Question 1: I am interested in the Woolworths spin out of Endeavour Drinks. Should I buy Woolworths’ shares now to get access to Endeavour?
Answer (by Paul Rickard): I think a lot of the “Endeavour” action is already priced into Woolworths and this is one of the reasons the price has been moving higher. It will probably stay well supported until 23 June, the last day that Woolworths shares will trade “cum-entitlement”.
Demerged companies typically start soft (due to the overhang of sellers), and then after a few months, move higher. On that basis, if you want to buy Endeavour shares, I would be looking to buy in the first few weeks after the demerger. As to buying Woolworths now to get an entitlement to Endeavour, my inclination is that it is close to being fully priced in.
Question 2: I am looking for a higher income style investment. What do you think of BetaShares Australian Dividend Harvester (HVST)?
Answer (by Paul Rickard): Avoid. Overall performance has been woeful. Here is a link to an article I wrote today on Switzer Daily. My conclusion: “While the income return has been attractive (a gross distribution yield of 8.5%), it has gone backwards in capital value. Over 5 years, the fund has returned (dividends plus capital loss) 1.01% pa, underperforming the benchmark index by a staggering 9.26% pa. Avoid.”
The article lists some other investments you could consider, such as Vanguard’s Australian Shares High Yield ETF (VHY) or the listed investment company Djerriwarrh (DJW).
Question 3: Can you please explain how Crown Notes (CWNHB) work and are they a good investment ?
Answer (by Paul Rickard): They are similar to a bank hybrid security. They are subordinated notes which pay a fixed interest margin of 4% over the 90 day bank bill rate. This is currently 0.1%, so CWNHB is paying about 4.1%. If the 90 day bank bill rate rises to (say) 2%, then CWNHB will pay 6%.
The notes don’t mature until 23/4/75 – in about 54 years’ time. Also, from 23/7/21, Crown can call the notes by repaying the $100 face value. It has the right to do this on every subsequent interest payment (i.e. every 90 days thereafter). From 23/7/41, if the notes haven’t been called, then the interest rate steps up to 5%.
One further point top note: Crown is not obliged to pay interest and failing to do so is not an event of default. It is, however, not then allowed to pay a dividend on its ordinary shares.
Bottom line – an attractive interest rate, but you could be stuck in this investment indefinitely. From a capital point of view, the stock is trading at $98.45 and it is never going to go much over $100. If Crown doesn’t look like it is going to call the notes, or its business or credit quality deteriorates, the price will fall.
I am holding a small quantity of CWNHB from the original issue, and over the 6 years, the stock has traded in an alarming range from circa $105 down to $75. I will be quite happy to exit the investment for $100.
Question 4: I would appreciate your thoughts on mining services company Monadelphous (MND). Will the increased activity in mining bring value in the medium term?
Answer (by Paul Rickard): Like you, I thought Monadelphous (MND) would have done better by now, given that the “commodities boom” and operations normalising post-Covid should lead to increased work. But there are cost pressures (particularly with labour costs) that are impacting margins.
The major brokers are reasonably positive with 1 buy recommendation and 4 neutral recommendations. The target price is $12.69 (range $12.00 to $13.85), is about 25.5% above the last ASX price of $10.11. It is trading on a forecast PE for FY21 of 16.7 times (not overly demanding), with a forecast dividend yield of 4.6%. I think there is value here.
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