- Joined
- 25 February 2020
- Posts
- 5
- Reactions
- 7
Carlton Investments (ASX:CIN) may soon significantly diverge from investor expectations, and unaware investors may get caught out if the share price of this Listed Investment Company (LIC) reacts to a change in Net Tangible Assets (NTA).
First, a description of Carlton, then the boring arithmetic about the divergence, then a question about garbage vs. Ferraris.
- Carlton is a pretty low-cost Listed Investment Company (LIC). The last annual report for Carlton came out on 9th September 2019, reporting $0.870m administration costs for $811.7m of assets (including deferred tax liabilities) for costs of 0.11% per year. There are very few with costs lower than this, mostly passive index funds, and the classic hedge fund cost of 2% per year (before performance fees) is about 18 times as high.
- Carlton is a mostly fairly diversified LIC. The last publication of its 20 biggest investments shows on 30th June 2020 that it had (skipping the first one for the moment) NAB, CBA, WBC, BHP, AGL, WES, ANZ, ... and just basically pretty big companies, the 19 companies (skipping the first) making up 47.4% of the NTA. Cash and term deposits make up 2.9%, so it's pretty much fully invested. So you might argue that the NTA will behave almost like the ASX 200 Net Total Return or (ASX:XNT), except that ...
- Carlton's biggest shareholding is EVT, or Event Hospitality & Entertainment, which made up 34.4% of the NTA on 30th June. EVT changed from $8.41 to $8.31 from 30th June to 31st August, or down 1.2% (decreasing NTA by about 0.4%, while the NTA (pre-tax) changed from $28.49 to $28.66, or up about 0.6%. By my arithmetic, this means EVT was about 33.8% of the NTA pre-tax on 31st August, or $9.69, and the rest was $18.97 of other share and cash. Note that in all of the following I haven't done any assessment of Event Hospitality & Entertainment, why it dropped, why it recovered, or if it might be overvalued or undervalued.
But how will the pre-tax NTA change from 31st August to 30th September? I'm assuming that the XNT is a reasonable proxy, that purchases and sales didn't change things much, that dividends received by Carlton were invested similarly, and all sorts of other things. Note also that like EVT, this makes no assumptions about if the entirety of the market is undervalued or overvalued, or if any of the other investments of Carlton are undervalued or overvalued. I'm also not doing all the arithmetic for the post-tax NTA either, which doesn't mean that it's not relevant, just that I'm only showing one of them, but you can imagine that a similar divergence might occur there too.
- The XNT changed from 63,472.5 on 31st August to 61,124.1 on 30th September, a decrease of 3.7% which means the $18.97 would have changed to $18.27, but after the shares went ex-dividend on 1st September, $0.56 should be subtracted, leaving $17.71.
- EVT changed from $8.31 on 31st August to $9.64 on 30th September, an increase of 16.0% which means that the $9.69 should change to about $11.24.
- So the new pre-tax NTA might be predicted to be around $28.95. This is an increase of about 1%, but if investors were expecting a drop of 3.7% from $28.66 to $27.60, it's a divergence of 4.7% or $1.35.
What happens from here? Well, if I can work this out, definitely other people can work it out. But has the market shown any sign of working it out? Regardless, Carlton answers some of these questions, usually between about the first and the fifth of the month, when it releases the end of month Net Tangible Assets statement.
Carlton closed trade on 31st August at $24.00 (which should be reduced by the $0.56 dividend to $23.44), and on 30th September closed at $23.26 (although the bid price for Carlton at the close was $23.30 so I'll use that). So Carlton effectively dropped by 0.8%, somewhere between the two. Since the premium or discount to NTA varies from month to month, it's maybe just a random number anyway.
- To show how much difference a day makes, since Carlton didn't trade at all on 30th September and the market dropped like a rock, if I'd done the same arithmetic on 29th September the percentages would have shown Carlton being closer to the change in XNT and further away from my prediction.
Of course, all of that is not based on anything being good value. It's only based on what change in value might be expected. But if it was way overpriced at 31st August, a small change in value might still see it way overpriced now. And if it was way underpriced, similarly. If I tried to sell you a bag of garbage for half the price I charged last week, it doesn't make it good value, and if I tried to sell you a Ferrari for $2 but you knew last week I was willing to sell it for $1, it doesn't make it bad value.
Anyone care to make a prediction? Better make that prediction before the Net Tangible Asset statement is released some time in the next few days most likely. Is it a bag of garbage or a Ferrari?
First, a description of Carlton, then the boring arithmetic about the divergence, then a question about garbage vs. Ferraris.
- Carlton is a pretty low-cost Listed Investment Company (LIC). The last annual report for Carlton came out on 9th September 2019, reporting $0.870m administration costs for $811.7m of assets (including deferred tax liabilities) for costs of 0.11% per year. There are very few with costs lower than this, mostly passive index funds, and the classic hedge fund cost of 2% per year (before performance fees) is about 18 times as high.
- Carlton is a mostly fairly diversified LIC. The last publication of its 20 biggest investments shows on 30th June 2020 that it had (skipping the first one for the moment) NAB, CBA, WBC, BHP, AGL, WES, ANZ, ... and just basically pretty big companies, the 19 companies (skipping the first) making up 47.4% of the NTA. Cash and term deposits make up 2.9%, so it's pretty much fully invested. So you might argue that the NTA will behave almost like the ASX 200 Net Total Return or (ASX:XNT), except that ...
- Carlton's biggest shareholding is EVT, or Event Hospitality & Entertainment, which made up 34.4% of the NTA on 30th June. EVT changed from $8.41 to $8.31 from 30th June to 31st August, or down 1.2% (decreasing NTA by about 0.4%, while the NTA (pre-tax) changed from $28.49 to $28.66, or up about 0.6%. By my arithmetic, this means EVT was about 33.8% of the NTA pre-tax on 31st August, or $9.69, and the rest was $18.97 of other share and cash. Note that in all of the following I haven't done any assessment of Event Hospitality & Entertainment, why it dropped, why it recovered, or if it might be overvalued or undervalued.
But how will the pre-tax NTA change from 31st August to 30th September? I'm assuming that the XNT is a reasonable proxy, that purchases and sales didn't change things much, that dividends received by Carlton were invested similarly, and all sorts of other things. Note also that like EVT, this makes no assumptions about if the entirety of the market is undervalued or overvalued, or if any of the other investments of Carlton are undervalued or overvalued. I'm also not doing all the arithmetic for the post-tax NTA either, which doesn't mean that it's not relevant, just that I'm only showing one of them, but you can imagine that a similar divergence might occur there too.
- The XNT changed from 63,472.5 on 31st August to 61,124.1 on 30th September, a decrease of 3.7% which means the $18.97 would have changed to $18.27, but after the shares went ex-dividend on 1st September, $0.56 should be subtracted, leaving $17.71.
- EVT changed from $8.31 on 31st August to $9.64 on 30th September, an increase of 16.0% which means that the $9.69 should change to about $11.24.
- So the new pre-tax NTA might be predicted to be around $28.95. This is an increase of about 1%, but if investors were expecting a drop of 3.7% from $28.66 to $27.60, it's a divergence of 4.7% or $1.35.
What happens from here? Well, if I can work this out, definitely other people can work it out. But has the market shown any sign of working it out? Regardless, Carlton answers some of these questions, usually between about the first and the fifth of the month, when it releases the end of month Net Tangible Assets statement.
Carlton closed trade on 31st August at $24.00 (which should be reduced by the $0.56 dividend to $23.44), and on 30th September closed at $23.26 (although the bid price for Carlton at the close was $23.30 so I'll use that). So Carlton effectively dropped by 0.8%, somewhere between the two. Since the premium or discount to NTA varies from month to month, it's maybe just a random number anyway.
- To show how much difference a day makes, since Carlton didn't trade at all on 30th September and the market dropped like a rock, if I'd done the same arithmetic on 29th September the percentages would have shown Carlton being closer to the change in XNT and further away from my prediction.
Of course, all of that is not based on anything being good value. It's only based on what change in value might be expected. But if it was way overpriced at 31st August, a small change in value might still see it way overpriced now. And if it was way underpriced, similarly. If I tried to sell you a bag of garbage for half the price I charged last week, it doesn't make it good value, and if I tried to sell you a Ferrari for $2 but you knew last week I was willing to sell it for $1, it doesn't make it bad value.
Anyone care to make a prediction? Better make that prediction before the Net Tangible Asset statement is released some time in the next few days most likely. Is it a bag of garbage or a Ferrari?
