23rd June 2015
Investment bank and broker Stifel has put a sell signal on Woodford Patient Capital due the fund trading at a 13% premium to its Net Asset Value. But Axa Wealth is warning long term investors that if they profit take and sell now, they may not be able to buy back in at a lower price.
The note from Stifel issued this week also says that some the fund’s progress is due to its inclusion in the FTSE All Share. It notes that the fund is not likely to be fully invested for some time and the fact that it is not paying a dividend in comparison with many of its peers. It suggests that the fund should be trading closer to its NAV or 103p not the current 116p. (The note is included at the foot of this article).
Adrian Lowcock, head of investing, AXA Wealth says “The Woodford Patient Capital Trust has benefited from Woodford’s reputation and impressive long term track record. It is hard to see this “Woodford premium” being eroded completely as he is arguably the most well-known manager in the UK and has a strong following. However, the premium is significant, particularly when compared to other smaller company investment trusts many of which currently trade at discounts to net asset value. At this level new investors might want to consider alternatives.
“Investors should balance their long term objectives and expectations for the trust against the short term profit which they could make before deciding on the best course of action. It is possible that the net asset value of the trust will rise closer to the current share price and effectively eliminate the premium. If this happened investors selling out not may not find an opportunity to get back in at a lower price. Given this trust was aimed at long term investors I don’t expect many to cash in now for a small short term profit.”
The Stifel note cites the following reasons for the sell recommendation
FTSE All Share inclusion: Over the past three weeks, the share price of Woodford Patient Capital has risen from 105p to 116p, with this 11p gain being well ahead of the 2p gain in the NAV over the same period. We think a key reason for this premium expansion is the inclusion of the shares in the FTSE All Share and FTSE 250 Indices from yesterday (22/06/15), with likely significant demand for the shares from Index Tracker funds in recent days.
Early Days: With the fund having only been launched two months ago, these are extremely early days in the life of the portfolio. Indeed, there have not yet been any factsheets or RNS announcements from the new fund on the level of invested assets or composition and shape of the portfolio. Normally, in these circumstances, we would wait some time before initiating coverage. However, given the elevated premium and the technical index factor, which appears to have created demand for the shares, we think it is worth highlighting the expensive nature of the shares to investors at this early stage.
Portfolio?: The company is yet to announce details of its invested portfolio. However, we think the portfolio will take some time to fully invest, especially inthe unquoted companies. The investment period may also be prolonged, giventhe increased size of the fund at IPO from the targeted £200m to the £800m outturn.
Premium management: In the listed fund sector, we think excessive premia can be as big a problem as excessive discounts and can lead to unwanted volatility in share prices. We note the board can issue the industry standard 10% of share capital on a premium without seeking further shareholder authority. However, the board may be reluctant to use this at present, given the likely high cash weighting in the fund.
No material dividend: Many funds with higher dividend yields such as infrastructure, property and some equity income funds are currently trading on premia to NAV, as a result of investor demand for yield. In contrast, Patient Capital is all about capital growth in the long term, with any dividend paid not expected to be material.
Recommendation & Valuation: At 116p, the shares are trading on a 13% premium to NAV est. of 103.1p at 22/06/15. The unquoted element of the portfolio is likely to take some years to fully mature, and we don’t think this is being properly reflected in the current high share price. At the present time, we think a fairer valuation is for the shares to trade close to NAV (i.e., currently 103p) rather than the 116p at which the shares are currently trading.