LIC & LIT Whitefield Limited SPP

I'm not invested in WHF so my approach will be even less Interested for future reference.

 

A few SPPs lately makes me believe a correction is around the corner.

 

No, each entity holding shares is entitled to approx 3480 shares, not 1:8.75, many will not take up the offer.

The price is calculated as follows,

• A$4.31; or
• an amount equal to a 2.5% discount to the volume weighted average market price of Whitefield's
Shares traded on ASX over the five trading days up to, and including the Plan closing date (i.e.,
30 November 2018), rounded down to the nearest cent.

Last SPP was August '17 and a total of 3,036,937 shares were allotted to shareholders with approx 84,000,000 already existing. a ratio of 1:27.6.

 

The SPP is only being offered to current WHF shareholders. Personally I don’t mind if a SPP is offered at a smallish discount. I like to support the LICs I invest in to raise capital for future buying opportunities.

I took exception to the BKI SPP as it was offered to the general public at the same discount. I don’t believe this particular SPP had the current BKI shareholders best interests in mind. The amount they were intending to raise was around 17% of their market cap. It just felt like a management fee grab to me.

BKI was my largest (and favourite) holding by a considerable amount. The SPP has taught me a value lesson, to spread my risk more evenly amongst my LICs moving forward.

 

"a 7.5% discount to the net asset backing (before deferred tax) at the last month-end (31 October
2018) adjusted for the expected half year dividend of 9.75 cents per share which will go “ex” prior
to the issue of SPP shares."
- From the annoucement
It's the discount to NTA not share price that matters.

There are a max of 10million shares on offer. My ratio was based on the limit/worst case.

 

I’ve kept it simple and assessed that at $4.31 and based on their recent dividend update, you are looking at a reliable stable dividend yield of 4.6% before franking. Not too bad for the old LICs in current market.
Long term holders will expect that dividend grow over the years. Sounds like a decent offer if you can scrump up the cash and can blot that “investment methodology mumbo jumbo presentation” out of your memory

 

I looked at it that I can buy the share for $4.31 when it’s currently trading at $4.59

It expects to pay 19.5c/share in the current year.
Or about 4.5% FF on what pay for it.

Good enough for me.

Blacky

 

Never considered the calcs from that aspect @Hodor but maths has never been my strong suit. Neat and an interesting way of looking at the offers.

 

SPP’s are not the only discounted buying opportunities. Simply taking advantage of occasional larger than usual discounts on market can result in a favourable outcome.

Given the opportunities (huge at times) I’ve taken advantage of with WHF over the longer term I could choose not to participate in their SPPs for a very long time and still be ahead despite any dilution.

As Thornhill often mentions these things tend to even themselves out over time.

If this sort of stuff makes one uncomfortable then best stick with plain vanilla index ETFs. For me however I still believe a combination of LICs / ETFs can work together nicely. But with LICs it pays to remember below average NTA discounts are your friend. When cash is available take advantage of what offers best value whether it be a LIC / ETF.

Although saying this sometimes (lots of times?) I just buy whatever I want without any thought about it. Even a coin toss is too much effort. Still seems to have worked out well.

 

I think I can see two things (which may not really matter that much a la @Nodrog).
1. Small holders taking up SPP can get opposite of dilution e.g. $15k holding + $15k SPP = 100% increase via discounted buying vs the total WHF growing say 5% from the full SPP.
2. Discount to NTA reduces value of your SPP? Would I be right in saying: let’s say the SPP raises $1m and WHF invests it in ASX 200 shares, then based on their 7% discount to NTA we have just lost 70,000 of that $1m straight away?

I’m not really bothered by these factors but my analytical brain couldn’t let it go

 

WHF gets the $1m minus costs of SPP.
The loss or dilution is more like this;

Imagine shares are slices of pie. To keep all slices an equal size they need to take a small amount from all the existing slices and give them to the new slices (created in the SPP).

I kinda tried to paint a bit of an ugly picture about all this so keep that in mind.
@unwillingwillis nailed why there was outrage around the BKI offer and not the WHF SPP.

It amazes me that an LIC such as WAM doesn't take advantage of their premium and do a SPP somewhere between the share price and NTA. Gives share holders ability to increase holdings at a discount to share price, increases value per share for existing shares, increases FUM for Wilson. Given their cash position maybe there isn't the opportunity to do such at this time.

+1
Ignoring these simple advantages doesn't make sense IMO. Psychology may be the most important thing, why ignore something that can meaningfully improve returns over the long term as buying at a NTA discount can? Take advantage of the free kicks.

 

From memory they do? And similar with DRP shortfall placement to so called sophisticated shareholders. Any opportunity to increase FUM but at least there’s no dilution impact on existing shareholders, in fact they benefit. But probably not anywhere near the additional yachts Wilson and staff can purchase from the fees. Maybe the aim is for each member of the family including kids to have their own personal yacht.

Eg just did a quick search:
https://www.asx.com.au/asxpdf/20180419/pdf/43tb521p6qmtkb.pdf

https://www.asx.com.au/asxpdf/20160801/pdf/43905g6d53x870.pdf

Typical WAM Shareholder:


Vs

WAM Key Staff:

 

Is that you doing the rowing @Nodrog?

I'll work with the principle of KIS as I'm pretty Stupid. Convoluted numbers and me tend to disagree. Results in me overthinking things too much.

If I plonk any in to this SPP it'll be because it's highly likely a repeatable event takes place every six months and within my preferred yield range.

 

At a shareholder meet a few years ago I remember GW saying there would be no more capital raisings for WAM as it would get too big to be flexible,thus spin-offs of WLE & WMI.

 

If that's the case then where's my row boat? I want it now!

 

WHF currently have 87,494,491 shares on issue.

October NTA was 4.76. forecast dividend 9.75c. NTA ex div = 4.6625

SPP is for 10,000,000 new shares (management reserve the right to accept up 30% of existing SOI or 26,248,347 new shares) Offer price is 4.31

If 10,000,000 new shares are issued the NTA situation after issue will be:

Current shares 87,494,491 * current NTA $4.6625 = $407,493,064 plus new share proceeds of 10,000,000 * 4.31 = 43,100,000

$407,493,064 + 43,100,000 = $451,043,064 divided by new total shares on issue 87,494,491 existing + 10,000,000 new = 97,494,491

$451,043,064 / 97,494,491 = $4.6263

Dilution = 4.6625 - $4.6263 = 3.62cents per share.

Each new share you apply for @ 4.31 you get exposure to $4.6263 of NTA. That is a 31.63 discount on NTA exposure. This discount is a present from Santa and I’m the tooth fairy!

O’k you sprung me – I’m not the tooth fairy and sadly Santa doesn’t fund NTA discounts to new holders – Existing holders fund the discount.

(if 10M shares are issued under the SPP) each new share receives a 31.63c discount to NTA which is funded by each existing share taking a NTA dilution of 3.62c on each existing share.

The break-even discount on new vs dilution on existing = 31.63/3.62 = 8.75 shares

If you can buy 1 share or more for each 8.75 shares you already own the SPP will come out in your favour. The greater the ratio of what you can buy to what you currently own the better off you are. But if you can’t buy at least 1 share for each 8.75 you own you will be funding other peoples discount.

As a large investor I would not touch WHF with a barge pole because I would be constantly being diluted. I suspect the persistent ongoing discount to NTA is a result of how the weight of money thinks about their serial dilution.

The right to convert preference shares instead of accepting the new pitiful terms also occurs on the closing date of the SPP and could lead to a similar level of dilution if many preference holders decide to convert.

Yer, Yer I know it’s all small stuff………. But is it really? The dilution from just this one SPP if they issue the 10M shares they are seeking will be equivalent in cost to 2 years of their MER expenses (or 5.5 years of management expense for VAS)

But not to worry – their rocket science active pseudo industrial approach will smash passive and justify all these insignificant little costs – Don’t you worry about it – just be a good little frog and stay in your pot, I guarantee you will never feel the heat of the fees being extracted.

Yes….. WHF is not as bad as some others, if you are accepting of that as a justification. But there is no way for my mind that it belongs in the same category as the passive index alternative lic’s AFI,ARG,AUI,MLT.

Yes if you are a small investor the SPP can work in your favour – but do you always intend to stay a small investor?

End of rant -back in my box.

 

Hi Dunno

Do you need to add franking credits that are distributed along with the dividend?

A quick back of envelope calculation on the last SPP, 10,000,000 shares were available but only 3,036,937 allotted, the dilution was approx .28%.

That is $28 per $10,000 invested.

 

The franking account balance is not accounted for on the balance sheet so is not included in the NTA figures. You don’t need to include it in the NTA dilution calculations I provided in the above post.

WHF have a franking credit balance equal to approx. 15c per share. Your rights to share in this account as dividends are declared over time is diluted by the same amount as your right to NTA is diluted.

$28 in $10,000 from the last SPP doesn’t seem a lot but stated in the same terms that MER is, its 0.28%. WHF seem to do this annually. I think people have got their head around the effect of expenses over the long term, I think they would see an increase of 0.28% MER as significant. Dilution is just as real a cost.

If all 10,000,000 shares are issued the dilution cost this time will be ~ 0.78%. buts its likely they won’t get that sort of take up so dilution won't be so bad – (not for want of trying and don't forget they have reserved the right to accept up to 26Million shares if by some miracle they raised that amount)

Potentially more shares may be issued and hence more dilution through the preference shares resetting which also occurs on the same day as the SPP closes, coincident or manipulating the short term share price and hence the adjusted VWAP calculation ???? The new terms seem shabby to me.


Cheers.

 

Hi @Hodor
That is a great way to conceptualise dilution.

Probably the only thing to add is that you can’t withdraw your money to close the bank account – you must get somebody else to buy you out. If potential purchasers fear they too will be subject to ongoing new partners being admitted at their expense – they are going to demand a discount to buy you out.

 

Thank you!
Excellent rant and loved following your calculations.
Yes small shareholders are happy