Spheria Emerging Companies Limited (ASX: SEC) offers investors access to an actively managed portfolio, which majorly comprises Australian Small Cap Securities. The company’s portfolio is constructed to invest in a select number of small and micro-cap companies listed in Australia and New Zealand. Its investment strategy aims to provide total returns in excess of the Benchmark and capital growth.
The company recently announced an on-market buy-back of 66,337,546 fully paid ordinary shares for the purpose of capital management, as the share price was trading in excess of a 10% discount to the last disclosed pre-tax Net Tangible Assets per share.
Through the on-market share buy-back, the company has planned to purchase shares for a total consideration of $5 million during the 12 month period from 1st July 2019 to 30th June 2020. This is in accordance with a clear commitment to shareholders that an action shall be taken by the Board when the share price trades away from the Net Tangible Assets. To ensure that the buy-back does not significantly reduce the capitalisation of the company, hindering its growth over time, the Board may consider undertaking a placement of company shares from time-to-time.
NTA Performance for 1HFY19 (Source: Company Reports)
Financial Highlights: During the first half of the financial year 2019, the company reported an operating loss before tax of $14.78 million and an operating loss after tax of $9.2 million. During the prior corresponding period, it reported an operating profit before tax of $4.2 million and operating profit after tax of $2.96 million. The loss incurred was predominantly due to unrealised revaluation losses on the company’s investments during the period. This was reflected by a weaker market during the six months, when the S&P/ASX Small Ordinaries Accumulation Index witnessed a fall of 12.7%. Interest income received during the period amounted to $76,000 as compared to the $68,000 in the prior corresponding period. As at 31st December 2018, the company had net assets amounting to $127.89 million as compared to $139.77 million in the prior corresponding period. Revenues from ordinary activities during the period went down drastically at a rate of 371%. Basic loss per share came in at 13.9 cps, depicting a decline of 166% over the prior corresponding period. Net tangible assets per security, including tax provided on realised and unrealised gains, amounted to $1.926 as compared to $2.043 in the prior corresponding period.
The company outperformed its benchmark by 2% despite the challenging conditions during the period. The company’s NTA declined by 10.7% after the adjustment of the dividend paid as compared to a decrease of 12.7% in the benchmark.
In addition, the Board of the company paid a fully franked interim dividend of 2.0 cents per share to its shareholders on 20th March 2019, with a record date of 6th March 2019. This summarized FY18 dividend of 4 cents per share paid, which equates to an annualised dividend yield of 3.5% or a grossed-up yield of 5.0% (including franking).
The company’s portfolio performance as at 31st December 2018 was depicted in terms of three perspectives as explained below:
- Manager Performance is the first perspective that aims to show the performance of the investment portfolio after deducting management fees and performance fees paid compared to the relevant benchmark. The relevant Benchmark used is the S&P/ASX Small Ordinaries Accumulation Index. Manager Performance for the company’s portfolio was -10.7% as compared to the portfolio benchmark of -12.7%.
- The second performance used to depict the portfolio performance is Net Tangible Assets or NTA Performance, which aims at showing the performance of the company after taking into account the management fees and performance fees, other expenses paid and tax on earnings. Tax on earnings included the amount with respect to realised gains but excluded any provision for tax on unrealised gains, capitalised share issue cost related balances and income tax losses. The NTA performance was reported at -10.7%.
- The third and the last perspective is a measure of the change in the share price and dividends paid during the period known as Total Shareholder Return or TSR Performance. This measure does not include the value of any franking credits when they are paid to shareholders and is a relevant parameter as the share market can often trade at a premium or discount to the NTA. The TSR Performance of the portfolio was reported at -9.0%.
The stock of the company is currently trading at a market price of $1.765, down 0.563% on 24th June 2019.
Let’s look at what Net Tangible Assets are in a bit of detail.
Net Tangible Assets of the company are derived by deducting the amount of intangible assets and liabilities of the company from the value of its physical or tangible assets. Goodwill, trademarks and patents are some of the examples of intangible assets. The value of Net Tangible Assets serves as an important factor when a company opts for acquisition financing as it owns more assets to use as a security for loans.
Net Tangible Assets per share is computed by dividing the value of net tangible assets by the outstanding shares of the company. The value depicts the amount of money that each shareholder would receive of the company were to liquidate.
The ratio is an important factor in designing the investment strategy as it helps determine if the share price accurately reflects the net assets of the company or whether a company is undervalued or overvalued. It serves as a useful measure when conducting a comparative analysis of the companies within the industry as there can be a different value of net tangible assets per share for different industries based upon the amount of intangible assets attached. For instance, the value of intangible assets for a company operating in the software industry will be much higher than that of an Auto manufacturer.
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