WAM's game plan for Century Australia

It has been a long road for investors in Century Australia Investments (ASX:CYA). After listing in 2004 at $1 the share price has more or less tracked sideways ever since and, as of Wednesday, was trading at $0.94.

However, this LIC's fortunes may be about to change, with the company appointing Wilson Asset Management as its new investment manager and initiating a share buyback and a $75 million capital raising, which closes at 7pm on Friday (May 19, 2017).

A new manager

The appointment of Wilson Asset Management, we believe, is the part of the restructure that investors should be most interested in. WAM has established an excellent track record over time that has seen strong growth in the Net Tangible Assets (NTA) of its LICs. This has led to a number of its LICs (such as WAM Capital) trading at strong premiums to NTA, however whether this occurs at Century Australia Investments remains to be seen.

With the LIC's top 10 holdings consisting of mostly banks and large resource companies, the WAM team will closely review its portfolio composition to see where improvements can be made. The results of this assessment will be communicated by WAM to its CYA shareholders in the next three to six months.

The LIC will focus on companies in the S&P/ASX 300 Index, and has the objective of capital growth and paying a regular stream of fully franked dividends.

The buyback and capital raising

The share buyback is in place for those investors who want to sell their shares (at a fair price) and exit the register. The buyback will be priced at NTA less transaction costs (which will likely be around 0.2 per cent).

The LIC is also looking to raise $75m of capital from new and existing shareholders, with the capital raising price based on pre-tax NTA (with some adjustments to allow for the costs associated with the capital raising). The full calculation can be viewed in Section 2.6 of the prospectus.

The NTA price used in the buyback and capital raising will be calculated as the pre-tax NTA at the close of trade on the third business day following the closing date of the offer (the offer's closing date is 19 May 2017).

As at April 30, the Pre-tax NTA was $0.955 (after the payment of a 1.6 cent fully franked interim dividend and a 1.1 cent fully franked special dividend, which was declared on April 18 and paid on May 10). With the S&P/ASX 200 slipping by just under 2 per cent since April 30, the Pre-tax NTA may have also slipped by around the same percentage (making the issue price slightly lower).

Given the share price is $0.94, there doesn't appear to be any real advantage in buying shares on the market compared to buying through the capital raising.

One benefit in owning this LIC is its tax losses, as the LIC will not be paying tax until the tax losses are recouped. With a pre-tax NTA of $0.955 as of April 30, when adding in a (net) 4.8 cents of deferred tax assets on carried forward losses, its post-tax NTA is $1.003. On top of this, there is a further 3.60 cents of tax benefits on realised losses, which are not carried on the balance sheet.

Ongoing Fees

The ongoing fees for this LIC appear fair, with a 1 per cent (plus GST) management fee, plus a performance fee where the manager receives 20 per cent (plus GST) of any outperformance of the S&P/ASX 300 Accumulation Index, subject to recoupment of prior underperformance.

With a new investment manager, and a share price that is below its post tax NTA, the LIC appears fairly priced. It is now up to the WAM team to utilise their investing skills and set this LIC up on a path of growth. For Century Australia investors, let's hope they can achieve this.