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   Activity Report

August - October 2016
Providence Activity Report
Information Only, No Action Required

Providence is constantly reviewing investment opportunities on behalf of clients. Being an independent company, each opportunity is assessed solely on its merits regarding risk and return and the appropriateness for our clients’ requirements.
It is often the investments you don’t invest in which has the biggest impact on performance so being true to Providence's promise of transparency and independent analysis, each quarter we share the basis of our decisions with our clients in this Activity Report. 

• Acceptances - 2

• Declines - 13

• Presentations - 11


Qube Subordinated Notes – Accepted.
Qube Holdings Ltd is an integrated provider of import and export logistics services.  It operates three divisions covering Automotive, Bulk and General Stevedoring, Landside Logistics and Strategic Development Assets.  Qube have offered to raised $305m through a subordinated note offer (ASX code: QUBHA).  The notes would be used as part of its ongoing funding strategy, including the development of Moorebank and other growth opportunities.  The notes offer an issue margin of 3.90% above 90 day Bank Bill Swap currently 1.74%, in addition to the 1.00% rebate Providence has negotiated on behalf of clients.  This equates to a first year running yield of 6.64%.  Investors receive unfranked floating rate coupons, meaning all interest is paid upfront.  The subordinated note structure ranks higher than common equity, but below senior creditors.  With the Industrials/Logistics thematic, we believe the Qube bond will be sought after as it is diversification away from Financials which dominates listed bond issuance.  The relatively small size of the offer has also seen the offer book close on the 2nd day of offer.  With the acquisition of Patrick, Qube is now well positioned to take advantage of the trade growth trajectory and as the sole developer and operator of the  Moorebank Intermodal Freight Precinct, it is our opinion that Qube will develop into the dominant provider of integrated logistics services in Australia.  At  the time of writing, QUBHA notes are trading above face value at $102.85.
Telstra Buyback offer – Accepted.
Telstra offered to buyback $1.25bn worth of stock (2% market cap) through an off market buyback facility.  The offer allowed shareholders to sell their Telstra shares at 14% discount to the Buy Back Tender price, they would benefit from the lower capital component and the attractive fully franked dividend component.  Our research showed it was only beneficial for zero tax paying entities (pension funds and charities), and at a detriment to clients within a personal, family trust or company structure.  The buyback result was a capital component of $1.78 + dividend of $2.65 + franking credits of $1.14 = total $5.57, this was 8% superior to the announced market price of $5.15.  For clients that had sold shares through the buyback facility, we repurchased Telstra shares at an average of $5.08 to maintain our preferred weighting.   


AAI subordinated notes IPO – Declined.
Suncorp advised that its wholly owned subsidiary, AAI Limited, would raise $225m of floating rate subordinated notes.  AAI operates Suncorp’s general insurance businesses including Suncorp Insurance, GIO, AAMI, Apia, Vero Insurance and CIL Insurance.  Within Australia, AAI owns $4.7b in market share of personal insurance market and $3b in market share of the commercial insurance market.  On review of the structure, we currently do not prefer unlisted fixed income securities which reduce secondary market liquidity, has reduced price transparency and have restrictive transaction amounts.  The offer term of a first call date being October 2022 was reasonable, however, we do have concerns about the longer dated maturity of October 2042.  In comparison to the parent companies listed subordinated debt offer (Suncorp SUNPD at 2.2% margin), we do not believe a 3.3% margin from AAI does not compensate enough for the additional risk. 
Blackwall Property Trust rights offer – Declined.
Blackwall Property Trust is a real estate investment trust which distributes income from rents received and growth from development projects.  At last review the trust had gross assets of $139m, 45% debt and underlying assets in Queensland and Sydney.  Blackwall offered a 1 for 17 rights issue at $1.20 per share, at the time of writing the shares were trading at $1.23.  Given the marginal discount to market (circa ~2%) we have declined participation on behalf of our clients.

Ingham Chickens IPO – Declined.
TPG scaled back the proposed Inghams Chickens float, aiming for only 40% free float and priced at 12x forecast earnings, down from 13.5x – 15.5x.  We see there being long term risk within the industry (mature business with limited efficiency gains, key contracts with supermarket giants and the relatively high gearing level).  We were surprised not to see the stock lift strongly on the first day of trading, despite having reduced the offer price considerably.  The offer for new shares was at $3.15, at the time of writing ING stock is currently trading on market at $3.27. 

Charter Hall Long WALE REIT IPO – Declined.
Charter Hall Long WALE REIT invests in Australian real estate assets that are predominantly leased to corporate and government tenants on long term leases.  The REIT consists of 66 properties valued at $1.25 billion with a weighted average lease expiry of 12.5 years.  The portfolio is diversified by geography and real estate sector, containing office, industrial and retail properties.  At the offer price of $4.00 per security, this represents a 6.3% June 2017 annualised yield, premium to net tangible assets of 4.1%, and look through gearing at 35%.  We declined on the offer due to a number of reasons.  With majority of the portfolio on fixed rental increases, a long WALE does not benefit in a rising interest rate environment.  The average cap rate at 6.4% also seems on the expensive side versus other industrial peers.  Underlying properties with regional exposure (eg Western Australia and Queensland) maybe of concern in event weaker economic growth.  The offer price of new securities was at $4.00, at the time of writing the stock was trading at $3.89.

Insurance Australia Group buy back offer – Declined.
IAG offered a share buyback offer at a discount to the final market tender price (similar to the Telstra buyback offer above).  The company would buy back 2.2% of the market cap, with the benefit of the fully franked dividend component.  In our view, the offer was struck too low with a low fully franked dividend component.  Even for a zero tax paying accounts (pensions/charities), the maximum benefit was less than 1%, which is marginal given the franking credits are received 2nd half of next year involving time cost.  The benefit would be further diluted by the actual scale back amount.

Elanor Retail Property Fund – Declined.
We were invited to participate in a retail property fund IPO, which offered regional property exposure with a distribution yield of 7.5% and gearing at 33.7%.  The fund currently has 5 properties valued at $243m.  We declined on given the exposure to specialty rental income (versus non discretionary majors); the properties having focus towards regional centres; and the fee arrangement being more expensive than others reviewed.

Antipodes Global Investment Company LIC IPO – Declined.
We met with Jacob Mitchell regarding his Listed Investment Company IPO (ASX code: APL), which is based on their Antipodes Global Fund strategy - a long short global equities fund with currency overlay.  We are currently watching the underlying fund, which is still relatively new having 1 year track record.  It has an absolute return objective, high conviction with around 50 holdings and currently has net exposure at 53%.  We would prefer going into the underlying managed fund directly versus using the ASX listed LIC structure, given the attached ‘free’ option which can dilute upside return until option expiry.  The LIC IPO offer price was at $1.10, at the time of writing APL was trading at $1.06.

Fortius Education Sector Fund – Declined.
We were invited to review a proposed syndicate investing in a strategic office building, to be used by a major education tenant. Although comfortable with the manager and the metrics of the deal, we are cautious of the current stage of the property cycle and are more focused on distressed and valued added opportunities.  We have been tending to look outside the traditional sectors of retail, commercial and industrial.

Argo share purchase plan – Declined.
We received notice of a non renounceable share purchase plan from Argo Investments Limited (ASX code ARG).  Argo have a closed end LIC structure which in our view is more insulated from investor inflows and outflows, as compared to large discount to NTA’s during market sell offs in open ended LIC vehicles.  Argo invest in a diversified portfolio of around 100 companies, with a conservative and dividend income focus.  The share purchase plan offer allowed existing share holders new shares at the lower price of either $7.32 or the 5 day Volume Weighted Average price including the closing date.  The final price of the share purchase plan offer was at $7.22 per new share, at the time of writing ARG was trading at $7.29.

JB HiFi entitlement offer – Declined.
We reviewed the JB HiFi renounceable entitlement offer.  JB HiFi is an Australian / New Zealand retailer of consumer goods (video games, electronics and home appliances).  The offer was for new JBH shares at a fixed offer price at $26.20, versus the stock at the time offer being $29.31 (roughly 11% discount to market price).  We preferred to receive the cash, as the entitlements not taken up are sold through the retail shortfall bookbuild.  At the time of writing, the stock is trading on market at $25.66.  As a general comment, the sector has seen some consolidation with the acquisition of Good Guys by JB Hifi, effectively making a duopoly between Harvey Norman and JB Hifi beneficial to the two retailers.    

Newmark Capital Como Centre – Declined.
We were invited to participate in a real estate investment.  We found the offer to be complex with office, retail, hotel and carpark exposure.  The initial forecast yield is 7% with scope for value enhancement.  The manager intends to develop a plan and strategy to evaluate opportunities regarding the property.  Given the long investment term (10 years) and not knowing the masterplan, we have declined investment at this stage.  For example, there may be unknown development risk which may not adequately compensate returns for the risk taken.

Metals X placement – Declined.
We declined to participate in the Metals X placement of approximately $100.6m.  While we were attracted to the significant discount to its previous close (12.9%) the stock is outside of our mandate for direct equities.  We prefer to play smaller resource exposures through specific fund managers.

Smartgroup Corporate Limited placement - Declined.
We declined to participate in the placement of approximately 7.6m shares in Smartgroup Corporate Limited.  We are positive on the theme of ongoing outsourcing of administration roles, however were concerned about its reliance of State and Federal government departments.  We would prefer to see greater diversification in the revenue base before committing capital to Smartgroup.


MLC Private Equity Fund – Presentation.
We met with Alicia Gregory and Serge Allaire from MLC Private Equity to get an update on their fund.  The fund has been 70% called over the past 3 years and expects to be fully called over the short term.  We are pleased to see the fund returning 14% IRR despite being in the early investment phase.  We would expect the fund to continue progressing well, as assets are sold at around 2x their cost multiple.  The fund currently has made 12 investments diversified across sectors and geographies.  A second MLC Private Equity Fund is in the process of being launched similar to Fund I, which will have concentrated Private Equity investments targeting 15% IRR.  A larger fund raising is expected to be beneficial to improve position sizing.  We are in the process of reviewing on behalf of clients and will revert when appropriate.

BCA Commodities and Energy - Presentation.
We attended a BCA commodity and energy  presentation by Robert Ryan, Senior VP, Commodity & Energy Strategy.  Key points discussed were: BCA continue to expect WTI & Brent to trade between $40 and $65/bbl, averaging $50 from end-2-16 to 2020. They expect the announcement of Saudi and Russian production cuts by 1m bbl/day at upcoming OPEC meeting November 30 and on the back of these announced cuts, they expect a positive market reaction in the order of $8-10/bbl.  BCA are neutral gold, silver and palladium, and neutral precious metals strategically.  BCA are tactical buyers of gold if it goes below $1250 per ounce.  BCA discussed a very interesting development that is not widely known in Australia (if not globally) in conventional markets. They cited the recent increase of seismic activity in Oklahoma and view this as related to fracking/storage activity. A wild card, but given the significance of Cushing, Oklahoma it’s worth monitoring regarding possible oil price spike on the back of a major seismic event in Oklahoma. One other interesting point of reference was the linkage with the USA 5-year/5-year CPI Swap (assessment of markets medium term outlook on USA inflation) to WTI crude futures. This is coincidently watched closely by FED and ECB.

Arrow Funds Management – Presentation.
We met with managing director Andrew Ashbolt.  Arrow is an asset manager of agricultural assets with a focus on asset (land/infrastructure) exposure in poultry, almonds, dried fruit and mangoes. The fund is focused on income generation with an average yield across all properties of ~10%. Distributions are quarterly. The bulk of the property exposure is with poultry and eggs (as land owner not operator) and the intention is to build out the exposure in the portfolio to almonds and dried fruit.  We are interested in the agriculture space for unlisted exposure and will continue with our due diligence and maintain a watching brief on this fund.

Jamieson Coote Bonds – Presentation.
We met with Charlie Jamieson and Angus Coote for an update on their Active Bond Fund. They noted the significant supply of bonds (~$16bn 10-year equivalent) in the last month having an impact on the local bond market as investors adjusted their exposure to account for new issuances (via Ausgrid sale and the issuance of the 30yr Australian bond). JCB target ~4-6% returns via their exposure to Australian only bonds.

Pzena Global Value Fund – Presentation.
We met with the Founder of Pzena Investment Management, Richard Pzena, for an update on their views.  They are very focused on businesses that are impacted negatively by ‘lower for longer’ rate outcome, who start to be better positions (i.e. focus on efficiencies, cost cutting, staying in business based on ‘lower for longer’ scenario continuing). The dispersion in valuations is extreme right now on a price to book metric. The average spread between cheap and expensive stocks is now not that far from the levels it hit in the internet bubble years. They believe we are in the midst of the longest value cycle ever but see/saw early signs of a turnaround in July. Central banks cut off the current value cycle as banks never got to adjust to the zero interest rate cycle… first time this has occurred. They are ~30-40% in financials, 15% energy, have some exposure to capital equipment companies. They are also exposed to stocks where the market has taken the view that an ‘old tech’ stock is loser to ‘the cloud’ where in fact there are (old tech) companies actively re-structuring or making good money from ‘behind the scenes behind the cloud’.

Perpetual Concentrated Equity Fund and Industrial Share Fund – Presentation.
We met with Stuart Dunn from Perpetual regarding the Concentrated Equity Fund and the Industrial Share Fund.  The Concentrated Equity Fund aims to outperform the S&P/ASX 300 Accumulation Index in a concentrated portfolio of 20 to 45 stocks.  The portfolio has marginally underperformed for the  past year to September however the recent quarterly performance has outperformed.  The Industrial Share Fund aims to outperform the S&P/ASX 300 Industrial Accumulation Index in a slightly more diverse portfolio of 30 to 80 stocks.  Similarly to the Concentrated Equity Fund, the portfolio has underperformed over the past year; however recent performance is encouraging.  Both funds have a quality bias so much of the underperformance can be attributed to their underweighting to sectors that have been driven by momentum.  We remain comfortable with a holding in these funds at this stage in the cycle given their preference for quality, undervalued companies.

Australian Equity Reporting Season – Update.
Overall, the Australian reporting season was slightly disappointing.  The market had been hoping to see a further improvement in Earnings growth to justify the lofty valuations however this was only evident across a few sectors.  Media, healthcare, insurance, telecommunications and infrastructure all performed poorly post reporting season despite reasonable growth in some of these sectors.  This indicates to us, that the market has grown impatient and is unwilling to pay the lofty multiples on offer in these defensive sectors in the hope of future earnings.  Resources performed stronger than expected mostly driven by confident outlook statements, lower costs of production and reduced debt balances. 

Watermark Global Leaders - Presentation.
We met with Tim Bolger (Chief Operating Officer) and Justin Braitling (Chief Investment Officer) of the Watermark Global Leaders Fund (ASX: WGF) regarding the impending IPO of this Listed Investment Company (LIC).  The portfolio follows a traditional long/short investment strategy across Australian and International equities.  While we are attracted to both international equity managers and long/short investment strategies, we do not believe that participation in the IPO that accompanies a 1 for 1 option is appropriate given the dilutive effect of the option.  We do like how the product will make available a market neutral strategy accessible to retail investors, which has not been available to the retail market in a LIC structure.  We will continue to monitor the Watermark Global Leaders Fund with potential interest if the LIC were to trade at a significant discount to its Net Asset Value (NAV).

One Ventures Healthcare Fund – Presentation.
We met with Michelle Deaker and Paul Kelly regarding a potential new Private Equity healthcare fund, which may receive backing by the Australian governments new biomedical technology fund.  As the fund is in early days, it would be too early to comment on terms as these have not been finalized. The government biomedical technology fund is in the process of reviewing private equity partners and proposed funds.  Our view is that government backing in this space is a significant benefit for the sector and will make commercialization and discoveries a lot easier for these research & development companies.  Aligning with OneVentures which have expertise in this field and have access to deal flow will be beneficial, should they be successful in attaining government support.  We are in the process of reviewing on behalf of clients and will revert when appropriate.

State Street Australian Equities Fund – Presentation.
We met with Toby Warburton regarding the State Street Australian Equity Fund.  It is a diversified portfolio of 50-100 stocks within the ASX 300 with a style neutral mandate.  The objective of the fund is provide investors with the greatest possible risk adjusted return.  It is anticipated the portfolio would outperform  the benchmark ASX 300 Accumulation Index by 2-3% over the full market cycle.  It is a systematic quantitative multifactor model across proprietary factors.  We like the funds limitations (eg maximum sector weight of 20% restricts the Financials exposure, which is currently 40% of the benchmark).  We are pleased to see the fund outperform over all time periods reviewed, the particularly over the past 3 years outperforming by +5.5% pa.

Pimco Cyclical Outlook – Presentation.
We attended Pimco’s Cyclical Outlook forum with views from CIO Marc Seidner and local portfolio manager Rob Mead.  Their outlook remains continued global economic expansion, mostly supportive monetary and fiscal policies and broadly range bound markets.  They expect world GDP growth to pick up slightly from around 2.5% this year, to 3% in 2017. With core inflation expected to remain below target in most major developed market economies, monetary policy will likely remain accommodative overall and fiscal policy is more likely to ease than tighten in most countries.  Policy dynamics within developed markets (such as US, Japan, Europe and UK) should diverge substantially as the US Federal Reserve may raise rates, the UK suffers slower growth due to Brexit uncertainties, Japan seeing higher growth due to significant fiscal stimulus, and Europe growth momentum to continue as they are likely to extend quantitative easing. They are concerned about asset prices that in many cases appear stretched.  Fiscal policy could be a surprise next year particularly in developed markets, as monetary policy effectiveness has diminished.
For more information phone (02) 9239 9333 or (03) 9653 6406 
Providence is an independently owned and operated investment advisory group.
ABN 42 003 224 904 | AFSL 245643
DISCLAIMER: Providence Wealth Advisory Group (AFSL 245643) has made every effort to ensure that the information in this report is accurate, however its accuracy, reliability or completeness is not guaranteed. Although consideration has been given as to the appropriateness of information to the recipient, no warranty is made to the accuracy or reliability of neither the information contained nor the specific recommendation for the recipient. Providence Wealth Advisory Group, its subsidiaries, affiliates or employees may have interests in securities or investment opportunities mentioned in this report. This document should only be read by the intended recipients. Providence Wealth Advisory Group, and its employees, disclaims all liability and responsibility for any direct or indirect loss or damage, which may be suffered by the recipient through relying on anything contained or omitted in this report and/or its recommendations.
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Providence Wealth Advisory Group · Level 9, 20 Martin Place · Sydney, Nsw 2000 · Australia

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