Question 1: What are your thoughts on Tabcorp (TAH) going forward with regards to share price and splitting of assets?
Answer: Tabcorp (TAH) plans to split in two – a Lotteries & Keno division (which will be demerged) and a Wagering & Gaming division. Shareholders will get to vote on the proposal in May 2022, with the demerger set to be implemented by 30 June 2022.
Historically, demergers in Australia do well (the sum of the parts is greater than the whole), and unlocking the pieces adds shareholder value. That’s why the share price went up when it was announced. And that’s despite the separation costs, which in this case will be about $250 million, plus additional ongoing costs for the two entities of about $40 million per annum.
I am ambivalent about Tabcorp – I think I want to see the information memorandum and be convinced that there are robust plans going forward. It hasn’t been well managed.
As for the brokers, according to FNArena, there are 3 “buys” and 2 “neutrals”. Consensus target price is $5.48, compared to last ASX price of $5.20. Broker forecast range is a low of $5.10 (Credit Suisse) to a high of $6.55 with Macquarie.
My sense is that it is not going to do much between now and May next year, support around $5.00 and sellers if it gets much above $5.50.
Question 2: Can you explain the relationship between construction company CIMIC (CIM) and Hochtief. CIM appears a solid business with a strong defensive pipeline of orders mainly in public infrastructure. But it also appears undervalued (Morningstar has fair value of $33.50 vs current value of $19.03). So why the disparity? Is the inevitable Hochtief takeover something to do with it, or is CIM in the naughty corner?
Answer: CIMIC is 77.7% owned by German engineering company Hochtief. The latter is controlled by Spanish company ACS Group which owns about 65%, so CIMIC is effectively controlled by ACS.
There is no “naughty corner” – ACS (through Hochtief) has been gradually increasing its ownership through the “creep” provisions. It doesn’t need to own 100% to control it.
If you invest in CIMIC, you will be a minority shareholder. You should assume that Hochtief will control CIMIC for ACS’s interests – not yours. That’s why several fund managers won’t invest in CIMIC and explains in part why there is somewhat of a “permanent” discount to broker valuation. Current broker consensus forecast is $25.37 (range $22.50 to $30.00).
Question 3: Recently Milton (MLT) merged with Washington Soul Pattinson (SOL). I had a substantial holding in MLT but no holdings in SOL. I viewed MLT as a sound investment vehicle with an excellent track record. SOL appears to be more volatile and is rapidly going south. I have much less confidence in SOL than MLT. What should I do with my holdings in SOL in these circumstances?
Answer: Washington H Soul Pattinson (SOL) is no Milton Corporation. It is a conglomerate with interest in TPG, Brickworks, New Hope, Financial Services and other controlled/partially controlled entities, while Milton was a relatively passive, broad-based listed investment company.
Milton had been a relative underperformer, and the obvious trade was to get out when the SOL offer came. It was an absolute motza for Milton shareholders.
If you want broad-based equity exposure, exit Soul Pattinson. If you are happy to take higher risk and potentially a more volatile ride, hang on. In fairness to SOL, their track record over the long term is very impressive. In the 20 years to July 2021, they returned 1,140% compared to the All-Ords Accumulation index return of 429%.
Question 4: What is the last day to buy NAB shares to get the next dividend?
Answer: National Australia Bank (NAB) goes ex-dividend on Monday 15 November, so if you want to get the fully franked dividend of 67c per share, you will need to buy the shares on or before Friday 12 November.
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