Income Report / Income note: Reviewing 3 underperformers in the portfolio (EHE, IGL, GMA)

By Market Matters 29 May 19

Income note: Reviewing 3 underperformers in the portfolio (EHE, IGL, GMA)

Market Matters Income Report 29th May 2019

The ASX has opened on the back foot this morning thanks to weakness in overseas markets, however the daily low was seen around 10.30am with a slight +18point recovery playing out since them. A close back up above 6450 would be technically bullish for the ASX200.

Currently, the market is down -48pts or -0.75% to 6436

The Income Portfolio had another solid week adding +0.61% with some of our more recent additions doing the heavy lifting. Flight Centre (FLT) has been strong since adding last week, putting on a quick ~7% while CSR is now up more than ~20% in 3 weeks. While no dividends were received during the week, the FY to date performance of the portfolio remains solid, particularly given its asset allocation mix and low market beta, or in other words, the portfolio exhibits considerably less volatility than the underlying share market while still delivering income that is forecast to be around 7% pa grossed for franking. In the current financial year, the portfolio is up +7.47% vs the benchmark (RBA + 4%) of +4.99%.  Since inception, the portfolio has returned 11.48%, above the benchmark which currently sits at +10.43%.

1 Reviewing current holdings

There are a number of positons in the portfolio that are worth discussing this week, and as usual, the positions we ponder most are the ones not living up to expectations. At MM, we firmly believe that looking after the ‘hard’ positions in a portfolio is key to longer term success in the markets.

IVE Group (IGL) $2.08 – while there was no new news recently on IGL specifically, its major listed competitor OVT came out with a double whammy - they downgraded earnings expectations and announced a $15.5m capital raising. OVT compete with IVE in large scale printing while competitors raising capital generally saps some natural buying from the sector more broadly. In this instance that excuse has less validity given the capital raised largely came from the founding family of OVT to take their stake over 50% of the business, so it seems that selling in IGL is not so much about money moving in the sector but fears that large scale printing  is having a tough time.

The optimist would argue that OVT’s poor form is more likely a result of IGL taking business but we don’t yet have any evidence of that.

On the back of all this news, Bell Potter put out a new report in the stock with a buy and $2.67 price target. Given the stock trades on low liquidity – and it seems there has been a seller out there (500k crossed this morning) we’ve seen the share price come back from a recent high above $2.40 to now trade at $2.08, not forgetting that a 8.6cps fully franked dividend was paid in March.

On an Estimated P/E for 2019 of 8x and a yield of ~7.8% fully franked the stock is clearly cheap with a phenomenal yield.

Despite the technical picture looking strained we remain comfortable with our 3% exposure in the MM Income Portfolio.

IVE Group (IGL) Chart

Estia Health (EHE) $2.68 - Aged care provider Estia Health (EHE) came out on Friday with an earnings downgrade, the company saying that EBITDA would come in below previous expectations, between $92-$94m which translates to 2-4% growth on FY18. Previous guidance was given “as low to mid-single digit percentage increase” at the EBITDA line for existing homes, but the company now expects this to be 2-4.5% lower than the FY18 number. Falling occupancy levels have been blamed for the revised guidance with poor publicity of aged care as well as the increase in influenza cases in SA which has seen occupancy levels fall to 93%. EBITDA will also be dragged by higher than expected compliance costs.

Estia does have some things working in its favour. The Government has recently announced a funding boost for aged care providers which will add around $9m to revenue for Estia, helping to offset some of the lower occupancy. EHE trades on an Est P/E for 2019 of 16.2x while yielding 6.07% fully franked making it reasonably attractive from an income perspective. While the downgrade is a negative, the magnitude was small.

We may look to add to the existing 3% position around $2.50.

Estia Health Ltd (EHE) Chart

Genworth (GMA) $2.63 - The mortgage insurer has been a tough position for the MM Income Portfolio and it’s only been through the banking of dividends that the position has stayed in the black. As banks have tightened credit, the demand for high LVR loans has declined reducing the demand for mortgage insurance and that’s had a big impact on GMA earnings. Earnings growth however was not the primary reason the position was added to the portfolio back in August 2017, the real story here is around excess capital on their balance sheet, and importantly their ability to return excess capital to shareholders.

Along with high dividends (yield around 8% fully franked), GMA have had ongoing share buy-backs in play. The current share buy-back has around $54m to run which is supportive for the share price. It seems GMA themselves are around 10% of the daily volume in the stock and therefore the buy-back should last another few months.

We will continue to hold GMA while the share buy-back is supporting the stock

Genworth (GMA) Chart

2 New opportunity

The MM Income Portfolio holds a global bond fund exposure called the NBI Global Corporate Income Trust, listed under code NBI. The trust has launched a capital raising via an entitlement to existing holders, while they’ll also have a shortfall facility available to new holders. Shaw is a co-manager on the deal and has access to the shortfall facility ([email protected]) if you have interest.

They are raising capital at an offer price of $2.00 versus current listed price of $2.05 and below the current NTA of $2.03.  Existing holders will be able to buy 1 new unit for every 1 unit held as at the record date of the 31st May . The shortfall offer will be held on / around the 28th June.

We remain positive on NBI and plan to take up our rights under the offer.

NBI Global Bond Fund (NBI) Chart


We are buyers of EHE into further weakness
We remain comfortable holders of IGL and GMA
We will take up our NBI rights  

Have a great day,

James & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 29/05/2019

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