Is it asking for trouble? The Murray Income Trust was trucking along happily, with an unbroken track record of dividend payments going back 47 years and an enviable yield of 4.6 per cent (Miles Costello writes). Then, in July, the investment trust took a huge leap, unveiling a plan to merge its assets with Perpetual Income and Growth — a fund previously managed by the fallen former Invesco Perpetual stars Neil Woodford, 60, and Mark Barnett, 49.
Merging investment trusts is rare and can be extremely tricky. In this case, bringing the two together, which still has to be approved at a shareholder vote next month, would double the size of Murray Income to roughly £1 billion and make it one of the biggest players in the equity income sector.
Yet with the crossover in shareholdings at the time of the agreed merger standing at only 20 per cent, there is also a huge amount of portfolio realigning to be done so that the holdings sit comfortably with Murray’s manager, Aberdeen Standard Investments. And what of the problematic unquoted holdings favoured by Perpetual Income and Growth’s two former managers and that arguably brought about their downfalls?
Murray Income Trust, established in 1923, aims to generate consistently strong capital growth and income for investors, mainly by investing in UK equities. It has comfortably outperformed its benchmark, the FTSE All-Share, notonly in recent months but also over one, three and five years. Perpetual Income and Growth was founded in 1996. It has a similar strategy to Murray Income and the same benchmark, but in both share price and net asset value terms it has undershot its reference index over the past one, three, five and ten-year periods.
The trust terminated its contract with Invesco Perpetual in April and later opted to pursue the combination with its former rival instead. There is an immediate piece of good news in that, unlike some of the two managers’ other previous funds, Perpetual Income and Growth is not crammed full of illiquid private companies, hard to value and often harder to exit. Even then, the roughly £700,000-worth of privately held investments that it does hold will stay with the fund’s liquidator after the deal completes. This is clearly a relief.
Yet that doesn’t mean the merger will be plain sailing. Perpetual Income’s portfolio is more weighted towards industrials, utilities, oil and gas and telecoms companies, while Murray has a larger leaning towards financials and consumer goods. This means that a raft of holdings, among them possibly Vodafone, Perpetual’s second largest position, will be trimmed back or exited entirely. The timing of any share sales will be crucial, given the number of companies in both portfolios that have suspended their dividend payments this year in the wake of the pandemic. With expectations rising that payouts will be back on the cards soon, shareholders will not want to miss out when they resume.
The trust is keen to ensure that the dividend yield remains steady and it has already declared three interim dividend payments totalling 24.75p to ensure it. It also has stated that it doesn’t expect to have to draw on its cash reserves after the merger in order to increase payments.
Although there are clear worries about execution, this combination looks attractive. The trust’s larger size should make the shares more liquid and means that charges will fall from 0.64 per cent of managed assets to a highly competitive 0.5 per cent. The shares, down 12p, or 1.6 per cent, at 738p, trade at a modest discount to the net asset value of about 6.7 per cent. They look to be a good bet.
ADVICE Hold
WHY High-quality trust with an attractive yield whose merger plan makes sense, but is not without risk
Omega Diagnostics
There are always winners to be found in an economic crisis (Greig Cameron writes). Omega Diagnostics is one.
The small Scottish life sciences group dates back to 1987 and was floated on Aim in 2006. Its interests have included kits for testing food allergies and tropical diseases.
Until Covid-19, much of the hope around its prospects was in a diagnostic test for HIV indicating when drug treatment is needed. The product, which gives results without the need to use a laboratory, is becoming popular in some African countries, as well as among large non-governmental organisations.
Omega’s shares sank to less than 7p in March this year as markets retreated during the initial days of the pandemic, but since then its manufacturing capacity has placed it in a strong position to help in efforts to monitor the spread of the coronavirus. It is part of the UK Rapid Test Consortium and is producing antibody tests for domestic efforts, as well as looking to export to places such as India.
At the start of this month Omega said that the consortium had received its first order for a million antibody tests that can show results within 20 minutes using a small drop of blood. It expects to manufacture 175,000 for that first order and to make about 25 per cent of the orders that the consortium receives over the longer term. It says that it will have the capacity to produce 200,000 tests a week by the end of November.
Finncap, the house broker, estimates that Omega will receive about £1.50 for every device, with gross margins of 50 per cent. That would mean peak weekly revenue of up to £300,000, with the broker pencilling in £5.7 million of revenue from Covid-19 test production in the year to March 2021. Omega had £9.8 million of revenue in the 12 months to the end of March this year when it made an underlying pre-tax loss of about £400,000.
There are other potential growth drivers, too. Its HIV product has passed a procurement milestone for the World Health Organisation and its food allergy kits have been approved by Chinese regulators for laboratory tests. Omega shares hit 107p this month, but were down 3p, or 3 per cent, at 95p today.
ADVICE Hold
WHY Demand for Covid-19 testing unlikely to tail off soon
