Bell Potter LIC Weekly: Earnings, free-cash-flow and dividends

By Hayden Nicholson | More Articles by Hayden Nicholson

This week Australian Foundation Investment Company (AFI) released its Half-Year FY22 results. The Company reported an increase in income from operating activities of 68.8% to $160.7m, aided by a recovery in dividends and distributions generated by the portfolio (+69.9%). AFI has declared and retained an interim dividend of $0.10 per share fully franked, unchanged from the pcp. Before provisions for the interim dividend (with an ex-dividend date of 9 February), the pre-tax NTA per share of the Company increased to $7.76 as at 31 December 2021, a 4.2% increase over the $7.45 pre-tax NTA per share reported back on 30 June 2021. AFI also paid a $0.10 fully franked dividend during this time, with a total net return of 6.1% for the six month period. Softer market conditions have carried through into the New Year with heightened volatility amid the prospects of multiple interest rate increases in CY22. Notwithstanding this, we have maintained the forecast dividend amount for AFI after adjustments, with free-cash-flow of the Company once again above the amount of total annual dividends paid, indicating value amid the sell-off, which may explain the wider premium.

Brother Listed Investment Company Djerriwarrh Investments (DJW) also released its Half-Year FY22 results this week. The Company reported an increase in income from operating activities of 46.0% to $15.1m, also boosted by a recovery in dividends and distributions generated by the portfolio (+57.2%) plus income from net realised gains on the options written portfolio (+29.0%). DJW has declared an interim dividend of $0.0675 per share fully franked, ahead of $0.0525 pcp and $0.0575 per share fully franked in respect of FY21. Before provisions for the interim dividend (with an ex-dividend date of 2 February), the pre-tax NTA per share of the Company increased to $3.47 as at 31 December 2021, a 4.5% increase over the $3.32 pre-tax NTA per share reported back on 30 June 2021. DJW also paid the $0.0575 fully franked dividend during this time, with a total net return of 6.2% for the six month period. We have revised our estimates for the sustainability and amount of total annual dividends paid by the Company in light of normalisation in free-cash-flow, with higher dividends and distributions received and brighter prospects for option premium via call-write strategies. Call option coverage of the portfolio at CY end was 28.0%, modestly lower than the guidance band of 30.0-40.0%. This bodes well coming into a sell-off when call options move out of the money and lose intrinsic value. The on-market discount has since narrowed from its 1 year historical average.

Bell Potter’s Indicative NTA tracks the ‘indicative’ movement of a LIC’s underlying NTA each month by monitoring the percentage movements of the disclosed holdings and using an index to track the movement of the remaining positions. The Indicative NTA works best with LICs that have a high percentage of investments concentrated in its Top 20, regular disclosure of its Top 20, lower turnover of investments, regular disclosure of its cash position and the absence of a performance fee. We have also included an adjusted indicative NTA and adjusted discount that removes the LIC distribution from the ex-dividend date until the receipt of the new NTA post the payment date. This report is published each Monday prior to the market open and is available on a daily basis. Intraday indicative NTAs will be available on request through your adviser.

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About Hayden Nicholson

Hayden Nicholson is an ETF/LIC Specialist at Bell Potter Securities. Hayden provides comprehensive coverage of the ETF and LIC sectors, producing a range of highly regarded reports covering investment fundamentals, asset class structure and cost, and the role of managed investments in portfolios.

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