Profits: looking behind the headline number

October 7th, 2016

This week,  the CEOs of the four major banks have been grilled by the House of Representatives’ Standing Committee on Economics, with politicians demanding  to know why Australian banks have higher returns on equity (13.8% ROE)  and profits than those in other Western countries and whether this is due to their market power. This appears to be both an exercise in political point-scoring and data mining, in that I strongly doubt that it would be in the national interest if the Australian banks generated the returns of the European Banks (4% ROE excluding Deutsche Bank). Weak returns limit internal capital generation and increase financial precariousness and thus the risk of taxpayer funded bailouts. Indeed if one looks at a more comparable and similarly structured banking market such as Canada (ROE 14.8%), that has five dominant trading banks, in a highly regulated market; shareholders could make the case that the Australian bank CEOs are not trying hard enough to generate profit!

In this week’s piece we are going to look at different measures of corporate profitability for large Australian listed companies, looking beyond the billion dollar headline figures that have spell bound our politicians.

Read more here.

Return on equity for Canadian banks is higher than Australia’s big four

October 7th, 2016

Written by Vesna Poljak  of the Australian Financial Review.

Australia’s bank bosses fronting the parliamentary inquiry have sought to play down the returns they earn by drawing a parallel with banks in Canada, another commodity economy similar in structure.

In this respect, the big four chief executives are correct. But in reality, comparisons with Canada flatter Australian banks, in the eyes of some investors.

Read more here.

Aurora Global Income Trust announces scrip takeover bid for HHY Fund

September 29th, 2016

Aurora Funds Management Limited (Aurora), as responsible entity of the Aurora Global Income Trust (ARSN 127 692 406) (AIB) and the HHY Fund (ARSN 112 579 129) (HHY), is pleased to announce AIB’s intention to make an off-market takeover offer (Offer) for all of the units in HHY.

Each HHY unitholder that accepts the Offer will receive AIB units such that the net asset value (NAV) of the accepting HHY units will equal the NAV of the AIB units issued.

Based on the last reported NAV of HHY (on 31 August 2016), the Offer equates to 12.52 cents per HHY unit.

The value of the AIB Offer is above the 30, 60 and 90 day historic volume weighted average price, as well as the current trading price of HHY units immediately prior to this announcement.

The directors of Aurora believe that the Offer provides an attractive alternative to HHY unitholders to winding-up HHY, as recently proposed by certain HHY unitholders, which would likely result in a return to unitholders lower than the reported NAV. In particular, HHY unitholders who accept the Offer and receive AIB units will be able to redeem their units for the then applicable NAV of AIB as opposed to selling their HHY units on-market for a discount, as presently is the case.

Aurora, in its capacity as the responsible entity, has been assessing the position of AIB and HHY, and investigating strategies aimed at restoring value to the units of both funds. Aurora has determined that it would be in the best interests of unitholders in both funds to proceed with the Offer. Aurora believes that the combination of two relatively small listed managed investment schemes will increase liquidity to position the combined entity as a sector leading specialist with gross assets in excess of $16 million, as well as reducing the costs applying to the funds on a per unit basis.

The Offer and AIB’s obligation to make the Offer is subject to a range of conditions which are set out in the Annexure attached to this announcement.

 Aurora Global Income Trust (ASX: AIB) intends to make a takeover bid for 100% of the units in HHY Fund (ASX: HHY) at its prevailing NAV.
 Compelling strategic rationale for the HHY Fund acquisition. Bringing together the two funds will likely provide increased scale, liquidity and lower management expense ratios across both funds.
 Under the Offer, the number of AIB units that accepting HHY Fund unitholders will receive will be calculated on the basis of the applicable NAV of each fund.
 Accepting HHY unitholders will have the ability to redeem their AIB units off-market for cash at NAV pursuant to its constitution.

Unitholders in both AIB and HHY do not need to take any action in relation to the Offer at the present time. The indicative timetable in relation to the Offer is set out below:

Key Event
Lodgement of AIB’s Bidder’s Statement with ASIC, ASX and HHY Fund – Late October 2016
Dispatch of Bidder’s Statement – Early November 2016
AIB’s Offer opens – Early November 2016
AIB’s Offer closes (unless extended) – Early December 2016

Rationale for the Takeover
Aurora’s Managing Director John Patton said that the Offer is intended to “create an enlarged platform from which to deliver value added outcomes for both AIB and HHY investors. This Offer gives HHY unitholders the opportunity to convert their HHY units into AIB units at a premium to HHY’s historical trading price, and achieve liquidity at prevailing NAV. It is also considered to provide a superior outcome to that which may be achieved in a wind-up of HHY”.

HHY unitholders will become unitholders in an enlarged listed managed investment scheme with net assets in excess of $16 million (on a pro forma basis assuming 100% acceptances). The Offer provides HHY unitholders with a value accretive exit strategy and also the option to stay invested in the portfolio of HHY (although in a diluted form) with exposure to a more substantial and potentially more diversified investment portfolio. In addition, the Offer will enable HHY unitholders to become unitholders in a fund that allows its unitholders to redeem their investment at a price equal to net asset value via an off-market redemption process.

The Offer will strengthen AIB’s asset base and will provide a complementary, high quality investment portfolio. The increased market capitalisation will provide an improved ability to grow the investment portfolio returns on a measured and sustainable basis leading to enhanced distributions growth without significant increased risk. By virtue of the benefits of economies of scale, the enlarged entity also has the capacity to reduce the management fees currently charged to AIB unitholders on an enduring basis as the costs will be spread over a larger unitholder base. It is also reasonable to anticipate the potential for operating synergies over the medium term including administration and overhead.

The Board of Aurora intends to await the finalisation of the Independent Expert’s Report (see below) before advising how HHY Fund unitholders should respond to the Offer.

Independent Expert’s opinion
The Directors of Aurora intend to appoint an independent expert on behalf of HHY unitholders to prepare an Independent Expert’s Report to assess the merits of the Offer. The Independent Expert will conclude whether the Offer is “fair, reasonable and in the best interest” of HHY unitholders participating in the Offer.

AFARF Meeting

September 26th, 2016

A meeting of the members of the Aurora Fortitude Absolute Return Fund was held at 11.00am on 26 September 2016 in accordance with the Notice of Meeting issued on 18 August 2016.

The independent Chairman, Mr John Malon, opened the meeting and noted that there had been some recent developments in relation to the subject matter of the meeting.  In particular, the Chairman noted that Aurora had informed him that:

(a) It wished to retire as Responsible Entity under section 601FL of the Corporations Act and clause 17.1 of the Fund’s constitution;

(b) It considered it in the best interests of members of the Fund that they have a choice of responsible entities to replace it as responsible entity of the Fund; and

(c) It requested that the meeting be adjourned to allow unitholders the opportunity to consider the alternatives and to receive additional information in relation to them.

The Chairman indicated that it was appropriate to adjourn the meeting to enable additional options to be put before the members of the Fund and for the relevant additional information to be provided to them.

It was indicated that notices of the meetings and additional information would be despatched as soon as possible, expected to be within the next 3 weeks.

The Chairman noted that Aurora was not yet in a position to confirm the date on which the meetings will be held, partly due to uncertainty surrounding the Chairman’s availability for the meeting.  However, it was stated that the objective was for the meetings to be held in early November.

The Chairman declared the meeting of the Fund adjourned to the place and time specified in a notice of adjourned meeting to be issued by Aurora and thanked unitholders for their attendance.

What to do with the Aussie Banks?

September 26th, 2016

Aside from employing over 200,000 Australians and touching every sector of the Australian economy, the four major banks plus the two regionals comprise 25% of the ASX200 and are the four largest stocks listed on the ASX with a combined market value of A$380 billion. Assessing future prospects for the major banks is currently one of the biggest issues facing Australian equity fund managers and retail investors alike. Indeed over the past week the in the financial press there have been articles  advocating a zero weighting to banks and another one on Tuesday morning recommending that bank shares are historically cheap and should be scooped up with abandon. We see that the current investment case for the banks lies between these two extremes.

After several years of delivering strong profit and dividend growth, primarily due to the tailwind of declining bad debt charges, in 2016 bank share prices have been sold off, with most of the pain falling on the two banks most heavily weighted to domestic housing,  Westpac (-8%) and Commonwealth Bank (-10%).  Paradoxically in the current yield-hungry environment, ANZ has been the best performer, despite cutting its dividend in May. In this piece we are going to look at the causes of this correction and some thoughts for the future.

Read more here.

ABW Explanatory Memorandum

September 21st, 2016

The directors of the responsible entity unanimously recommend that you vote AGAINST all of the resolutions.

Read the full Explanatory Memorandum here.

REITs – Hugh Dive on ShareCafe

September 20th, 2016

Hugh Dive discusses REITs on ShareCafe.

Shorting – Hugh Dive on ShareCafe

September 20th, 2016

Hugh Dive discusses Shorting on ShareCafe.

HHY Explanatory Memorandum

September 15th, 2016

The directors of the responsible entity unanimously recommend that you vote AGAINST all of the resolutions.

Read the full Explanatory Memorandum here.

Australian insurers face a tough three-year outlook

September 12th, 2016

Written by Vesna Poljak  of the Australian Financial Review.

“That’s no different to what’s happening to the former supermarket duopoly, says fund manager Hugh Dive from Aurora Funds Management. “What’s a bigger issue for me which hasn’t really been focused on in the market is Suncorp and IAG are facing market share losses through a bunch of challenger brands. It’s a bit like what’s going on in grocery. The higher margins have given the Aldis of their world more oxygen and the ability to nibble away at market share,” he says.”

Read more here.

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