Income Report / Income Report: Some thoughts on the MM Income Portfolio (GCI, CSR, GMA, TCL, PDL, PPT, WBC)

By Market Matters 06 November 19

Income Report: Some thoughts on the MM Income Portfolio (GCI, CSR, GMA, TCL, PDL, PPT, WBC)

Market Matters Income Report 6th November 2019

A fairly lacklustre open to trade at the index level with strength in Energy stocks being offset by further weakness amongst the IT names. Medibank (MPL) is trading down ~9%  after reporting a higher period of claims while fund manager Pendal Group (PDL) have met / marginally beat full year numbers, the stock trading 6% higher. We sent an alert out to buy PDL this morning for the Platinum Portfolio around $7.75, we are now content to set an $8 limit price on that alert. PDL trades at a steep discount to other fund managers and as we’ve seen recently with Janus Henderson (JHG) cheap fund managers will at some point experience a P/E re-rate – this has potentially started in PDL today

Overall, the ASX 200 is currently trading up +6pts or +0.09% to 6703.

ASX 200 Chart

The Income Portfolio was up strongly during the week, adding 0.45% against the backdrop of the ASX200 Accumulation index which traded down -0.7%. The two best performers for the week were CSR (+14.80%) and GMA (+10.34%) both climbing double digits to help the portfolio outperform.

Unsurprisingly ANZ (-6.19%) was the worst performer in the portfolio following their lacklustre full year report last week before we cut the position in favour of WBC. The portfolio is tracking above the benchmarks, currently up +3.11% financial year to date, versus its absolute return benchmark of +1.72%. Since inception the portfolio is up +20.19% vs the benchmark of +12.64%.

**New Offer which closes at 2pm today – sorry for the short notice** Gryphon Capital Income Trust (GCI) Shortfall Book Build

GCI is out raising more capital in the form of a 1 for 3 entitlement offer at $2.01 a share, a ~1% discount to where it is currently trading. The trust invests in residential mortgage backed securities (RMBS), which in simple terms is a security that is underpinned by a bunch of housing loans. Gryphon is a specialist in the area, managing over $2b in total in the space for both institutional and retail money. The trust targets an income return of RBA Cash + 3.50% (net of fees), Management cost of 0.96% with no performance and has thus far achieved what it has set out to do since the IPO of the fund in May last year, paying dividends in each month since June 2018.

The deal aims to raise around $100m for the fund, with new shares listing in December they will not be eligible for the November distribution.

We have been invited to bid for entitlements not taken up by unit holders and while MM will not be bidding into the offer given our current cash levels it does present compelling value for those looking for access into the residential mortgage market in a simple cost effective way.

If you would like to make a bid, please call Harry on (02) 9238 1561 or email [email protected] – we would need to set up an account through Shaw and Partners to settle the transaction.

Gryphon Capital Income Trust (GCI) Chart

Some thoughts on the MM Income Portfolio

Taking profits on CSR: Building products company CSR has been a strong performer in the MM Income Portfolio currently up more than ~40%. The share price has rallied strongly this week on rumours of a potential takeover from GFG Alliance. Now trading on a P/E of 18x for FY20 and with negligible earnings growth likely in the next 12 months (more a FY21 story) we think this is too rich for a takeover plan to happen and are taking the available profit on the position despite it paying a reasonably attractive 5% partially franked yield. We are taking profit on our 4% holding in CSR **watch for alerts**

In line with our bullish view on commodities, we are looking to redeploy these funds into BHP, however given the rally this morning in BHP, we will simply sit on the cash for now waiting for a better time to buy it.  

CSR Limited (CSR) Chart  

Genworth (GMA) – running stops: We had a question about running stops in the Monday morning report this week and today we have a practical example of how we would run this strategy. Mortgage Insurer GMA has been in a strong trend for the past year and our position is showing a paper profit of more than 50%. While the technical trend in this stock is strong, when looking at the WBC result on Monday one issue shone through, that being 90 day past due home loans increased from $3.1B at 30/9/18 to $3.4B at 31/3/19 and to $3.8B at 30/9/19. The 1H19 bad debt charge was $333M  and there were $428M in net losses. These trends are negative for a business like GMA.

The previous high in GMA was $3.79 so technically, the stock should not pullback and close below that level. We are therefore running stops on a close below $3.73 to give a margin of safety.

Genworth (GMA) Chart

Watching Transurban (TCL): We only recently added Transurban to the MM Income Portfolio as we faded the rally in global interest rates however while we believe it’s far too early to be talking about an end to the multi-decade bear market for interest rates we do believe they are reaching, or already have reached, the nadir of the descent.  In the short-term we can see one final dip by US  10-year bond yields towards 1.4% but this is getting very close to attempting to interpret the day to day noise that reverberates through markets as news flows across our screens. As bond yields bounce / rally the greater the money appears to be flowing from the defensive stocks into the likes of the resources.

If we see bond yields make another low we will exit interest rate sensitive stocks like Transurban

Transurban (TCL) Chart

Looking at fund managers: We have just sent an alert out to buy Pendal Group (PDL) in the Platinum Portfolio and the stock has moved sharply higher over our price point. We have amended our buy level to be $8.00 or better.

We hold Perpetual (PPT) in the Income Portfolio with a 4% weighting. We are bullish PPT and would be content to increase our holding if we had available cash. PPT targets ~$45

MM is bullish PDL & PPT

Perpetual (PPT) Chart

ANZ into Westpac (WBC): While we remain underweight bank equity in the MM Income Portfolio (given our exposure to bank hybrids), following the weaker than expected ANZ result we switched the MM holding from  ANZ into WBC ahead of their result on Monday – the switch hasn’t worked so far however we remain comfortable that it will.

WBC has launched a Share Purchase Plan (SPP) giving holders the ability to buy up to $30,000 worth of shares at $25.32 which represents a ~7%  discount to the last traded price. While the new shares will not be entitled to the 80cps dividend the discount is still attractive. The institutional raise was done on Monday and our wholesale / institutional clients received 35% of the bid amount, implying demand was strong in the book at the $25.32 issue price.  

Westpac cut the dividend as expected however they cut it further than we thought printing 80cps versus the ~90c we had pencilled in however importantly this is 100% franked while ANZ is now 70% franked. While the underlying result from WBC was also weak, it was better than ANZ overall. Importantly, with the completion of the capital raising Westpac’s  common equity tier 1 (CET1) ratio is now above 11% which is sector leading and substantially above the 10.5% hurdle.

In terms of the outlook from here, it seems conditions will remain tough for bank earnings into FY20 – having additional capital on board will be prudent, as long as they are not seeing something that we’re not!

MM plans to take up the SPP in the Income Portfolio increasing our weighting in WBC accordingly

Westpac (WBC) Chart

Conclusion(s)

·         MM is taking a nice ~40% profit on CSR and looking to buy BHP

·         MM are running stops on GMA

·         MM are bullish PDL and PPT

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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