Up, down and sideways: This has been the fortune of three of our recent most LIC calls, so where do they stand now? A month ago we became comfortable enough with Bailador Technology Investments (BTI) – after speaking with co founder David Kirk for the second time – to bring it into the model portfolio. After placing a buy on it the stock has rallied, and the margin of safety needed to keep it as a buy no longer exists – we’re therefore moving it to a hold. Perpetual Equity Investment Company (PIC) has tracked sideways since our initial call, but it’s still in the buy range, while Cadence Capital moves from a sell to a hold as the share price has closed in on the underlying value of the portfolio.
Moving Bailador (BTI) to a hold
What a difference a month makes. The pounding of the pavement by David Kirk and co-founder Paul Wilson has paid off. Since the addition of the capital raised predominantly through Soul Pattinson, the share price has very rapidly closed the discount to NTA and now is trading at a small premium to pre-tax NTA of 1.72 per cent at the time of writing, and 9.26 per cent to post tax.
The closing of the gap between share price and NTA has seen the LIC model portfolio collect a tidy gain on paper of 17.33 per cent. It was an unexpected short term result but one we are happy with nonetheless.
For this very reason and this reason alone we are moving BTI to a hold. There is no longer a sufficient discount to call this one a buy- but do watch this space. We will not need a large double digit discount to NTA to change the recommendation to a buy again.
Keeping PIC a buy
PIC remains the battler of the group. The buy recommendation was made when the share price was $0.94. At the time of writing PIC’s share price currently sits at $0.915.
The thesis was that PIC had the clout of Perpetual behind it in a small and flexible vehicle. It was cashed up to the hilt and the market was getting ugly, giving the team plenty to select from including international equities.
As it stands today, the share price is trading at a 10.59 per cent discount to the last available post-tax NTA. The options overhang is still present, but with a strike price of $1 and an expiry date of June 10, you would have to think they are going to finish well and truly out of the money.
The investment case still stands. The team are long-term investors and deploy capital slowly into undervalued opportunities. As of the last update the portfolio still has plenty of cash at hand with the balance at 19 per cent. The remaining portfolio composition is 59 per cent Australian equities, with Woolworths Limited (WOW) the largest holding at 10.8 per cent, and international equities making up 22 per cent. Bank of America Corp (NYSE: BAC) is the largest international holding at 7.9 per cent.
PIC still remains good value at the current price. The overhang of the options may be holding shareholders back but they will soon be in the rear view mirror. PIC also provides investors with an unprecedented level of transparency; you know the value of the portfolio every day. Is that a good thing? I can’t answer that but it doesn’t leave investors guessing what the value is.
PIC remains a buy call. For even more information straight from the horse's mouth, Perpetual are hosting a briefing for shareholders and interested investors this Wednesday (May 25) at 11am. Click here to register: Perpetual webcast.
Cadence Capital no longer a sell
The damage has been done. We highlighted the growing disconnect between the share price and NTA in this article indicating the model portfolio’s decision to sell: click here to read more. At the time of writing, Cadence was trading at a premium to NTA of 23 per cent. We speculated the dividend was holding up the share price well above the NTA.
The dividend has come and gone and the share price has now fallen back towards the underlying value of the portfolio. Order has been restored. But the share price is still trading at a premium of 8.42 per cent to post tax NTA.
As always we want to see a discount to NTA. We will continue to monitor Cadence and for now move the recommendation from a sell to a hold given a substantial chunk of the premium has now come out.