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The Experts

Tim Boreham
+ About Tim Boreham

Welcome to the New Criterion, authored by Tim Boreham.

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

Tim Boreham has now joined Independent Investment Research and is proud to present The New Criterion, which will honour the style and purpose of the old column. These were based on covering largely ignored small- to mid-cap stocks in an accessible and entertaining manner for both retail and professional investors.

The New Criterion will strive to continue the tradition in a weekly online format.

The column will not offer stock recommendations because we think readers can make up their own mind on the facts and opinions presented.

Our coverage will include both the industrial and mining sectors, including listed investment companies and IPOs. The stocks covered will not necessarily be of investment grade with sound financials. But they will have credible management and – at the very least – an interesting story to tell.

We hope readers will find The New Criterion both entertaining and informative.

Come hell or high water

Friday, September 21, 2018

The dry conditions in many of the key farming regions highlight the importance of water security for our listed agricultural plays. When it comes to water rights, some are in a better position than others

With the parched conditions lingering in some key farming regions, it’s becoming a case of the water “haves and have-nots” for the key listed agriculture plays. 

The cost of temporary water rights on the spot market has more than tripled in the last 12 months and, not surprisingly, they’re keeping a keen weather eye on weather spring rains to eventuate to alleviate what could become a crisis for many growers.

“The market is very concerned at the moment,” says water expert Richard Lourey of Sauber and Co, who notes record low rainfall in central and north-west NSW.

“Everyone is worried about how dry it is and everyone is concerned about whether they will be able to get their allocation.”

Some contend that financial (non-grower) buyers have been pushing up the price of rights, creating resentment in low-return sectors such as dairying. Others argue that as these rights holders lease the rights temporarily to growers, the water is still available.

What’s for certain is that in the ‘real’ world, demand for water is unprecedented because of the rollout of water intensive nut and fruit orchards and cotton growers buoyed by the high prices for the commodities.

So how are the listed agri plays likely to fare?

For the time being, Duxton Water (D20) is on the right side of the equation because it has a book of almost 44,000 megalitres of rights, mainly permanent and predominantly in the ‘high security’ category, which means they are more likely to receive their full annual allocation.

Currently about half these rights are leased to growers but the fund expects this portion to rise to 70-80% “due to the expected increase demand for water supply solutions.”

In its June half commentary, Duxton says that with the January to June period one of the driest on record, many irrigators drew down on their carry over reserves from last year, forcing them to wade back into the market (in some cases, this action was needed to avoid fines for overuse).

In the meantime, many farmers haven’t covered their requirements for the 2018-19 growing season, with many of them forced to bring forward irrigation to September or October. “This is likely to increase demand in the allocation market through summer and autumn as irrigators finish summer crops and support their permanent plantings towards harvest,” Duxton says.

The Chris Corrigan –chaired Webster (WBA) is the biggest private owner of water rights – 200,000 megalitres — but is also a prolific grower of walnuts, almonds and cotton.

So Webster may have plenty of water, but it also has plenty of orchards and crops to quench. The company recently sold a cotton property called Bengerang for $132.7m, thus reducing its irrigated land from 24,500 ha to 15,000 ha. Development work at two properties will increase this coverage back to 20,000 ha in the current financial year.

“The company remains well positioned to grow its operations, further supported by our investment in water which continues to underpin our business,” Corrigan declares.

For Select Harvests (SHV), the country’s biggest listed almond grower, it’s a case of being alert and not alarmed. One again, Select has sizeable water rights worth $51m, but needs to slake the thirst of three million trees across three properties in southern NSW, northern Victoria and SA.

Select is not yet wading into the heated spot market in the hope that its springs and aquifers will suffice for the key growing period between November and May.

“Water is our biggest macro concern,’’ says CEO Paul Thompson. “But we don’t know the impact of entitlement allocations or where the market will settle.”

Select is also using field technology to reduce usage. For instance, it measures sap moisture rather than soil wetness for a more reliable gauge of watering requirements.

Select has held off watering until the evening to save water (and energy) costs  - a tip that any inner urban gardener could have imparted.

Then there’s Select’s landlord Rural Funds Management (RFF), the biggest ASX-listed landowner with 44 properties valued at close to $800m.

In theory Select’s tenants (which also include Treasury Wine Estate, Baiada Poultry and Olam) bear the climate risk. Still, with 93,000 megalitres of water rights valued at close to $50m, Rural Funds can ensure there’s enough water to support the cropping activities.

In a major non-irrigated diversification, Rural Funds recently bought five feedlots in NSW and Queensland from cattle giant JBS Australia for $149m.

While the evidence points to water rights surging further, there are a number of unknowns apart from the likelihood of precipitation and whether snow in the highlands melts under the sun or is washed downwards by rain (the latter produces more water).

On the demand side, intensive water users, such as rice and cotton growers, may do the sums and decide it’s not worth planting a crop this year. If that’s the case, they may sell their entitlements and cause the water price to tumble (as has happened before). 

This luxury of not growing doesn’t apply to orchards, which need to be kept alive, come hail or shine. Some pundits reckon that because of the proliferation of such permanent crops, farmers will struggle to secure temporary seasonal allocations in coming years.

Not surprisingly, Duxton Water shares have risen 18% since mid June. While its water rights are on the books at $95m – 40% higher than a year ago – the fund cites a fair market value of $120m.

The company has net tangible assets of $1.27 a share, which means the stock is trading at a slight premium to this intrinsic worth.

While Duxton shines, the weather concerns have pushed Webster shares down 13% since hitting a record high of $2.02 in mid June, despite a walnut crop that looks like being the second best on record.

Webster’s water rights are in its books at $222m but valued at $360m (directors view even this number as conservative).

Select Harvest shares have declined 30% from last June’s two-year high of $7.45 a share.  Select should benefit from a bigger crop – an expected harvest of 15,700 tonnes compared with a poor 14,100t previously (bearing in mind the harvest has only just begun).

Pricing is also improving because of persistent drought in California, which supplies 90% of the world’s almonds.

For investors punting on the big dry continuing, Duxton is the obvious play, as the bourse’s only pure play water rights play. However the troubled Blue Sky Alternative Investments (BLA) holds $258m of water rights in its Blue Sky Water Fund.

On a cautionary note, the water rights market is notoriously complex, often illiquid (ironically), poorly regulated and thus open to manipulation.

If the heavens open in the right locations, water again will become a buyers’ market.

Currently, the Southern Oscillation Index, the guide to likely El Nino dryness or La Nina wetness – is at a neutral setting. So in theory it could go either way.

Tim Boreham authors The New Criterion 

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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Not sexy but a good show

Friday, September 14, 2018

If there’s a clear winner from the murky swamp of revelations uncovered by the banking Royal Commission, it’s the provider of independent administration and investment platforms for the financial advisory industry.

The listed alternatives — (HUB24 (HUB), Netwealth (NWL) and Praemium (PPS)) —  could never be mistaken for ‘sexy’ companies. 

But when it comes to the recent earnings season, they were among the better performers, as advisers migrate in droves from the conflicted bank-owned platforms.

What’s the history?

First adopted in the 1980s, platforms were developed as a simple way for investors to hold, acquire and administer assets. For intermediaries such as brokers and financial advisers, they help to streamline advice implementation in an era of elevated regulatory requirements.

Post the Royal Commission revelations, having a platform owned by the manufacturers of the investment products is as acceptable as dwarf tossing or third world slavery.

The banks (and AMP) still account for about 80% of the market. But most of the banks have got the message and are offloading their wealth platforms as fast as they can find a buyer offering a half-decent price.

How did HUB24 report?

Given this backdrop, HUB24 reported a 129% in underlying net earnings to $5.4 million, with funds under administration surging 51% to $8.3 billion.

Revved-up management also declared a maiden 3.5 cents a share dividend and increased its guided funds under administration to $19-23bn in 2021, compared with earlier guidance of $12bn by 2020.

HUB24 now accounts for 12% of total industry flows and as of March 31, accounted for close to half of new flows.

CEO Andrew Alcock says advisers for some years have been looking for an uncompromised choice of products to offer clients. “The Royal Commission has just expedited that.”

Lest investors get too excited, the platform industry is also fragmented and very, very competitive.

Another competitive threat is that once bifurcated from their tarnished owners, the bank’s former wealth operations will operate with the ‘independent’ cachet.

But Alcock contends they still will be product manufacturers and in any event will not have invested adequately. “When they’re stand alone, they’ll be behind the pack,” he says.

“All up, in the last 10 years, we’ve spent $60m to $70m (on product development) and this year will spend $7m.”

So what can go wrong? 

The pachyderm in the room is rival BT’s recent decision to slash the pricing of its Panorama platform.

In July, BT cut its administration fee to 0.15% of assets, with a $540 a year flat accounting fee. For a holder with an average account of $400,000, this equates to a 42% cut.

Rivals argue that the reductions are ‘headline’ only, with variations for specific products.  “I think our pricing is very competitive,” says HUB24’s Alcock. “It’s not just about pricing, it’s about features and functionality.” (Because it provides a tailored service for individual clients, HUB24 doesn’t publish a universal rate card).

What’s happening at Praemium?

Over at Praemium, group revenue grew a healthy 22% to $43.2m, with profit (ebitda) rising 40% to $8.8m.

Praemium operates in Britain as well as here and if anything, the Old Dart performance brought down the batting average with a negative performance.

As with HUB24, Praemium investors can’t complain about local inflows, up 45%. In particular, self managed accounts inflows rose 69% to $2.2bn.

Shaw and Partners highlights Praemium’s forecast compound annual ebitda growth of 17% over the next five years, with double digit earnings per share growth over the next three years.

And the ASX newcomer Netwealth?

Not to be outdone, Netwealth reported a 73% surge in full-year profits to $29m, on 36% revenue growth to $83m.

Netwealth also reported funds under advice of $18bn, up 41% and 18% above prospectus forecasts (the company listed in November last year at $3.70 a share).

Netwealth is winning 22% share of fund inflows, but still only accounts for 2% of the overall market.

“Netwealth has made a large impact in a short amount of time,” opines Pengana Capital’s Steve Black. 

“Through updated technologies, elegant user experience and by providing financial planners with the ability to manage their clients’ money, report and charge for additional services, this relatively new platform is positioning itself as a welcome alternative to the tired staples offered by the big banks.”

If there’s a bum note, Netwealth’s revenue margins fell 12% to 0.53%. Profit margins are likely to remain flat as the company re-invests in the business.

HUB24’s margins also came under pressure in the second half and are expected to come under further pressure from larger new clients (such as dealer groups) typically demand – and receive — a discount.

Netwealth is still a family affair, as it 53% controlled by the Heine family (Michael Heine and son Matt are joint managing directors).

They have no plans to sell down.

As with growth stories, the seemingly unfettered potential of the independent platforms comes at a price: factoring in some generous earnings growth for this year, the shares are trading on ritzy earnings multiples.

Netwealth, HUB24 and Praemium bear market valuations of $1.78bn, $830m and $340m respectively.

But who said quality is cheap?

Given the master trust, wrap and platform market is now worth more than $800bn and growing at a 12% per annum clip, there’s plenty of room to grow, barring some radical remediation by those stale incumbents.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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A whopping fully-franked 60% dividend!

Monday, September 10, 2018

Normally dividends reflect management’s confidence in a company’s growth prospects. But in the case of Reverse Corp (REF), its 5.5 cents a share fully franked payout was a result of its legacy business (facilitating out-of-credit reverse charge calls) being made redundant by all-you-can-eat mobile plans and internet telephony using public Wi-Fi.

Late in July, Optus said it would no longer avail itself of Reverse’s services. In early September, Telstra followed suit.

Chaired by former McDonald’s supremo, Peter Ritchie, Reverse has also developed a profitable online contact lens site.

But with its 1800-Reverse service likely to join the floppy discs and dodos in obscurity, management saw no better way to deploy its $5.3m cash balance than to return $5.1m of it to shareholders.


Reverse shares tumbled from 9 cents to 3 cents after they went ex-dividend on September 5, valuing the company at just $2.8m.

The question now is: how much is the ongoing profitable contacts business worth, along with the reverse charging operation as it is wound down?

Reverse reported full-year ebitda of $566,000 and a net loss of $503,000, on ebitda of $566,000.

Tim Boreham authors The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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Howling with pain

Friday, September 07, 2018

The listed childcare sector has been popular with investors, but emerging oversupply and affordability issues mean that all is not well in the sandpit. The operators are banking on the government’s revised subsidy scheme to revive their fortunes.

While a fresh report on the childcare sector highlights a dearth of places for under two year olds in some non-urban regions, oversupply is emerging in the main cities and the three listed childcare providers are howling with pain.

With the once-booming sector placed in the naughty corner, the federal government’s $3.5 billion Jobs for Families childcare package – effective from July 1 – could not have come quickly enough.

Childcare centres have been a popular asset class for property investors because they offer stable long-term leases, with the lease payments partially underwritten by the taxpayer.

Childcare has been less vulnerable to cyclical property variables and is often perceived as a stronger long-term income prospect.

About 80% of centres still owned by families and individuals, making for an “uneven and fragmented” industry (in the words of a Centre for Independent Studies report on the sector). According to agent Peritus Childcare Sales, 101 childcare centres changed hands in 2017 for an average $4 million, 25% higher than the previous year.

The trouble is the sector became too popular with too many investors chasing too few suitable locations, especially in non inner city areas. In 2017, 825 development applications were lodged in NSW, Victoria and Queensland.

According to the listed property trust Arena (ARF), 224 new centres have opened in calendar 2018 so far (net of closures), with 300 under construction.

At the same time, securing bank funding has become more difficult and fewer development applications are proceeding to construction.

The operator of 17 Victorian centres, Mayfield Childcare (MFD) set the early tone before the earnings season, downgrading its calendar 2018 earnings expectations from $4.1m to $3.5m.

The company cited soft occupancy rates (that is, not enough kids) and higher competition that has stymied price increases.

The company also cited the lag effect of the discontinuation of the Howard era Baby Bonus, which has affected birth rates.

At the same time, Mayfield’s acquisitive intentions have been hampered by a lack of quality stock. In some cases, greenfields sites have opened almost empty, which at least makes it easier to clean up after the finger painting!

Think Childcare (TNK) then posted a good old Barry Crocker -- the sort of unexpectedly numbers rarely seen in today’s world of tight earnings guidance.

Think’s first-half earnings tumbled 74% to $700,000, with calendar 2018 guidance shaved by 38% for earnings and 10% for sales.

Think owns 45 centres, 80% of which are in Victoria where new openings have been at record levels for the last 18 months. Of its cohort of centres, 18 faced specific new competition.

Think chief Mathew Edwards says the old childcare system meant that enrolments were “untraditionally” flat between February and June.

“We expected to see a rebound and as a sector didn’t fully appreciate the depth of fees stresses families were experiencing.”

G8 Education (GEM) was the last of the listed trio to release its numbers, but sadly it wasn’t the case of leaving the best to last.

G8’s half-year earnings fell by 22% to $23.7m, with management also calling out “unprecedented” oversupply issues and regulatory change.

G8 shares sunk by 16% on the day to five-year lows, more on the outlook than the predictably downbeat numbers.

“We are not forecasting a material improvement in market conditions until mid 2019 and are adopting a conservative approach to occupancy growth forecasts (in the current half),” the company said.

G8 has also curtailed its acquisition of greenfields sites from an intended 30 to 19.

G8 is the biggest listed operator with 512 centres and the second biggest overall behind the not-for-profit Goodstart, which picked up most of ABC Learning’s centred when Eddy Groves' baby went bust after an orgy of (over) expansion.

At a macro level, there are still plenty of supportive factors for the sector. Female participation in the workforce is increasing – as is the population -- and the easing supply should result in improved occupancies and returns.

The new funding scheme – replacing the cumbersome childcare benefit and childcare rebate schemes  – should support the sector after the widely-reported teething problems abate.

The government claims 94% of parents will be better off under the arrangement, which, unlike the former scheme, does not cap subsidies for families earning an income of up to $185,710.

Think’s Edwards says the new “once in a generation” subsidies means childcare has gone from being the most expensive in a decade to the cheapest in history.

For parents, that’s not before time: the Centre for Independent Studies estimates that even with Canberra’s subsidies out-of-pocket expenses have increased by 50% since 2011.

We bet their salaries haven’t.

RBC Capital Markets analyst Garry Sherriff assumes a “gradual improvement in occupancy levels from calendar 2019 and beyond, noting that the new childcare reforms and moderating industry supply growth will take time to cycle through the system.”

Over the last 12 months G8, Think and Mayfield shares have tumbled 45%, 22% and 18% respectively.

It remains to be seen whether it’s a case of an over stimulated sector in need of an afternoon nap, or whether there’s something more disturbing happening in the sandpit.

For investors who prefer freehold ownership without the travails of being an operator, Arena owns 207 centres valued at just over $600m.

Folkestone Education Trust (FET, $2.81) owns 354 centres worth $890m, but has just agreed to be acquired by Charter Hall in a $200m cash deal.

Tim Boreham is author of The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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Another bank on the horizon?

Friday, August 31, 2018

Which bank?

Four Pillars, beware: the low-key payments services house is applying for a banking licence under a new restricted ‘P plate’ category aimed at supporting the growth of the fintech sector.

If Novatti (NOV) gets the green light, it will join the unlisted Volt, which made history in May by being awarded the first such restricted licence. A handful of other fintechs have also applied.

The company hopes to lodge its paperwork with the regulator, the Australian Prudential Regulation Authority (APRA) in the current quarter.

Inevitably, the so-called neo banks (most of which are not banks) target Millennials, the swelling tech savvy but slightly irritating cohort that is comfortable with app banking and think a cheque book is something out of a Prague library.

Novatti is tackling a different niche market: new migrants and overseas students, especially from Asia. Given Novatti’s core business covers remittances and pre-paid card services to that market, the strategy plays to an existing audience.

According to CEO Peter Cook, this business goes elsewhere after the customers have graduated from pre-paid cards to transaction accounts and loans. “Most are actually well educated and in $80,000-a-year jobs and are very aspirational,” he says. “This is a really good client base if you can get it right.”

Even though Australia’s migrant intake has been curtailed, we still accept around 220,000 migrants a year, with an additional 800,000 foreign students (200,000 from China).

An APRA restricted licence limits cumulative deposits to $2m and total assets cannot exceed $100m. But as with those P platers, the idea is that holders graduate to a full licence (requiring at least $50m in regulatory capital).

Despite the slimmed-down requirements, a restricted licence still involves a sizeable financial commitment (and existing infrastructure) beyond the limit of most fintechs.

Cook estimates the cost for Novatti around $7m, including $3m for tier-one capital. That’s no small beer for an entity that turned over $9.1m in the June quarter and held $4.5m of cash.

 “Still, we’re a good candidate for a bank because we have an AFSL (Australian Financial Services Licence) and a remittance network,” he says.

“We have our own compliance team and do a lot of financial processing.”

Cook admits that if he had announced the plan two years ago he would have been “marched off to a special hospital for checking”.

To smooth the path, the company hired two former bankers: Guy Cavallo, who headed payments at Australia Post and Geoff Bloom, a former ANZ operations executive.

With a current market valuation of $40m, Novatti listed in January 2016 after raising $7m at 20c apiece. “We had a very rugged first year,” Cook said. “A major tech project went a bit feral and it was a big distraction that burnt through a lot of money.”

Since then, Novatti has jettisoned some troublesome tech business and acquired more suitable ones in payments and remittances.

Novatti stock found favour in mid June this year after the company announced, a platform that allows the payment of Australian bills via Alipay with China-based e-wallets. WeChat Pay and China UnionPay are also expected to join the platform.

The company’s current product suite includes utility billing platforms, a cash voucher service (Flexepin) and a reloadable Visa card (Vasco Pay). “The beauty of payments is that $1 of revenue 98c flows through to the bottom line,” Cook says.

2. A savings plan for Millenials

While Novatti pursues a banking licence, the diversity of the fintechs’ business models show there are plenty of other ways of being a ‘bank’ without the seeking the costly and time-consuming regulatory seal of approval.

Take Raiz (RZI), the former Acorns Grow that works on the savings, rather than lending, side of the equation.

Raiz launched in February 2016 in a joint venture with Acorns of the US, based on an app that enables users (typically Millennials) to save money by rounding up the cost of a small purchase. The savings are invested in ETFs and unlike a bank deposit the savers are exposed to market fluctuations.

For its part, Raiz charges a flat fee of $15 a year on amounts up to $5,000, or 27.5 basis points on balances higher than that.

The JV was dissolved this year after it became clear the parties had other priorities: Acorns of the US was keener on becoming a bank than a fund manager and was lukewarm about expanding into South East Asia.

Raiz acquired the local rights to the platform, changed its name and then listed in June this year, having raised $15m at $1.80 apiece in an oversubscribed offer.

The company has since launched a superannuation product and is preparing to enter the Indonesian and Malaysian markets with its savings app. “In Indonesia we’re targeting a consumer class of 50 million people,” Lucas says. “In 10 years’ time that should be closer to 120 million.”

Currently Raiz has $222m under management across 165,000 active subscribers locally. CEO George Lucas says is a decent base, given Morgan Stanley estimates that an average fintech customer costs $500 to acquire. To date, Raiz has spent a miserly average of $15 per customer.

Currently, the average Raiz customer has a balance of $1,243 (as of June 30) with the average investment gaining 11% since inception.

They won’t be plonking down a deposit on a house in a hurry, but are doing better than Raiz shareholders who have done around half their dough since listing.

Raiz’s June quarter results showed a 123% boost in normalised revenue to $729,000, with net cash outflows of $4m. The subsequent fully year numbers showed a $7.1m loss on revenue of $2.76m, but care is required because the revenue only accounts for five months as the demerged entity.

Despite the red ink Lucas is puzzled why the shares have swooned, but acknowledges market concerns about an equity raising. “It’s not even on my mind,” he protests.

“We have sufficient capital to execute what we want to do.”

As at the end of July, cash stood at $11.6m.

Despite the torrid market reaction, Lucas is also convinced that listing was the right thing to do. A holder of six million Raiz shares already, he’s raring to buy more now that the results have been released.

Tim Boreham is author of The New Criterion

Disclaimer: Raiz has commissioned Independent Investment Research (IIR) for research. At the date of this article the research study has not been commenced by IIR. The author was not aware of this until after his interview with the CEO of Raiz.  Under no circumstances there have there been any inducements or like made by the companies mentioned to the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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A taste of honey

Friday, August 24, 2018

The $190 million cash/scrip takeover offer for honey producer Capilano is pitched at a decent premium but will the suitors have to sweeten the pot?

Will media mogul Kerry Stokes’ support for the consortium lodging a $190 million bid for the honey packer and marketer be enough to get the deal across the line? Through his company Wroxby, Stokes is a 20.6% holder in Capilano and is happy to take his consideration in scrip.

But some pundits reckon that the bidders -- private equity fund Wattle Hill and agricultural investor ROC Capital -- are swooping at an opportunistic time, with the company on the cusp of a golden earnings recovery.

Based on Capilano’s 2017-18 earnings announcement that accompanied the takeover news, the offer of $20.06 a share cash and a cash-scrip alternative values the company on a generous earnings multiple of 19 times. But while earnings fell 4% to $9.8m, broker Cannacord reckons they were well ahead of expectations. On the firm’s expectations for 2018-19, the stock is trading on a multiple of only 14 times after being rerated post the takeover announcement.

“We won’t be surprised to see an alternative proposal emerge,” the firm says.

Select Equities analyst Mark Topy concurs. “We believe the bid has highlighted the latent value in Capilano with its leading market share position and honey supply to expand in the Asian region,” he opines.

“We believe that other parties may identify this value in assessing and launching a possibly higher bid.”

With a circa 70% domestic market share, Capilano presents a rare chance for a buyer to land its sticky paws on one of the country’s best known consumer brands.

Not that the producer is devoid of issues.

This year’s crop is expected to be the highest in a decade, which flies in the face of reports that our bee population is in less than robust health. In other words, there’s an oversupply.

Another negative is that Coles recently decided to stop stocking Capilano’s Allowrie brand, which is sourced from Argentinian and Chinese honey but also contains 30% Australian honey.

The patriotic Coles decided it only wanted local honey, which provided an entree to key competitor Beechworth Honey to increase its private label presence.

Woolworths, however, continues to stock Allowrie, arguing the value product is popular with consumers. Topy estimates the brand accounts for 5% of Capilano’s revenue.

Supply wise, the dry weather is a key X factor. About one quarter of honey comes from Queensland, where conditions have been unfavourably dry.

Manuka honey (a fave of health-conscious consumers) is in especially short supply and Capilano has been relying on Kiwi beekeepers to maintain market share.

Capilano’s full-year results show the company is sitting on a honey stockpile of 6746 tonnes worth $51m, which positions the company if the Big Dry continues. As Capilano chairman Trevor Morgan says: “It’s comforting to have a little more honey in the yard than has been the case in recent years.”

Also, increased supply isn’t entirely negative for Capilano, because it lowers the price for the commodity the company pays to the bee keepers. According to Topy, apiarists now receive an average $4.80 a kilogram, compared with $5.20 a year ago.

But if the drought persists and supply constricts, these prices are likely to rise.

Investors have taken a cautious approach to Capilano because its push into China has been slower than expected. The company has recently moved from a direct approach to more of an emphasis on the Daigou (cross border) channel and the Alibaba and ecommerce sites. But Wattle Hill is a China specialist with a remit of expanding the brand into offshore markets.

Stokes is obviously confident of the strategy: Wroxby has agreed to take up its entitlement in scrip, which frees up other Capilano holders to accept either shares or the $20.06 cash offer (a 28% premium to the ‘undisturbed’ price of $15.65/sh)

Other holders on Capilano’s tight register  (many of whom are beekeepers) are likely to want to follow Stokes’s lead and maintain an exposure to what’s the bee’s knees of Australian honey.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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More disruptions in the recruitment sector

Friday, August 17, 2018

Until Seek came along, recruiting was pretty much about bunging an ad in Saturday’s classifieds and sifting candidates based on their ability to write a semi-coherent application.

Or in the case of Melbourne, it was more about the old school tie they wore -- and perhaps nothing much has changed.

Of course the bulging papers are long gone, but the disruption continues.

These days, job seekers are more likely to belong to ‘talent communities’ and post on jobs boards, with their applications sifted by impersonal algorithms.

Even the great disruptor Seek (SEK, $20.65) is feeling the effects of the fast shifting landscape, but the company still grew revenue by 25% and ebitda by 15% in the 2017-18 year.

For the rest of the sector, it’s been hard labour for the upstarts and the stalwarts alike. No matter how clever, new business models have struggled to gain traction in a sector that remains fragmented and heavily competed.

Further threats are likely to arise from jobs automation and the intentions of Google, which has launched a portal in the US called Google for Jobs.

1. Ambition (AMB, 12.5c)

In the traditional white-collar sphere, accounting and legal recruiter Ambition struggles to shake off the effects of the global financial crisis. But the firm is modestly profitable and is eyeing an opportunity in specialist recruitment for start-ups, especially in Asia.

2. Ashley Services (ASH, 24c)

This one typifies the angst around the sector. Having listed four years ago, the Sydney-based recruiter and trainer has been around for almost 50 years but became embroiled in the training sector drama that led to the overhaul of the abysmally rorted Vet Fee Help scheme.

Ashley posted a $67m reported loss in 2015-16, including an ebitda loss of $6.7m. In May the company lost a contract worth 17 percent of its annual revenues, but expects this revenue to be more than offset with work from new and existing clients of its blue collar and skilled recruiting divisions.

Ashley’s half-year accounts showed stirrings of life: a $2.2m on revenue of $169m, a turnaround on the previous $5.1m loss. What’s more, its shares have almost quadrupled since plumbing their 7c low of a year ago.

 3. Rubicor Group (RUB, 2.3c)

Here’s another interesting recruiter to watch because it’s a substantive player in the local market with $180mj of annual revenues, but with a measly $8m market capitalisation. The mark-down is well deserved, given the company’s near-death experience with debt that saw it bat on only at the grace of its bankers.

The company is only just profitable: ebitda of $200,000 in the December half. But its balance sheet is in better shape.

Rubicor boasts an impressive rota of local clients, including Google, Facebook, Westpac, Bluescope, Amcor, the ABC and Telstra.

Not that the latter two are doing much hiring these days.

4. Livehire (LVH, 44c)

Meanwhile, it’s a case of divergent fortunes for Livehire, which listed in June 2016 at 20c. Backed by recruitment doyen Geoff Morgan, LiveHire curates a talent pool for every job in a client organisation.

A key difference is that candidates own their data and can join the talent pools of as many companies as they want.

5. ApplyDirect (AD1, 4c)

This also listed in June 2016 at 20c and is more about bypassing the jobs boards and recruitment firms, so that candidates access jobs from employer websites on one carefully-catalogued page. Across the broader listed cluster of recruitment stocks, performance has been highly variable. Rather like your average employee, come to think of it.

6. HiTech (HIT, $1.10)

Some niche plays, such as HiTech, have hit the bullseye with the IT recruiter’s shares almost doubling over the last 12 months and gaining more than ten-fold over the last three years.

7. Schrole (SCL, 1.3c)

However academic recruiter Schrole has lost 25% of its value since back-door listing in October last year. With June quarter receipts of $438,000 and cash outflows of $169,000, Schrole may have to do a little bit more to avoid after-school detention.

While it’s clear that at least some of the recruiters will continue to struggle with executing their strategy, at least the macro conditions are favourable, with local unemployment at six-year lows.

More corporate action is likely after two of the biggest ASX-listed recruiters – Chandler Macleod and Skilled Group – were taken over last year.  The former was acquired by Recruit Holdings of Japan for $290m, while Programmed was subsumed by Persol (also Japanese) for $778m.

8. RBR Group (RBR) 0.6c

The obscure Perth-based resources recruiter is little known here, but is part of the scenery in Mozambique where Prince Andrew opened its new training centre in 2016. Resources-wise, the southern African country is the place to be, with $US50 billion of LNG work slated across two major onshore projects.

In their development stage the projects will need 50,000 workers – and by law 19 out of every 20 have to be Mozambican. This puts RBR in an enviable position.  A junior explorer that ran out of puff, RBR bought an administrative services company in Mozambique that was the springboard for its training and recruiting operation.

Having amassed a local database of 110,000 workers, RBR expects to be the first recruiter to obtain the requisite British Engineering and Construction Industry Training Board (ECITB) certification. The company currently is one a few to hold a labour broking licence in the country.

“Every worker needs an ECITB qualification and no-one in the country is registered to provide it,” says RBR executive chairman Ian Macpherson. “I’m sure there will be more (providers) but it’s just that we will be the first.”

Led by ExxonMobil and Anadarko, the two LNG consortia ventures are at final investment decision phase.  The Anadarko venture entails an initial 12 million tonnes per annum plant, building to 50 mtpa in phase two.

The ExxonMobil project is pitched at 15mtpa and involves building two of the biggest liquefaction plants outside of Qatar, the world’s biggest LNG producer.

Both plants are due to start construction in 2023 or 2024.

RBR currently has a contract with Anadarko lead contractor McDermott’s, but also hopes to sign directly with at least one of the two giants.

 Currently, RBR draws about $500,000 of revenue annually from non-LNG contracts, such as training stevedores in the country’s northern port which received its first commercial cargo in two decades. The company also provides training at South32’s aluminium smelter at Mozal in the country’s south.

RBR’s value proposition is pretty simple: if it wins a mandate to sign up 5000 workers – 10 percent of the required number – that amounts to earnings of $10-15m per year on a profit margin of $15 per worker per day. Given RBR currently bears a sub $6m market cap, investors don’t need the Duke of York’s seal of approval to see how enriched they could be if the Mozambicans plans bear fruit.

The rub is that the company had $340,000 of cash at the end of the June quarter and needs to raise more.

Tim Boreham authors The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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Is cannabis a good investment?

Thursday, August 09, 2018

The charts of most of the dope stocks show a sharp retraction from their ‘highs’ attained between November last year and January this year, although most of them are still well up on their levels of a year ago.

Yes, medical dope is now legal here – as it is in most other key jurisdictions – but access is strictly controlled. While there’s a broad acceptance that cannabis is useful for indications such as epilepsy and cancer pain, there’s a dearth of formal clinical evidence and innately conservative doctors need to be convinced.

Rather than going through the bureaucratic hoops, many patients will continue to ‘self-medicate’ illegally with less than desirable therapeutic outcomes.

Reflecting the difficulty of the medical caper, the trailblazing MMJ (MMJ, 26c) is now focused on the recreational Canadian cannabis market via its minority-owned Harvest One.

1-Page (1PG, 16c) has also smelt the skanky breeze of change. The cashed up shell of a failed recruitment house, 1-Page is to abandon the ASX in favour of a European domicile after buying a dope company there.

One dope stock that’s found favour is the natural supplements outfit BOD Australia (BDA, 51c), which is pursuing a two pronged strategy of developing over the counter products as well as a dissolvable wafer to deliver medical cannabis products.

BOD executive chairman George Livery says that despite the awareness of the benefits of cannabis components – hemp oil is a source of desirable omega 3 and omega 6 acids – wellness groups such as Swisse and Blackmores have refused to inhale.

Livery should know: until recently he was Swisse’s strategy and corporate director.

“I guess it’s the stigma attached to the word cannabis,” he says. “They just don’t have their eyes on what’s happening in the space.”

BOD already had a range of skincare products on market, but only found market favour after announcing its cannabis foray with Swiss group Linnea and Singapore’s iX Biopharma.

Describing its products and research as “evidence based”, BOD has commenced an early stage trial of a sublingual wafer to deliver cannabis derivatives to the blood stream more efficiently.

Natural medicines

BOD chief (and 10 percent shareholder) Jo Patterson says BOD has a “clear point of difference” to the crowded medical dope stock sector.

“We started business with a vision of bringing natural medicines to the market. A pharma drug is a singular molecule solution while natural medicines are complex molecules working in harmony.”

BOD has exclusive rights to the wafer, developed by iX Biopharma, which could be applied to any number of cannabis therapeutics.

The local Therapeutics Goods Administration in July gave permission for an early stage clinical trial, to test how much of the active substances get into the blood stream relative to the standard injected delivery.

“Our hypothesis is water will slow efficient absorption of the drug into the blood stream,” Patterson says. “Intravenous delivery is the gold standard but what else can we deliver more efficiently into the blood stream. We want to avoid the organs breaking it down.”

Meanwhile, BOD continues to chalk up modest revenues from its current range that includes the pregnancy supplement MamaCare, Bright Brains (anti-dozing), SediStress (irritable bowel syndrome) and the Uber Secrets (an alternative to Botox, not a certain ride share operator’s surge pricing formula).

The deals with API and Symbion cover two-thirds of the country’s chemists, or about 3,500 outlets.

In conjunction with Manuka Pharma, BOD also hopes to market a hemp honey replete with the antibacterial agent methylglyoxal.

Meanwhile BOD shares have also been helped along by the $800m – but now messy – takeover offer for skincare rival BWX (BWX, $5.42). BWX owns the Sukin and Trilogy brands, while BOD sells a range called Pommade Divine and has the local rights to Dr Roebucks.

“The move showed the market value of these businesses and we got a little bit of a rub-off effect,” Patterson says.

Despite this, BOD remains valued at a mere $23m.

MGC Pharmaceuticals (MXC) 5.6c

Our second oldest listed ‘pot stock’, MGC is also in the cosmetics game with posh British department store Harvey Nichols, now stocking 18 of its cannabis-based skin care products that sell for $50 to $100 a pop.

MGC chairman Brent Mitchell said the company saw the success The Body Shop was having with its hemp-based products.

Beyond that, though MGC’s cosmetics business – in joint venture with an Israeli company called Dr M Burstein – is likely to remain a sideline as MGC pursues its broader “seed-to-sale” strategy in Europe.

Unlike its ASX-listed peers, MGC focused on Europe from the outset, creating manufacturing facilities in Slovenia and the Czech Republic where the regulators were most amenable.

“We wanted to set up a cultivation operation in Europe but with a pharmaceutical-grade processing facility to sell to European pharma companies as well as make our own medicine,’’ Mitchell says.

“That’s been our vision since we relocated from Israel to Slovenia and Czech Republic three years ago.”

Now, the company plans to build a four times bigger facility in Malta, where the hot weather reduces the cost of propagation and allows for three crops a year instead of two.

“It will be one of the most operationally advanced facilities for certification purpose in Europe,” Mitchell promises.

But where does all the cannabinoid-rich greenery go?

MGC expects to supply the certified raw product in Europe, especially to Germany which currently bans cultivation within its own borders but otherwise has a booming medical cannabis sector.

But first and foremost, MGC plans to launch a line of approved pharmaceuticals for ailments such as post-chemotherapy nausea, adult and child epilepsy and anorexia.

It’s already developed Cannepil, a treatment for sufferers of drug resistant epilepsy.

MGC has approval to supply Cannepil in Australia, where it has lined up a base of 100 registered users.

Mitchell describes the local market as small but lucrative.

 “If we can capture less than half a per cent of the available market for drug-resistant epilepsy, that equates to $1m of revenue a year,” he says. “If we can grow that to 3-5% then it’s a serious business.”

Of the 18 MGC products gracing the Harvey Nix shelves, 15 of them are non-clinical stuff like day creams and face washes, while three are for the symptoms of conditions such as acne, eczema and psoriasis.

Achieving scale in the cosmetics game requires deep pockets and deep distribution. Rather than taking pot luck, MGC is amenable to a partnership with a more substantive industry operator.

Tim Boreham edits The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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The New Criterion: Finding value in the Aussie gold sector

Friday, August 03, 2018

Despite the multitude of worries in the world, the gold price in $US terms continues to be under pressure, trading about 2.7 % below its level of a year ago and about 10  % off its January peak.

So much for bullion being a safe harbour investment.

The higher greenback is the obvious ‘culprit’, interlinked with higher US interest rates that mean richer investor returns are available elsewhere.

US inflation – gold’s traditional friend -- remains benign although Trump tariff barriers might change that.

But for Australian gold producers the good times continue to roll, with the $A-denominated price up about 4 % over the 12 months.

On average, local miners can extract the stuff for $1000 an ounce, which leaves a fat margin relative to the current circa $1650 an ounce spot price.

There’s a catch, though: the big producers like Newcrest Mining (NCM, $21.60)Northern Star Mining (NST, $7.20) and Evolution Mining (EVN, $2.79) look fully or overvalued, having outperformed their global peers for some time.

 RBC Capital Markets notes investors are flocking to the majors because of their strong balance sheet and margins and consistent operating performance (which hasn’t always been the case).

They simply look expensive, although not so much relative to their global peers.

Meanwhile, most of the smaller gold plays on the ASX are trading at a discount. “It’s time for investors ... to look down the curve for value in the Australian gold space,” the firm says.

What better a place to start than in the West, where operating risks are low and the geology is generally well known?

Investment options include mid-tier extant producers such as Saracen Gold (SAR, $1.87), Ramelius Resources (RMS, 56c) and Silver Lake Resources (SLR, 55c).

For more patient investors, gold plays in the development or advanced exploration phase are an alternative gambit.

Take Dacian Gold (DCN, $2.94), which has been ramping up its underground Mt Morgan mine, in WA’s Leonora region. From the December quarter it plans to produce commercially from what would be Australia’s biggest new gold mine in six years, at a rate of 180,000-210,000 ounces a year.

Like all decent deposits Mt Morgan has been subject to pass- the-parcel ownership. Dacian bought the project from the administrators of Range River Gold, which in turn had acquired it from Barrick Gold in 2009.

As it ramps up output to commercial levels, Dacian has raised a chunky $40m via an institutional placement to bolster its reserves base, with a drilling push at its Westralia and Cameron Well sub deposits.

It’s also shelling out $12m to extinguish an obligation to pay royalties pertaining to output from its Jupiter deposit, also part of the Mt Morgan project.

The raising struck at a $2.70 a share, a 10 % discount, was heavily oversubscribed.

 All things being equal – and they're usually not – RBC expects Dacian to generate underlying earnings of $47m in 2018-19, rising to $107m in 2019-20.

 These numbers represent earnings per share of 21c and 48c respectively, putting Dacian on a miserly earnings multiple of 12 times and then six times.

Investors are waiting for a July resource update. The current mine is predicated on an eight year life but if the drilling push delivers results this could be elongated.

Alternatively, Gold Road Resources (GOR, 67c) offers an exposure to a new mine slated for production by June next year, at its Gruyere deposit.

With a total resource of 5.88 million ounces – 3.56 m.o. in the more assured reserve category – Gruyere is of Australia’s biggest undeveloped gold deposits.

It’s a case of quick work for Gold Road, which discovered the Gruyere, on the Yilgarn Belt near Laverton, only in 2013. In late 2016 the company sold half of the project to South Africa’s Gold Fields for $350m of cash, which underpinned the $585m cost of the plant.

Construction work is well underway at Gruyere, which is slated as a 270,000 oz a year producer with a 13 year mine life. But it’s hoped that current drilling on neighbouring targets – some within the JV and some fully owned by Gold Road – will eventually provide further mill input or even justify a separate project.

With a $650m market cap, Gold Road is now far from a penny dreadful. But with expected all-in costs of $950/oz and with the path to production fully funded, Gold Road promises to be a veritable golden goose if the $A bullion price holds firm.

Macquarie Equities forecasts calendar 2019 revenue of $69m and net earnings of $8m, ramping up to serious revenue of $255m and a $69m net profit in 2020.

Sticking with the WA gold theme, minnow NTM Gold (NTM, 4c) faces an unusual dilemma as it contemplates contemplates a drilling campaign at its mainstay Redcliffe gold project.

Rather than craving institutional backers, the well-backed NTM wants more retail punters to round out the register and inject some liquidity into the stock.

The stock is 7 % owned by Ausdrill, which earned the stake by providing drilling services.

NTM shares have gained favour since mind June, when the company almost doubled its resource base to 538,000 oz (roughly evenly split between the indicated and inferred categories).

The company aspires to double again one million ounces – enough to support a 100,000 oz a year operation – but to achieve this it has to find new deposit on the sprawling tenement.

Not wanting to die wondering, NTM is testing 30 targets along a 40 km strike zone, much of which is yet to see a drill bit. The campaign covers previous drill hits, extensions to existing deposits and “new conceptual targets”.

Should NTM get into production, mining is likely to be based on a “toll treatment” operation by which the ore is trucked to one of four nearby processing plants.

NTM chief Andrew Muir says the market is valuing NTM’s resource base at a fraction of which it values the company’s local peers. 

Criterion has heard such a lament many times before, but given NTM’s slender $12m market cap he might have a valid point.

 NTM is not only proximate to Mt Morgan, but on the same geology of other famous-name projects including Gwalia (owned by St Barbara), Thunderbox (Saracen), Darlot (Red 5) and Kin Mining’s Leonora, which is in development.

“We are a pretty simple digestible story,” Muir says.

Despite bullion’s current lack of popularity, bullion tends to react well to ballooning government deficits and debts, which is what’s been happening in the US.

On the supply side the best and biggest gold resources are also rapidly declining, leaving the next bunch of up and comers to fill the gap.

Tim Boreham edits The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.




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The New Criterion: Growth stocks

Friday, July 27, 2018

Growth stocks have outperformed value stocks in recent times, but the 31 year old value investor Templeton Growth Fund is a patient investor. Elsewhere in the listed investment company sector, a new fund is taking a different approach to ensure it doesn’t trade at a discount to asset backing

Templeton Global Growth Fund (TGG) $1.42

Funds oriented to growth stocks such Hamish Douglass’s Magellan have been the rock stars in recent times, which makes value funds such as Templeton the crooner on stage at the RSL club belting out hits from the 1960s.

The disparity is reflected in the Nasdaq – which is laden with tech stocks – gaining 22 % for the year to date, compared with the S&P500 index (of top global companies) climbing 14 %.

The listed exponent of the global Templeton ethos of finding opportunities among unloved established companies, Templeton Growth hasn’t wavered from this approach since debuting in May 1987 (just in time for October’s Black Monday).

“We’re about value as well as patience,” says chief investment officer Peter Wilmshurst.

Since inception the fund has returned 7.5 % per annum after fees, compared with the global MSCI index’s 6.7 % return (the index includes emerging countries so is the fund’s preferred measure).

Value funds do better when interest rates are high, because investors are less more likely to plonk their money in cash rather than push stock valuations to silly levels.

Given the “artificially low” US rates are definitively heading north – the 10 year bond rate broke through 3 % in May – value stocks should be gaining favour.

But last year, the asset class underperformed growth funds by 10 % (the Templeton fund itself fought to a draw, gaining 14.4 %, compared with the MSCI’s 14.8 % increase).

As with all investment trends, the worm will turn and low-multiple stalwarts again will be favoured over extravagantly valued growth stocks. The simmering trade war ignited by Donald Trump could well be the catalyst if it stymies economic growth.

But Templeton hasn’t waited for the macro conditions to shift, having taken a punt on two under loved sectors.

The first one is oil.

As the price for the primordial sludge tumbled in 2015 before bottoming in early 2016, Templeton was bulking up its exposure.

Not on Wildcat Strikes Inc, mind you, but traditional plays such as Shell and BP. With crude breaching the $US70 a barrel, these stodgy stalwarts have roared back into favour.

The fund has also been keen on oil services plays – which are almost as numerous as the oil producers themselves -- but they too have rallied hard and are only fairly valued.

The fund’s second big punt is on European banks.

Most financial services stocks struggle with low interest rates, but that’s especially the case with Europe where the banks receive negative interest if they park a deposit with the European Central Bank.

On the customer side, it’s hard to price a deposit below zero so the banks have experienced a margin crunch.

Wilmshurst reckons that European Central Bank president Mario Draghi will be keen to engineer a rates rise before his term ends in 2019.

“You would expect him to go out as a central banker who saved Europe and put it back on the path to prosperity with normalised interest rates.”

The fund weighed into the European banks in 2012-2013, picking up Credit Agricole at 0.3 times book value (now the French bank is trading at a slight book premium).

Wilmshurst also likes the Asian focused UK banks HSBC and Standard Chartered and Barclays. He also dubs Chinese telcos as “among the cheapest in the world.”

Meanwhile, Templeton does have a few tech growth stocks (such as Alphabet) in its portfolio, but it’s largely a case of no FAANGS to these investments.

Currently the Templeton lic is trading 7.6 % below the value of net tangible assets (the value of the underlying portfolio) of $1.58/sh.

Wealth Defender Equities (WDE) 86c

Still on listed investment companies, the Perennial Funds Management offshoot was touted as offering investors airbag-type protection against market downturns. But like those faulty Takata airbags, the concept is subject to a recall.

The idea underpinning Wealth Defender was that the fund would deploy derivates such as caps and collars and futures to protect the portfolio against market-wide declines up to 20 %.

But protection comes at cost – one to two %age points of performance --and the fund has sadly underperformed since listing in May 2015.

Since inception, Wealth Defender’s NTA has grown only one % compared with the broader market’s 5 % growth (the fund largely invests in the ‘usual suspect’ top 50 companies).

Wealth Defender’s other woe is that its shares have traded at a persistent discount to NTA (the gap is currently around 10 %).

To rectify this, from August 1 management has the option of using protection on a “dynamic, discretionary” basis, when it deems it appropriate “in view of the market outlook.”

Management has also taken a bath on its management fees, widely perceived as too high. Notably, a 15 % fee was payable even if returns were negative, but above the index return.

Now, the fee still accrues but is only payable when there’s positive NTA growth.

Like the rhythm method, there’s an inherent risk with such “optional protection”: the manager needs to be able to foresee a sharp market downturn, which often come with no warning.

Wealth Defender shareholders will feel like right Wallies if the fund decides to ride bare just at the wrong time.

Meanwhile, Paul Moore’s PM Capital has a different approach to narrowing the NTA discount that blights so many lics.

The global investor is doing the rounds to raise up to $490m for a new listed vehicle called Ptrackers, which emulates the performance of PM’s existing PM Capital Global Opportunities  (PGF, $1.30).

The difference is that in June 2025 holders have the option of redeeming their shares at the prevailing NTA value, or converting to PGF shares. Any discount should vanish closer to D-Day as arbitrageurs do their work.

Of course, the Ptrackers ‘no discount warranty’ doesn’t guarantee the fund’s NTA will actually grow over the seven-year period.

Tim Boreham edits The New Criterion

Disclaimer: Ptrackers and Templeton Global Growth Fund are covered by Independent Investment Research. Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.



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