Invesco Asia buybacks narrow discount – A narrowing of Invesco Asia’s discount made up for underperformance in NAV terms over the year ended 30 April 2019. The NAV total return for the period was 0.8% against 1.6% for the benchmark (MSCI AC Asia ex Japan Index) but, as the discount moved from 13.0% to 8.9%, the return to shareholders was 6.0%.
The dividend for the period was 5.7p, up 3.6% on the year before. The board plans to increase the dividend per share each year, utilising the revenue and capital reserves, if necessary.
The narrowing of the discount reflects, in part, a decision by the board to use share buy backs to help the discount narrow to at least 10%. The board used to use the ex-income NAV to work out this discount but has moved to a more normal NAV including current year income basis. In the end 445.000 shares were bought back into treasury.
[Invesco Asia is making all the right noises about tackling its discount – fees were cut early in the year, the discount has been tightened up and the board has realised that it needs to focus on attracting individual investors. It is a shame that it underperformed the benchmark again (last year it was 2.3% behind) but we think this may be largely a problem of Ian Hargreaves’s style being out of favour).]
Extract from the manager’s report
“The Company’s stock selection in Indian equities contributed significantly to relative performance, particularly holdings in commercial banks. ICICI, for example, was the standout performer, thanks to an improvement in its earnings visibility and higher provisioning cover as it moves closer to recognising the bulk of its bad loans. The lender has also seen core profitability recover while benefiting from an improvement in the broader macroeconomic outlook. This more positive macro environment also benefited HDFC Bank which similarly contributed to performance, sporting steady earnings growth and improved cost controls.
We also hold a number of Indian companies that are less exposed to the domestic economy and which have been successful in the internationalisation of their business. Agrochemicals company UPL, for example, has continued to contribute positively supported by strong earnings results. The company also finalised its acquisition of Arysta LifeScience, which could help drive earnings growth over the medium term. Aurobindo Pharma also added value, a generic pharmaceuticals manufacturer which similarly derives much of its revenue from overseas sales. The company has won US FDA approval for many new products and recent acquisitions in the US and Europe have helped improve the visibility and sustainability of its earnings.
In the IT sector, Infosys contributed positively, with the Indian software services firm raising its full-year sales forecast on the back of its increased win rate of large outsourcing contracts and a recovery of its financial services business, while maintaining solid cash-flow generation. Meanwhile, MediaTek detracted as concerns over a slowdown in China’s smartphone market were compounded by trade tensions, although the share price has regained some lost territory through the first quarter of 2019 on positive earnings and market expectation of further product diversification. We believe the company looks strong from a medium-term perspective and that the market has focused too much on weaker smartphone demand. However, MediaTek has turned a corner in terms of product quality and in the 5G era we expect to see more value-added products which will expand average margins in its telecoms business. It is also incubating new areas which should deliver revenue in the coming years, including ASICS, Big Data, and Wifi. These areas have less competition which should help increase margins. With nearly a third of its market capitalisation in cash and investments, the company has significant unrecognised profits from investments in such subsidiary companies.
The performance of Chinese internet companies has been mixed, with general concerns surrounding a slowdown in consumer spending and increased competition in e-commerce. NetEase added value over the period, regaining territory lost in the fourth quarter to end the period higher as new content for its major games proved popular, while visibility improved for the launch of new online games in its pipeline following the regulator’s issuing of new rules for approvals. However, this was not enough to compensate for the impact of Baidu, which has faced lingering concerns over a weakening revenue growth outlook. Its spending on video content and promotions is also expected to weigh on profit margins though its core search business is likely to prove resilient. While we are conservative in our assumptions for near-term earnings growth, the medium-term outlook remains positive in our view, supported by news feed and growth potential in online video, voice search and autonomous driving. There is also significant value in its stakes in iQiyi and Ctrip, while it has a strong balance sheet with around 25% of its market capitalisation in cash.
Other contributors to relative performance included China Communications Services, which gained on expectations that China would launch pilot commercial 5G projects in the second half of 2019 as well as broader industry growth prospects. We decided to sell the holding in the first quarter, with the company trading close to our estimate of fair value. China BlueChemical contributed positively on expanding margins for its methanol and urea segments. CNOOC was buoyed by the strength of the oil price, with overseas ventures in Guyana, among others, expected to add to capacity expansion while management has been encouraging in terms of profitability and cost controls.“
IAT : Invesco Asia buybacks narrow discount