Views at a Glance / Income Report; MCP hits the boards, interesting moves around CNI, new Hybrid muted for Bendigo Bank – CNI, MXT

By Market Matters 11 October 17

Income Report; MCP hits the boards, interesting moves around CNI, new Hybrid muted for Bendigo Bank – CNI, MXT

Income Report 11/10/17

A lot happening in the MM Income Portfolio in recent times with the Goodman Group Hybrid being redeemed (and therefore we received the cash back for it + the final distribution) while on Monday we saw the MCP Master Income Trust list on the ASX under code MXT. The income portfolio took a 5% weighting into the Listed Trust which invests in corporate mortgages alongside banks and other lenders. Something different for the ASX and it clearly hit a cord with investors - the company raising more than $500m, which is big. The $2 listing was well supported, reasonable volume through in the first few days and we’re seeing a capital price of $2.08 at time of writing, up 4% from the $2.00 listing price. More on MXT below.

For the week, the portfolio added 1.14% which is solid versus the ASX 200 which was up by 1.04%. Although only early days, overall the portfolio is tracking along nicely with a total gain of 3.57% since inception (5th July 2017). Cash levels have been reasonably high (currently 14%) which drags performance until the cash is deployed into good opportunities. That said, flexibility to buy weakness / sell strength is incredibly important in our approach and we remain comfortable carrying high cash at times, or on the flip side, being fully invested. Our allocation to hybrids / fixed interest will also increase flexibility when market opportunities present themselves. We’re active managers and have the luxury of reducing defensive securities into weakness. For instance, should the market track towards 5500 ahead of a seasonally strong period for banks towards the end of Oct / early Nov, we will certainly consider reducing hybrid exposure to take up direct equity exposure as a shorter term tactical stance.

Centuria Capital (CNI) - $1.415 P/E of 10.0 Yield of 5.31%

CNI was a foundation member of the MM Income Portfolio and it’s been an interesting ride thus far, with certainly more twists and turns to come. We last touched on this stock in the income report about a month ago (here) after they acquired a 9.3% stake in PropertyLink Group (PLG) – while another Centuria vehicle bought 7.7% of PLG. At that time we wrote that they’ve already announced that they will initiate discussions with PLG regarding potential strategic initiatives – however is a takeover of PLG on the cards? PLG owns 30 industrial assets with a book value of ~$695m and also has $1.2b of external funds under management so it’s the sort of exposure CNI would like to have. As a holder of CNI, any takeover may involve the issuance of new shares, which is probably not a good thing and something we should be conscious of. PLG on the other hand, is clearly in their sites it would seem. A strong yielding stock with good assets and takeover appeal to boot. If we were not holding CNI, we would consider PLG.

Since then, CNI has launched a takeover for PLG which sent the PLG shares up from 91.75cps to $1.00 as of yesterday despite rejecting the approach while CNI did launch an equity raise which put pressure on their share price. In the meantime, Centuria (CNI) has now found itself the target of a share raid by Credit Suisse on behalf of  the Warburg Pincus entity, e-Shang Redwood Group. The private equity backed entity bought 14.9% of CNI on Monday night at $1.48 which was a 13% premium to their last traded price. This has obviously had a very positive influence on the CNI share price – with the stock now trading at $1.41. The MM Income Portfolio has a 7% weighting to the stock from $1.20, however we continue to like the stock at these levels. To complicate matters further, the CNI equity raise comprises an institutional placement and a 1 for 4.9 entitlement offer to existing shareholders at $1.28 per share – there our weighting to CNI will increase further through this raise.

The timetable for the entitlement issue is below, however given shares are being offered at what was a 5.2% discount to the last traded price pre-announcement ($1.35 on 5 October), it makes sense to take up the entitlements on the portfolio.

Centuria (CNI) Daily Chart

MCP Master Income Trust (MXT) - $2.08 – target yield of 4.75%

The Master Income Trust was added to the portfolio this week, or more accurately a few weeks ago through an IPO with the actual listing taking place on Monday. We’re normally not big on IPO’s however this was something different, gave us a good risk adjusted exposure into corporate loans so we allocated 5% into the MM Income Portfolio. The other interesting point around this exposure, and it was highlighted in an article this morning in the AFR (click here) is around their active management style in terms of their exposures. We’re all about adding value, managing positions actively and this is exactly what Mectrics Capital Partners do in terms of their loan exposures. The article outlines a deal done last year where MCP accumulated it’s loan exposure through 2016 at around 67c in the dollar, was instrumental in a restructure and is now likely to offload their $220m exposure at significantly higher levels. This is indicative of how these guys operate – and we like it.

In terms of the security, it’s now listed and has done well on market considering it’s a low risk fixed income offering. We suspect that some groups may have restrictions around taking up IPOs therefore they are forced to buy on market which artificially inflates the price initially.

For more information on the investment, review our initial note published on the 16th August which can be found by clicking here

The trust publishes a daily NTA figure, which is the value of the underlying assets in the portfolio. As of yesterday afternoon, the value of those assets was $2.0027. We never like paying ‘overs’ for anything so for those that may have missed the boat in terms of the IPO, our view is to wait until the price is more aligned with the NTA, and not trading at premium which is the case now. Hold tight. 

MCP Master Income Trust (MXT) Daily Chart

Bendigo Hybrid

Yesterday the AFR was running a report suggesting that Bendigo and Adelaide Bank (BEN) is preparing to launch a $400m tier 1 hybrid issue. Interestingly, the existing Hybrid on issue that would be refinanced as part of this transaction is the BENPD. This is a $269m issue which has a Call Date of 11 Dec 2017, and it is trading at $103.13. At $103.13, BENPD, on grossed up for franking basis, is offering a skinny 1.70% annualized, or a margin of 0.03% (for existing holders). For new buyers, with the call date is now inside 90 days, franking is not applicable.  On a cash basis, the annualized yield to call is -4.08% (annualized) or -5.75% margin. This highlights market thinking around the new issue, with the expectation that the new issue will be 1. Hard to get & 2. Offer a good yield. By owning the BENPD you would get a priority allocation into the new one, so, you take a hit on the old, to get an uplift on the new. It’s also reflective of the lack of supply of new hybrids.

We’ll review the issue when it lands, however in the meantime, some interesting charts from the Shaw & Partners Hybrid desk.

Source; Shaw and Partners

Summary

The portfolio is now sitting on 14% cash, and we are considering the Bendigo Hybrid – note to come should we pull the trigger

CNI is showing a good paper profit of +16% however a combination of cheap valuation, good yield, and a corporate appeal has us targeting a move above $1.50

MXT has now listed with good performance thus far. We’re happy holders however would not add to positions until the market price tracks back closer to NTA

Disclosure

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 Wednesday.

Disclaimer

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 11/10/2017.  11.00AM.

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