Income Report / Income Report: Reviewing IVE Group after they make a timely acquisition (IGL, NBI)

By Market Matters 04 December 19

Income Report: Reviewing IVE Group after they make a timely acquisition (IGL, NBI)

Market Matetrs Income Report 4th December 2019

A second strong day of selling for local stocks taking a negative overseas lead and adding to it on the downside – the ASX200 breaking through 6600. All sectors are trading lower around lunchtime, again the consumer staples the hardest hit for a second consecutive day, Coles and Woollies both on the nose.

Sectors today

Australian GDP data was out at 11.30am this morning and was a touch soft, printing +0.4% MoM v 0.5% expected, annualised Australia is growing at 1.7%, a fairly anaemic rate.

Economic data out today.

Overall, the ASX 200 is currently trading down -119pts or -1.77% to 6593.

ASX 200 Chart

The Income Portfolio was down during the week, falling -0.49% which was around half that of the ASX200 Accumulation index which traded down -1.08%. Equity positions were generally weaker, although no one position fell more than 3%. Ive Group (IGL) was the best performer, adding 6.13%, while MQGPD, MXT and NBI all paid distributions. Despite the softness, the portfolio is tracking above the benchmarks, currently up +2.88% financial year to date, versus its absolute return benchmark of +2.08%. Since inception the portfolio is up +19.88% vs the benchmark of +13.00%

IVE Group (IGL) $2.25

This is an interesting integrated marketing business held in the MM Income Portfolio trading on an Est P/E of 9x and a yield of ~7% fully franked – clearly the right numbers if their earnings can hold up and even grow a bit. Last week they bought a catalogue distribution business from Salmat for $25m in cash, and they plan to spend another $25-30m improving it.  We had originally thought they would announce some form of capital return, most likely a share buy-back given the depressed levels of the stock; however, they’ve decided to spend money on future growth.  This doesn’t take capital management off the table, although it pushes it back probably 12 months or so.

That said, they do have a good track record of integrating purchases into their framework, and this one should be earnings accretive. As a result of the purchase, Bells have increased their EPS estimates by +5.2%, +9.4% and +5.9% in FY20e, FY21e and FY22e respectively, while at Shaw we’ve upgraded very marginally across those years, around 1-3% p/a, a reasonable outlook given the current valuation.

MM remains positive on IGL  

IVE Group (IGL) Chart

NB Global Corporate Income Trust (NBI) $2.06

Global bond manager Neuberger Berman in late November announced plans to raise additional capital in the form of a new issue for the NB Global Corporate Income Trust, which is a portfolio of global bonds listed on the ASX under code NBI. We hold this in the MM Income Portfolio and enjoy the 5.25% targeted yield on offer. In the release, the propaganda from the company was as follows:  NBI continues to deliver on its objective of providing a consistent and stable income stream. From its inception to the end of October 2019, NBI has achieved a total return of 7.19% and, for the financial year ended 30 June 2019, paid an annualized distribution of 6.24%3 (net of fees and expenses). For the current financial year to the end of October 2019, NBI has paid distributions totalling 3.59 cents per Unit, which represents an annualised distribution of 5.25% (net of fees and expenses) and is in line with NBI’s Target Distribution.

It is anticipated that the offer of new Units will comprise both an entitlement offers for existing Unitholders and a public shortfall offer for new investors. Neuberger Berman is currently finalising the key terms of the offer and timetable with the proposed joint lead managers, and expects further details being released to the market in due course

The offer would be done at (Net tangible assets) NTA which was at $2.03 at end of November – although this could change before January. The current price of NBI is $2.06 so there is a short-term trade there. We currently hold a 7.5% weighting in the income portfolio, and we don’t want to increase this. We’re also low on cash and need to fund a 5% allocation to the recent AMP hybrid as will be discussed below. As a consequence, we will reduce NBI by 2.5% with the intention of upweighting again in the new year through the issue of new securities at NTA.

MM plans to reduce NBI by 2.5%

NB Global Corporate Income Trust (NBI) Chart

AMP Hybrid $100 (lists on 24th December)

This was a recent offer we covered last week in a note titled,  Why we’re adding the new AMP Hybrid to the Income Portfolio – click here.  

MM is positive on the recent AMP Hybrid, adding it to the Income Portfolio with a 5% weighting

KKR Credit Income Fund (KKC) $2.48

This was a recent issue that was up scaled due to demand however it has not traded above the listing price since coming on the boards. This is a more diversified credit fund meaning that they focus across the credit spectrum investing in strategies / portfolios of loans, bonds, fixed and floating rate notes around the globe which includes both traded and private credit - clearly a very broad church.  They target a net return of 6-8%p.a. although the actual income target pa is 4-6% and that is ‘through a market cycle’. Right now, we’re at a low point in terms of yields so the concept of through a market cycle would imply that 4% is a more realistic goal at this point.

We covered this at time of listing concluding that we prefer a more targeted approach, while the fee structure was fairly high for a credit product - when base fee, expense recovery,  RE & indirect costs included, it equates to around  ~1.2%, plus there is a performance fee meaning fees could end up being around ~1.5% for a credit product in a low rate environment. When net target return is 6-8%, and fees are 1.5%, it means they are investing in credit delivering 7.5-9.5% return potential while they’re incentivized to deliver through a performance fee. This implies a higher risk exposure in our view.

KKC traded to a low of $2.43 and a high of $2.49 since raising money at $2.50

MM remains neutral (at best) on KKC.

We covered this and others a few weeks ago in a report titled: Where to put money coming out of Term Deposits: Click Here

Conclusion

We remain bullish IGL
We are planning to reduce NBI by 2.5%
We are adding the new AMP Hybrid to the portfolio

Have a great day!

James & the Market Matters Team

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 Friday, or after the session when positions are traded.

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