“The Sum of the Parts Worth More Than The Whole?”

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The continued significant discount to Net Tangible Assets (‘NTA’)  at which Kina Asset Management Limited (‘KAML’) trades on the PNGX should be carefully monitored by opportunistic investors.

In an announcement to the PNGX today, KAML stated that the NTA per security for the month of January 2021 was K1.58. This compares with the most recent traded price per security of K0.90.

The underlying portfolio within the KAML structure is usually fairly liquid and therefore NTA should be a fair estimate of the fundamental value of the sum of the parts of these securities comprising each KAML security.

Under normal circumstances, a modest discount to NTA is justified on the basis of the interposition of a holding company structure between investors and the underlying securities to which these investors have economic exposure. Any incremental tax or regulatory inefficiencies would further impact on the price of the security relative to its NTA.

However, the scale of the discount to NTA at which KAML has been trading for a long while is indicative of more than simply the normal friction or agency costs.

Clearly, the market is impacted by the lack of liquidity in KAML shares.

Returns to the KAML portfolio, and by extension to shareholders in KAML, flows from distributions (by way of interest or dividends) from the securities in the underlying portfolio, as well as a mark-to-market of the asset prices of each of the investments.

As such returns from KAML should be sourced from a  mix of cash income and capital gains.

Normally, a security such as KAML will be susceptible to takeover activity in circumstances where a liquid portfolio of securities trades at a disproportionate discount to the sum of the parts making up that portfolio.

The raider’s thesis will be to acquire the shares in the Listed Investment Company (‘LIC’) at the market price and then liquidate the portfolio at or near NTA for an instant profit. In more developed markets, the takeover would probably be largely debt funded, thus enhancing returns on equity invested even further.

The mere risk or opportunity for such activity will tend to keep the share price of the LIC more in line with NTA.

We can only interpret the very wide discount to NTA as a sign that no credible takeover of KAML is envisaged at the present time.

Does the discount make KAML an attractive investment? Well, as they say, that depends!

On the one hand, we are believers in market forces eventually ensuring that security prices reach an equilibrium that is consistent with the true value of the assets in question.

As such, the diversified portfolio of securities in which KAML is invested seems to be robust and attractive. It represents a mix of PNG and international assets. The PNG assets have a reasonable cash yield (through interest payments, coupons and dividends) and the international portfolio provides attractive foreign exchange hedging.

However, none of these positive attributes will fully accrue to KAML investors unless the steep discount to NTA is eventually reduced or eliminated.

The KAML board has got to find a way to increase liquidity in trading of its securities. This will in turn drive prices closer to NTA.

Easier said than done I hear you say, and you would be absolutely correct.

We are very sympathetic to the challenges faced by KAML and we are always looking to be supportive of their efforts.

By way of simple suggestions (and we fully expect that KAML has already considered these) we offer the following strategies or initiatives may be a part of the solution:

  • Introducing a redemption mechanism of some sort – either through an arrangement with a large institutional redemption agent or by making the KAML securities (or at least a portion of securityholders’ portfolios) redeemable at a more modest discount to NTA.

This may require KAML to either hold more cash or more actively liquidate a portion of its portfolio in response to redemption requests. We have not considered any regulatory hurdles at this stage which may make this difficult.

One of the most difficult aspects of introducing redemptions (assuming of course that liquidity is not an issue – a big assumption) will be to avoid a “rush for the door”. For example, if KAML were to now introduce a redemption policy in respect of say 30% of the securities on issue at say 75% of NTA, the stock would immediately reprice but in getting there, a significant number of shareholders may decide to take advantage of the redemption option. Careful consideration would need to be applied – and may well have already been so by KAML.

  • Gradually shifting its portfolio towards securities that have a higher cash yield, thus increasing the amount of distributions paid by KAML.
  • In a developing market such as Papua New Guinea, liquidity will quickly dry up in securities that pay modest or no distributions.
  • By having a greater share of income in the form of cash yield, KAML could make higher distribution payments and thus build greater investor loyalty.
  • In turn, the LIC could then rebalance back into international securities which offer long term value from capital growth and currency diversification.
  • There is always a floor price under a security that pays an attractive dividend.

We introduce the above comments as part of the ongoing dialogue and discussion amongst market participants only. JMP Securities Limited has yet to initialize research on KAML and we do not have a target price or a recommendation in respect of the security.

It is our earnest hope that the PNGX market grows to a point where supply and demand for securities such as KAML are in equilibrium at prices that are more consistent with the underlying value of the assets that form part of the KAML portfolio.

All investors must perform their own analysis and are advised to discuss their investment needs and risk appetite with their brokers prior to trading.”


Chris Hagan

Head, Fixed Interest and Superannuation
JMP Securities

Level 1, Harbourside West, Stanley Esplanade
Port Moresby, Papua New Guinea

Mobile (PNG): +675 72319913
Mobile (Int): +61 414529814

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