Volta Finance Ltd (LON:VTA) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Your recent report sits behind a disclaimer. What can you tell us about that?
A1: It is just the standard disclaimer that many investment companies have. In essence, for regulatory reasons, there are some countries (like the US) where the report should not be read. In the UK, because CLOs are not a simple asset class, the report should be looked at only by professional/qualified investors.
Q2: You called your recent piece What Volta brings to investors. What can you tell us about it?
A2: In this note, we highlighted three things that Volta Finance has brought to both UK and European investors since it listed on the UK stock market on 28 May 2015: i) it has given investors relatively high total returns; ii) it provides a higher ongoing income (and we briefly summarise recent reports on cash generation and strong dividend cover); and iii) Volta is uncorrelated to benchmark bonds, an alternative asset class that investors may have considered for income.
While the company’s CLO investments may not be to every investor’s taste, and there are risks (Volta marks to market, which is not adopted by all peers), these three traits are noteworthy.
Q3: So, taking your first point first, what can you tell us about the higher returns?
A3: Since 20 May 2015, they have generated total shareholder returns (TSRs) of 58%, against European and UK stock markets’ TSRs of ca.40%. Returns from 10-year government bond holdings over the period have been between 10% and 24%, varying by country. The company’s returns have been above those of major asset classes.
In the report, we show a couple of charts of the returns, and we go into some detail on the volatility, highlighting that, in part, it is due to their mark-to-market-accounting its assets – which is not adopted by all peers. Consequently, the company is subject to a double whammy of the NAV being affected by sentiment and then the shares also being affected.
Q4: Your second point was about the higher income. What can you tell us about that?
A4: VTA has a stated dividend target to pay out quarterly dividends equivalent to 8% annualised of NAV. On our forecasts, this is expected to see dividend yields of 9.7% and 10.3% in FY’22 and FY’23, respectively. The historical dividend yield thus represents a huge premium of between 7% and 9% over government benchmark rates. Importantly, this gap has been widening by between 0.6% and 1.2% for different countries in the past few years – so a higher income and a widening gap.
Having a high yield is of limited value if the dividend is not going to be sustained. On our numbers, we are forecasting 2022 cover of ca.2x, and we note that, in its latest factsheet, the company stated that the actual six-monthly rolling annualised cashflow yield was 15.5% of the end-month NAV (against a target 8% dividend payout). We have, in our recent notes, explored the business reasons behind this strong cover.
Q5: And your final point was a low correlation?
The statistical correlation between the daily total return on Volta Finance’s European shares and a number of European government benchmark bonds is between 0.3 and 0.45, or, put another way, there is no correlation. We believe many investors buy VTA for its income – so you can get an income-bearing asset without correlation to the main income asset class.