Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
lti does seem to suffer from a form of verbal diarrhoea, having posted ten of the 14 posts since my last. it would be nice if he or she contributed to what could be a serious debate about what mike kerley is doing, but even when he or she states, “i am simply having to point out the facts,” he or she doesn’t. assertions are not facts.
lti wrote, “hfel issue shares at a premium when there is a demand – end of”, but has shied away from attempting to show, in actual money terms, how this benefits existing investors, even though he repeatedly asserts that it does. if he or she is so certain of this, it should have been a simple matter to do what i asked and provide us with the figures, but lti’s posts are barren of facts.
the last directors’ report tells us that 3,855,000 new shares were issued for a net £11.0mn. that’s an average of 285.34 pps. the downward sloping share price graph in 2021/22 was fairly smooth, so it might not be unreasonable to assume an average price from the starting point (301.5) to the finish (281.0). that average is 291.25, or 292.25 if one allows 1pps for the offer price being above the mid price. this is actually 7p greater than the average price at which the new shares were sold, suggesting a deficit rather than a premium. we should politely assume that mk did better than that, but was it more than 12 pps better? if it wasn’t, there was no gain at all from the so-called premium and we have all been fooled.
as my last post revealed, the increase in ‘other expenses’ in 2021/22 was £196,000. that is equivalent to 5 pence for each of the new 3,855,000 shares issued that year. so to break even, so to speak, on the issue of new shares, mk needed an extra 7pps to equal the average in the market and another 5pps to cover the extra costs. that would have been a price of 297.34, raising another £462k, just to break even. it should be noted, of course, that whereas the supposed premium from the sale of the new shares would have been a one-off, the increased expenses will occur every year.
lti has also written, sarcastically no doubt, “i tend to make investments knowing what the investment is.” we’d all like to think that, but how can lti know what the investment is when he seemingly focuses solely on the dividend yield and not only ignores other matters but refuses even to consider the issues that others are raising, preferring to **** them off? very disappointing, especially in someone who is supposedly a long term investor.
we will soon have a new annual report to consider. i can’t be alone in hoping that lti will study it carefully, before launching into another grandstanding performance.
My last paragraph to lti was inadvertently chopped. Here it is in full.
A final thought for you to consider. As new shares have, we are told, been continually issued at a premium, that obviously suggests there is an appetite for them. So, if new shares had not been issued to satisfy that appetite, the would-be investors would have had to buy them in the market. Usually, when there is a demand for shares and their number is capped, the price goes up, so existing investors enjoy the boost, but when more shares are pumped into the market that doesn’t happen. Oh dear.
LTI
The directors of HFEL will be pleased to have someone as knowledgeable and forthright as you to defend and promote their strategy. This will no doubt help the sale of new shares, but please explain how we benefit from the premium at which they are sold. How much did this come to in 2022 and where does it appear in the accounts? Is the amount greater than the additional costs incurred, such as increasing audit costs to which I have previously drawn attention (up 23% in 2022).
Have a look at page 50 of the 2022 annual report. This details all ‘Other expenses’. The total increase was £196k, up 21% (the directors got 12%,). How does this compare with what might have been raised from the premium, do you suppose? Would you please do the calculation and share it with us. I have shared my research in several posts, beginning in response to monkeyman99 on 2/9/23.
Monkeyman99 wrote, “Having gone through the portfolio it is clear this portfolio should had been trimmed down and the asset manager is clearly struggling with this portfolio due to its size.” That prompted me to post this.
“It is evident to me that HFEL has been repeatedly issuing shares in order to buy additional earnings and profits with the proceeds, so that it can continually increase its dividend. One adverse consequence is that the accompanying dilution substantially reduces the effect on its EPS/DPS. Another, which is a real danger, is that in straining to acquire more dividend income HFEL is buying companies of increasingly poor quality, which will hold the capital value back when markets recover. These are the stats for the past 4 years: revenue up 33.7% and profit after tax up 37.9%, BUT EPS up only 9.9% and dividend up only 10.2%.”
Do these facts not suggest that at least some of the additional capital has been wasted?
As Napoleon found, constantly increasing the size of your empire can lead to disaster, not glory.
In my letter to Ronald Gould I wrote, “In your chairman’s statement last November you claimed that the NAV had grown by 1.9%, but that is at odds with the Janus Henderson fact sheet. That shows minus 6.7% for the 12 months to June 2022 and minus 1.6% for the full five years to June 2023.” His reply did not address that apparently deliberate misinformation. Do the directors (paid £183k in 2022) actually know what is happening?
You like to deride other posters, but you do not address the facts, nor try to justify your opinions with evidence. This is hardly helpful to others, even if it leaves you feeling smug.
A final thought for you to consider. As new shares have, we are told, been continually issued at a premium, that obviously suggests there is an appetite for them. So, if new shares had not been issued to satisfy that appetite, the would-be investors would have had to buy them in the market. Usually, when there is a demand for shares and their number is capped, the price goes up, so existing investors enj
To GS
I am not inclined to pursue matters with Mike Kerley myself, at least at this time. Others are welcome to, in which case I would hope that the Q&A are posted here, for all to see.
The matters which most concern me are the high turnover of the portfolio and the continuing issue of new shares. The former, which cannot be explained by the latter, needs more explanation than has so far been offered, to satisfy those who suspect that, while it may assist dividend aggregation, it may also be contributing to a falling NAV. As to the latter, I fail to see how it can ever – in an investment trust – benefit those who are already invested in the trust: that idea is nonsense.
Ade2a
Yes, if those who ask questions share them and the answers on this chat board, that should be of benefit all round. Small issues should be avoided, I suggest, as Kerley is not going to spend his time dealing with trivia, but significant matters such as how will the trust deal with an invasion of Taiwan would be good to know.
A question was put to Ronald Gould, via Janus Henderson. Mike Kerley responded.
This was the question.
Last year’s dividend cost £36mn. The cash flow statement shows that this was principally paid for by “profit” of £11.5mn and “losses” of £22.6mn. I don’t understand how income sheet losses convert to positive cash flows, but have to assume that this is because of my indequate accountancy knowledge. The more interesting figures though, also taken from the cash flow statement, are the £449.6mn from the sale of investments and the £447.6mn used to buy investments. As the balance sheet shows investments valued at £438.5mn, it appears that there was a roughly 100 per cent turnover of the company’s assets in the space of one year. Why?
This is Mike Kerley's response.
The dividend cost of £36m is paid for by income from the dividends from the companies we invest in plus option premium. This is reflected in the consolidated cash flow statement in the report and accounts. The Company’s profit and loss includes these receipts but is also impacted by market movements.
The portfolio turnover in FY 22 was approximately 100% as you correctly state. We are not buy and hold investors irrespective of valuation and tend to change the portfolio when companies are fully valued, when circumstances change or when better opportunities present themselves. We also top up holdings into ex-dividend dates to ensure maximum revenue generation which in recent years has been more prevalent as Asia’s dividend growth has been below expectations, mainly due to Covid-19. Additional turnover is also created should some of our options get exercised, although this is relatively small. Finally, the investment of monies received from share issuance is included in these turnover numbers. These are invested into existing positions with a focus on companies about to go ex dividend to ensure existing shareholders revenue is not diluted. This combination of style, revenue maximisation and share issuance is responsible for the relatively high turnover.
The numbers quoted above relate to the financial year ending in August 22. We are about to release our 2023 results in the coming weeks and I will be more than happy to answer any questions you may have regarding these should you require.
Regards, Mike Kerley
Thank you for your letter dated 2 October 2023, which I and my fellow directors have received. Thank you also for your support of the Company through your investment with us. I appreciate that, at present, the overall return you see on this must be disappointing to say the least.
The links which you included in your email were informative; we do keep track of the sentiment towards the Company through various media channels and letters received from our investors are shared with me.
While we have maintained a progressive dividend, capital performance has been poor since 2020. For the 3 years to 31 August 2023, total return performance was -4.9% with the share price total return at -10.3% for the same period. Although the dividend yield at 31 August 2023 was 11.2%, we acknowledge that this has benefitted from a falling share price.
We do, however, understand why we have reached this position and I, along with the Fund Managers will elaborate on this point in the annual report which is due to be published in the not-too-distant future. As you can imagine we, as a Board, spent a substantial amount of time this year considering the investment strategy – its appropriateness over the long term and in the current market conditions, the yield of the portfolio and projections for dividends from the Asia Pacific region, as well as the positioning of the portfolio along with the prospects looking ahead for the portfolio and the region in general. We concluded that the strategy remains appropriate and can deliver a progressive dividend alongside capital growth; it has done so in the past and we believe it will do so again in future.
To your point on share issuance, we have increased the premium at which shares can be issued to ensure that existing shareholders benefit from the uplift of issuing new shares at a premium to net asset value. The increase in the size of the Company has the additional benefit of spreading the costs over a wider shareholder base. The proceeds derived from issuance are invested into existing shareholdings with a focus on companies that are about to trade ex-dividend to ensure that the revenue reserve is not diluted by new shareholders. As you rightly point out, the value of the shares issued over the last few years is considerable, but these are issued periodically and the proceeds always invested in a timely fashion to ensure there is a little or no impact to performance, income or existing shareholders.
I would urge you to keep an eye out for the latest financial results which will be published in November. My statement and the Fund Managers’ report will provide more detail on performance, but also on the future positioning of the portfolio specifically to address the issues that you have raised.
Please feel free to get in touch with me again should you have any further concerns after the annual report has been published.
Yours sincerely, Ronald Gould, Chairman
I have received a reply from Ronald Gould, via Janus Henderson. This will appear in my next post, but experience suggests that for a reason I cannot fathom, all capital letters will be changed to lower case. This has happened to my own postings, when I first typed them in Word and then copied them in. It doesn't look nice, but the meaning is, mostly at least, quite clear.
it’s a shame that slownsteady’s reading of my letter to the chairman of hfel was stopped when he came to the words “ponzi scheme”, because the following paragraphs contained some facts of which he may have been unaware. it’s the facts that need addressing, not my choice of words to describe them.
i wrote, “rather like" a ponzi scheme and explained why. to answer slownsteady directly, although hfel is classed as a closed end fund, in reality it doesn’t quite match that description, for the reason i stated. it has been persistently issuing new shares, which of course bring in new money, but this means that hfel is, shall we say, half open-ended. that money then has to be invested to meet the increased number of shareholders wanting their dividends. some contributors to this chat facility evidently think this additional money is a good thing, but i have questioned that, thinking that the quality of the additional investments obtained with that money might not be as good as the earlier investments upon which hefl’s reputation was founded. qed perhaps.
it was not me who first suggested that hfel might be milking dividends by repeatedly buying and then selling the same shares. it was comments from others that alerted me to the possibility. it is however the accusation that i have put to ronald gould, to which he has yet to respond. i found addresses for all the directors, including an email address for one, but none has yet thought fit to respond. interesting, that.
now, let us consider some further facts. last year’s dividend cost £36mn. the cash flow statement shows that this was principally paid for by “profit” of £11.5mn and “losses” of £22.6mn. i don’t understand how income sheet losses convert to positive cash flows, but have to assume that this is because of my indequate accountancy knowledge. the more interesting figures though (as i now think, not having noticed them before), again taken from the cash flow statement, are the £449.6mn from the sale of investments and the £447.6mn used to buy investments. as the balance sheet shows investments valued at £438.5mn, it appears that there was a roughly 100 per cent turnover of the company’s assets in the space of one year. why?
like other investors in hfel, i have to hope this will all work out well, but there are sufficient reasons to wonder and perhaps even to worry, for me to expect one of the directors to respond to my letter. for those who might wish to press them on the matter, here are the other addresses i wrote to.
timothy clissold, peony advisors ltd, 1 waverley place union street st helier jersey, je4 8sg; david ma****er, meridian asset management c i ltd, 13-15 charing cross po box 22 jersey, je4 0xn; nicholas george, john lamb hill oldridge limited, ormond house, 26-27 boswell street, london wc1n 3jz; ms julia chapman, julia.chapman@tisegroup.com.
Letter sent to Ronald Gould, IFCI, The Esplanade, St Helier, JERSEY, JE1 4BP
Henderson Far East Income Ltd [HFEL]
Are you aware, I wonder, what the chat rooms are saying about the management of your company’s portfolio? If not, I strongly urge you to visit at least one. This is a comment extracted from https://www.lse.co.uk/ShareChat.html?ShareTicker=HFEL&share=Hendfar-East
but other comments there are pretty damning too.
“On the Citywire forum investors in Hendeson Far East Income are actually willing to face the truth that this trust is converting capital in to income. One comment on this forum refers to the trust as "eating itself", which I thought was a good way of putting it! other comments refer to the obfuscation committed by both the managers and the board of directors, who are meant to act in the best interests of shareholders.”
That investor thinks the fund is likely to “do a Woodford”. See https://moneyforums.citywire.com/yaf_postsm242296_HFEL--Henderson-Far-East-Income--I-just-bought-more--having-2nd-thoughts.aspx
In essence, a growing number of investors believe shares are being bought cum dividend then sold when they go ex dividend. This would certainly go some way to explaining the persistently falling NAV. In your chairman’s statement last November you claimed that the NAV had grown by 1.9%, but that is at odds with the Janus Henderson fact sheet. That shows minus 6.7% for the 12 months to June 2022 and minus 1.6% for the full five years to June 2023.
My holding, in an ISA, is 6,000 shares. It is well under water and although some are inclined to suggest that this is all to do with China I don’t think that stands up to scrutiny. What stands out for me is the 77 per cent increase in balance sheet equity since 2018, which has produced no benefit for shareholders at all.
This is not a growth company needing more equity to grow its business and thus make bigger and bigger profits. It is in fact struggling to keep its head above water, in the sense that its principal object is to provide an income from its investments, now needed to satisfy an ever-growing body of investors. In that respect, it seems to me it has become rather like a Ponzi scheme, inasmuch as it is constantly seeking new investors in order to sustain its dividend, which in real terms has actually been shrinking. This inevitably means that the quality of its assets will deteriorate, thus limiting the potential for returning to the NAV of five years ago, let alone growing it to meet one of the company’s stated objectives.
when hfel began, it could focus on quality, but that gets more difficult as the portfolio grows, as illustrated by the rising audit cost, from £35,000 in 2018 to £58,000 in 2022, an increase of two thirds.
in 2018 there were 121.13mn shares, but at 31.8.22 there were 154.95mn, an increase of 27.9% more mouths to feed. this activity raised an additional £107.3mn, but by the end of last august investment value had actually fallen, by £24.1mn. if investments had instead risen in line with new capital, the value would have been £818.0mn and the dps touching 39p. however, only one quarter of increased profit after tax has been converted to eps/dps. because of its artificially high dividend yield, hfel has become a wealth-destroying value trap. dividends per share for the 4 years since 2018, plus those for 2023 to-date, total 110.7p, but the share price in that time has dropped by 143p, from 361 to 221. those buying in 2018 haven't even had their money back.
the poor investment performance is reflected in the dividend. this looks good by comparison with the share price, but only because the share price has fallen so much. the last three dividend increases have measured just 1.7% each, which does strongly suggest that the new investments bought from the new equity raised by hfel have actually been progressively weakening hfel’s dividend paying capacity. there is in fact a widespread expectation that the dividend will soon be cut, using china’s problems as an excuse but in fact caused by hfel’s own actions.
the company of which you are chairman is failing its investors, with a falling value and diminishing return. this requires vigorous corrective action before it is too late.
copies sent to julia chapman, timothy clissold, david ma****er, nicholas george and janus henderson fund management.
Steve
HL gives the Market capitalisation: £2m
Shares in issue: 682.08 million
Zac
You are correct. I used the wrong percentage for the increase in shares, but that does not invalidate my calculation of how that increase, when compared to an almost static investment portfolio value, has reduced the NAV per share by 23%.
The 76.8% increase is of the equity value on the balance sheet, from £139.7mn to £247mn, an increase of £107.3mn. This is yet further proof of how badly HFEL has been managed, as it can be seen that each additional share, on average, cost £3.17.
Ade
My response at 12.38 to an earlier post of yours was written too hastily. A company's market capitalisation has nothing to do with the balance sheet. Is simply the current share price multiplied by the number of shares in issue. It therefore changes every day, reflecting price movements and the issue of new shares or the cancellation of any bought back.
When new shares are issued for whatever price chosen by the directors, the net proceeds will add to the company's net asset value while they are held as cash, but once invested it is the value of those investments that will appear in the balance sheet. If at the next reporting date those investments have risen in value, then (other things being equal) the NAV of the company will rise. If they have fallen, then so will the NAV.
HFEL's NAV has not risen as a result of issuing new shares. It fell from £441mn at 31.8.18 to £435.58mn at 31.8.22. That looks static, but because new shares were issued during that time, taking the number to 176.8% of what it was at 31.8.18 (ie getting on for double), the NAV per share has fallen a lot. HFEL had 121.13mn shares at 31.8.18, but the number was 154.95mn at 31.8.22. Dividing the company's NAV by the number of shares gives us NAV per share of £3.64 at 31.8.18, falling to £2.81 per share at 31.8.22. This is the primary reason why the share price itself has fallen.
The NAV is not influenced by the share price, nor could it be, since it is a company's realisable value, not its prospective value. Share prices are though influenced by what investors think of a company's prospects. If the prevailing view of HFEL's prospective asset value growth were good, the share price would not be tied to its NAV. If dividend growth were expected to be strong, that would be another reason for the share price to rise well above the NAV . As it is evident that the share price is tied to NAV, it is also evident that those who might otherwise buy HFEL shares are in the main, despite its high DY, deterred by its poor prospects. Anyone who does the arithmetic can see that the high dividend yield has not been fully compensating for the deteriorating NAV per share.
Yes, Ade, it is usual (but not absolutely necessary) to pay dividends on newly issued shares. For an IT focused on income, therefore, it is essential to ensure that new shares bought with new money do not weaken the dividend payout. With the last three increases measuring just 1.7%, it is reasonable to be highly sceptical that HFEL has achieved this.
Ade
What responders to my posts do not seem to realise is that if so much new money had not been raised in recent years, to sit on the balance sheet at its original value, there would not have been the need to add to investments at an evidently declining value, thus leaving net assets (the intrinsic value of the company) unchanged, rather than rising to match the new money invested. That is why the share price has declined so much, artificially elevating the DY. Even so, if the actual dividend had been increased to anything approaching a commensurate level that might have justified raising the new equity, but the dividend level has shown a diminishing return. The more I think about it, the real explanation for what has been happening may well be financial engineering, but for whose benefit. It has definitely not been in the interest of those who have held the shares for some time, which I regret to say includes me.
ADE
As I have written before, all my numbers are taken from the last five years' IFRS audited accounts, three years of which are here on this website (see 'Fundamentals') and the missing two were be found under 'Financials' on the free-to-use HL website but have currently been taken down. As I printed them from HL some time ago this is the source I have been using, but I know they are in accord with the 'Fundamentals' here, so you can at least see the last 3 years for yourself - as can everyone else on this chat board. The percentages I have shown come from normal arithmetic, comparing one number with another. Nothing I've written has been made up.
The figures do of course come originally from the annual accounts, which can be found on the Henderson website as PDFs.
Damienmoore is misleading when he says, "The money raised from new equity is quickly deployed by the manager and on a per share basis the company does not lose assets." Although a loss is not a loss until it's crystallised, a falling share price naturally reduces the NAV of that holding, which is what appears in HFEL's balance sheet. When new money is consistently invested in shares which lose value, which the accounts show has been happening at HFEL, that strongly suggests that either the manager is incompetent or he is pursuing the wrong strategy. As HFEL's balance sheet shows, the practice of issuing more shares to follow the same path was substantially reined back in 2022, so perhaps the manager (or the board) did eventually realise its stupidity, at least in the present environment, but a study of announcements in the past year would show whether that is true (I don't have the time to do it).
The idea that the manager has been dividend stripping is an interesting one and may well be true. If so, I would expect that to be formally reported as HFEL's policy in every six month period it happens. However, as I have pointed out, the tiny dividend improvement this may have achieved has been done at the expense of investment value - and vastly so.
Guitarsolo - a postscript
You are wrong to say that the outcome of issuing more shares and investing the proceeds is that things stay "in balance". As I have now shown, repeatedly, they are woefully out of balance. Neither the dividend nor investment values reflect the extra money. The value has fallen dramatically (which cannot be anything like wholly attributed to market values generally) and the dividend increases have been pathetically small.