Share related question

[Ridin-High]

Hi Share pundits

Wanted to share something with you guys and see if their is another angle im missing.


I have two share holdings, their ticker codes are: AFI and MLT. They are both listed investment companies (rank 1 and 3 in terms of market cap).

Now LICS can trade inline/discount/premium to their NAV (Net asset value) their is a few factors which may determine this from my reading these include liquidity and market view on future performance. LICS from history have shown a tendency to under perform during bull markets and outperform during bear markets (people take money from LICS and invest directly during bull and then turning to managers during bear in the common theory)

I'm trying to Identify risks to make sure i have everything on the map

Now

AFI

*Trading at a small discount/inline (2-3% discount) with NAV no issues. Company is pretty much fully invested and holding very little cash. No Debt, but access to a line of credit. Have outperformed their bench mark which is the S&PASX 200 on a 3/5/10 yr period and underperformed over 1yr. Good feet considering this takes into account tax and management fee's ASX 200 accumulation doesn't.

* So not trading at a substantial discount to NAV, no debt, low management fee's (0.17% of FUM), risk of fraud from fund managers low.

*Fund basically tracks the asx200/all ords.

*Nothing shown as outstanding risk (company wise)

*Shown to jump off before the ship before the ***** hits the fan, sold out of centro properties group @ around $5.75 per share ($18.7million worth), also done this with ABC learning and some other companies

MLT

*Trading at a larger discount to NAV (approx 12-13%) Now is this just a liquidity issue? Their was a recent merger between MLT (1.5bn market cap) and CHO (500mill cap) and CHO was aquired by MLT issuing shares to CHO share holders (CHO holds MLT shares) so a reason possibly is that CHO share holders found them selfs doubled up in MLT stocks and selling.

*MLT has a heavy weighting towards banks (top share holding is Westpac which comprises 11.5% of the entire portfolio)

* MLT relies on broker research when making investment decisions and has close relationship with company directors, where AFI does in house financial modelling.

* MLT out performed on 10yr, under perform 5yr, out perform 3 yr, under perform 1 yr. This is based on net asset backing growth, not total shareholder return.

* MLT has over zealous adherence to buy and hold philosophy when fundamentals have clearly deteriorated, showing a poor sell discipline. (but apparently the board has admitted this and addressing issue)

* MLT holds abit more cash and not fully invested, hence that part of the portfolio subject to inflation devaluing it. But presents ability to jump on opportunity as long as you don't hold the cash forever... ARG seems to have sat on large cash amount for awhile now.

* Has been criticized for spending to much time focusing on smaller holdings

So risks facing MLT is that it may continue to trade at a large discount to NAV, which doesn't really matter in the long run as EPS + DPS growth and stability is whats important.

I've surfed the net, talked to some other investors and un-able to hunt down other reasons for the discount to NTA other then liquidity issue and that because heavy weighting to banks and people may think they are overvalued.

Regards,

RH

 

[Trogdor]

Hi RH,

I own both of these - and they make up (together with ARG) a significant proportion of my equities portfolio.

You are pretty spot on with your points below.

For a 10%+ discount if you are happy with the over-allocation to financials MLT is a good buy. I grabbed 1000 more of MLT last week myself.

If you think the resi market / economy won't crash then the banks are reasonably valued.

I think div yield on MLT on today's purchase price will grow very well in the next two - three years.

Not advice, just my rambling thoughts.

Cheers.

 

[Corey Batt]

Mr Market could be doing it for many reasons but lets see:

I would be thinking the reasoning is that we are currently having a bull-bounce back pushing up prices, pushing up their NAV but their own share price is lagging. This can be due to the easy money found right now creating a cyclical feedback.

I was thinking about leveraging into AFI a while ago as a part of my financial plan, however looking at the stats you may as well just buy into the companies from their B&H list, drop TLS and a few others and you'll be outperforming them considerably. Unless of course you really want to let go of the reigns and don't want to manage your funds - which to be at that point you'd be looking for passive income for 'retirement'. Then there is the over exposure of both companies to the banks, which from 3 year projections have the potential stagnation of loan writing, weighing down on dividend pay outs.

Usual disclaimer, I'm full of crap and don't take my post as advice, make up your own mind based on your own research and decisions.

 

[whatever123]

It should have nothing to do with their over exposure to banks, because if that was a concern, you could buy MLT and sell short bank shares for an relatively safe arbitrage gain.

Usually when LICs trade at a discount, its because the market doesn't trust managements ability to outperform or even match the index sufficiently to justify the management fees.

eg $1000 invested in a LIC paying a management fee of 2% a year for tracking the index means in 5 years it will be worth $903.92.

Thats something I might consider buying for a 12% discount to NAV.

Edit: I notice that the MER is quite low for MLT, havent checked if they have other fees. If not, they might not be a bad buy.

 

[bluestorm]

AFI and MLT appear to have gone nowhere for a year. AFI P/E ratio of 25.86, MLT P/E ratio 21.1.
Personally look overpriced to me.

Anyway, yawn. Picked up HST (Hastie Group) after it came out of trading halt yesterday (and down 72%). Nice 18% gain in 24hrs.

 

[Trogdor]

@ bluestorm - P/E is NOT how you value LICs. Thats a useless measure for them.

@whatever - they have negligible management fees (around 0.19% from member) -like AFI and ARG. Agree with your point but thats not the reason for the discount.

 

[whatever123]

@
@whatever - they have negligible management fees (around 0.19% from member) -like AFI and ARG. Agree with your point but thats not the reason for the discount.

Yes, I also realised that later ( see my edit). That always used to be the case in the days MERs were a lot higher. (lol I heard Storm financial used to charge something like 5%+)

So its got me wondering the reason for the discount now too.

 

[Ridin-High]

If you look at the share price graph it drops after MLT annouces the final stages of combining with CHO and if you overlay that with the all ords chart, you can see the AO's is going up.

This is my assumption is that it has something to do with the merger with CHO, Some people have said that it might be due to CHO share holders now finding themselfs doubled up in MLT stock and re-adjusting their portfolios?

Thanks for your thoughts so far guys.

MLT management expense ratio is around the same as AFI/ARG, but AFI/ARG have double the market cap... but AFI/ARG have more staff

One article that i read suggest a possible reason why LIC getting no love is that they are not doing a good enough job of promoting themselfs to financial planners and the like

Regards,

RH

 

[Shaneelastic]

NDL for mine looks like it could have a massive run if the new directors can backdoor a project into this shell