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Research: Investment Companies
Invesco Asia Trust (IAT) today announced the combination with Asia Dragon Trust (DGN), involving the transfer of certain assets of the latter to IAT in exchange for new IAT shares through a scheme of reconstruction and wind-up of DGN, with the new entity renamed Invesco Asia Dragon Trust. Investors in both trusts will benefit from IAT’s investment strategy with a proven track record, greater economies of scale, a new attractive fee structure, as well as an unconditional tender offer for up to 100% of the issued share capital conducted every three years.
Invesco Asia Trust |
Combination to create the ‘go-to’ Asian trust |
Investment trusts |
28 October 2024 |
Analyst
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Invesco Asia Trust (IAT) today announced the combination with Asia Dragon Trust (DGN), involving the transfer of certain assets of the latter to IAT in exchange for new IAT shares through a scheme of reconstruction and wind-up of DGN, with the new entity renamed Invesco Asia Dragon Trust. Investors in both trusts will benefit from IAT’s investment strategy with a proven track record, greater economies of scale, a new attractive fee structure, as well as an unconditional tender offer for up to 100% of the issued share capital conducted every three years.
Maintaining IAT’s successful contrarian approach
The enlarged entity will be managed by IAT’s current investment manager pursuing the same successful contrarian total return (TR) strategy looking for mispriced, quality Asian/Australasian equities with strong balance sheets. IAT’s managers will utilise the combined portfolio of more than £800m (based on current asset values) to exploit the current valuation disparities across Asian markets, discussed in our previous note. The larger trust’s size will also result in higher stock liquidity and the potential for inclusion in the UK flagship top 250 equity index. Furthermore, the trust will maintain IAT’s dividend policy of paying 4% of NAV, and move from semi-annual to quarterly payments. IAT board’s intention is to pay out 7.80p per share next month, with the subsequent two quarterly dividends at 3.90p per share.
New tiered management fee
Invesco Asia Dragon Trust will be subject to a new tiered management fee: 0.75% on the first £125m of NAV, 0.60% on £125–450m, and 0.50% above £450m. The significant size and new fee structure will allow the trust to target an attractive ongoing charges ratio of less than 70bp in future financial years (vs 103bp and 91bp for IAT and DGN in their last financial years, respectively). Moreover, IAT’s investment manager will make a ‘significant contribution’ to help absorb the costs associated with the combination, thus avoiding any NAV dilution.
Extensive discount control mechanisms
DGN’s shareholders will have an option of a partial cash exit for up to 25% of DGN’s issued share capital at a 2% discount to the formula asset value per share. General shareholder meetings to approve the deal are expected in early February 2025, and the transaction should be concluded shortly thereafter.
Subsequently, the trust will maintain IAT’s target of an average discount to cum-income NAV of below 10% over each financial year and conduct share buybacks accordingly. Moreover, it will be subject to a triennial unconditional tender offer for up to 100% of the issued share capital at a 4% discount to prevailing NAV (first tender expected in 2028), which we believe represents a strong commitment to narrowing the discount to NAV. This will replace IAT’s current triennial continuation vote, as well as its performance-related conditional tender offer of up to 25% of IAT’s issued share capital in the event IAT fails to outperform its benchmark by 0.5pp over the five years to end-April 2025. In this context, we note that IAT’s four-year NAV TR to end-April 2024 of 11.0% pa was well ahead of the benchmark at 4.5%.
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Research: TMT
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