, the size of the offer being small and potentially lack of secondary market liquidity versus ASX listed issues.
- Westpac dividend reinvestment offer
Westpac recently announced their 2015 interim results which included an interim dividend of 93c per share, increasing 3% on the 2014 interim dividend. While Westpacs capital ratios remain strong, there is some regulatory uncertainty over future capital requirements. As a result, the bank has indicated its intention to lift capital levels. As part of the process, the Westpac Board has decided to apply a 1.5% discount to the market price of shares issued under a dividend reinvestment offer. We have declined on the Westpac offer given the marginal 1.5% discount, particularly after the recent NAB entitlement offer we have accepted on behalf of our clients.
- ANZ dividend reinvestment offer
ANZ recently announced their 2015 interim results which included an interim dividend of 86c per share, which is in line with their interim dividend last year. Similar to Westpac as above, with regulatory uncertainty over future capital requirements, ANZ have decided to apply a 1.5% discount to the market price of shares issued under a dividend reinvestment offer. We have declined on the ANZ offer given the marginal discount to market price, particularly after the recent NAB entitlement offer we have accepted on behalf of our clients.
- Argo Global Listed Infrastructure IPO
Argo has appointed global asset manager Cohen & Steers as portfolio manager for a newly incorporated listed investment company which will invest in global infrastructure securities, seeking to raise $200m attached with a free 1:1 option expiring March 2017. We met with the manager and were positive on the global listed infrastructure strategy and their 12 year track record, however, we dislike the structure of LICs featuring free options which limit the potential upside and dilute shareholders once options are exercised. Our preference is to invest in LIC vehicles when they trade at a large discount to net tangible assets, over the course of the cycle.
- Adelaide Bank Convertible Preference Share 3
We were invited to participate in a $225m Adelaide Bank convertible preference share offer (ASX code: BENPF) which features a margin of 4% above 180 day BBSW, optional conversion in June 2021, mandatory conversion June 2023 and the normal capital trigger event and non viability trigger event risks. We have declined the offer due to the relatively small offer size and our preference towards shorter duration and more liquid capital securities.
- ANI Takeover Offer from 360 Capital
We participated in the Australian Industrial REIT (ANI) Initial Public Offering as we were attracted to the defensive characteristics of the portfolio, clarity surrounding future earnings and the low level of gearing. This takeover proposal will materially change the portfolio of assets that investors have exposure and reduces NTA, forecast earnings and forecast distributions while significantly increasing gearing. As such, a number of the defensive characteristics of the original portfolio will be removed and investors will be left with a poorer quality portfolio of assets. Other reasons are laid out in more detail in the Targets Statement issued by ANI which we strongly agree with. Most notable concern is the lower liquidity in takeover stock with limited takeover premium being offered to ANI unitholders for this lower liquidity.
- Barwon Neighbourhood Shopping Centre Fund
Although attractive from an income only perspective and being comfortable with the manager, we don’t believe there is a lot of value add for this investment being close to fully leased and around market rents. We believe cap rates have compressed to expensive levels at a low point in the interest rate cycle and therefore have declined this offer.
- Australia Dairy Farmers Group placement
Australia Dairy Farmers is a farm owner and operator to produce fresh milk to the processing sector of the industry. The group intends to progressively aggregate dairy farms in prime dairy producing regions of Victoria. The company recently came to market looking to raise $31m to acquire 6 dairy farms. We have declined the offer given the small issue size and our preference for more liquid placements.
- International Justice Fund IPO
International Justice Fund has been established to rapidly grow into a leading provider of litigation funding. The initial public offering was looking to raise between $37m – $47m to be used for funding litigation. We have declined the offer given the small issue size and our preference for more liquid floats.
- Pacific Hotel Cairns
We reviewed a direct hotel property opportunity in Cairns looking to raise $12.7m with a strategic view to purchase, refurbish and sell the asset over a 10 year investment period. We have declined on the offer as expected return of 6% pa did not offer enough compensation for the long term investment lockup, the high gearing of 50%, and low performance fee hurdles.
Presentations
- Federal Budget Update.
On review of the Federal Budget delivered last month, we believe there is no impact to client portfolios. There are no significant changes to superannuation legislation that will affect client accounts. For small companies with annual turnover up to $2 million, the company tax rate will fall by 1.5% to 28.5% from 1st July 2015. A temporary measure will allow small businesses with turnover below $2 million to get an immediate tax deduction for every asset they acquire that is valued up to $20,000 for tax purposes.
- Bentham Global Income Fund update.
We met with fund manager Richard Quin from Bentham for an update on their Global Income Fund. The fund aims to generate a stable income return by investing in a diversified portfolio of senior secured credit securities. Bond rates globally compressed significantly last year, with most credit managers being positioned for a rising interest environment through short duration positions. We are pleased to see the fund having posted a positive cash-like return over the rolling 12 months, in a scenario which would expect negative returns. The manager remains short duration (expecting interest rates to rise) and currently prefers syndicated and collateralized loans.
- EFG Private Banking Group.
EFG Asset Management is a global private banking group offering private banking and asset management services headquartered in Zurich. We have been in discussion with EFG regarding international custody arrangements and access to their funds research team which seeks out active high conviction managers (hedge funds, long short and private equity). We will continue to review this offering on behalf of clients, particularly for those seeking to invest through an offshore platform.
- Centuria Investment Bond.
We met with Neil Rogan from Centuria regarding Investment Bonds as a potential complementary structure to superannuation in its current form. Investment Bonds have a maximum tax rate of 30% and are tax free after 10 years on withdrawal. They are suitable for clients that are restricted by maximum superfund contribution limits, for those with a long term investment goal, and can have multiple beneficiaries for estate planning. We are still in discussion stages regarding how it may be implemented and will be reviewing with clients if it may be a suitable investment for their portfolio.
- Forza George Street Fund update.
We have recently invested in Forza George Street Fund (Brisbane), but have experienced an early set back with Macquarie Bank revising conditions to the debt facility which had terms making it unacceptable. Since May, the manager has been very busy holding weekly conference calls with a new debt provider and are working through the checklist of the new debt facility conditions. To date, they have been able to satisfy many of the core conditions and are working to get as many of the requirements complete as soon as possible. Additionally, they are currently in heads of agreement with the first prospective tenant; actively pursuing a second leasing opportunity; and have negotiated some short term leases to provide additional short term income whilst repositioning the asset for longer term leases. Providence will continue to monitor the unconditional debt position, and expect this to be completed over the next few weeks.