ASX: RF1 – Distribution, the Screamingly Obvious DRP Opt-in and ASIC No Action Announcements

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It was implicitly foreshadowed in the AFR article dated 7 June quoting RRM, but RF1 announced the obvious – a ‘monster’ estimated distribution of of $0.75 cents per unit. It was obvious because: 1) RF1 is a LIT not a LIC and therefore is required to announce / distribute any realised gains in the same financial year; 2) RF1 NAV returns of 86% over the 12-month period to 31 May 2021; 3) as a long / short strategy that reduced gross leverage in peak Covid, then increased leverage, then decreased again, this process implicitly means on the surface of it a higher degree of realised gains (and potentially very large ones); and, 4) the close-ended underlying Emerging Companies Fund III, which recorded a very large +130% gain for the 12-month period to 31 May 2021, was also going to make a large distribution to RF1.

The share price premium to NAV has increased markedly over the last few weeks. In part RRM suspects because some canny investors were aware that under RF1’s DRP, new units are issued at NAV when the share price is trading at a premium. So, an arbitrage opportunity may play out.

In fact, RF1 was trading at $5.20/unit on Friday 25 June and the NTA was $4.39/unit. That is new units under the DRP would be issued at an 18.5% discount to the share price. Money for jam! The record date is 1 July 2021 while the DRP Election Cut Off date is 2 July 2021. To put it another way, if an investor does not take up the DRP option that investor runs the risk of material NTA dilution. There has probably never been a DRP in the LIC/LIT segment where the incentive to opt into the DRP is so obviously to do so. And that is great news for Regal, otherwise it could be a sizable loss of capital.

The ASIC No Action announcement means that ASIC will take no enforcement action following an investigation in relation to three (never disclosed) stocks. No details were ever released to the market regarding the investigation which Regal first became aware of and announced to the market on 27 November 2019. In RRM’s view, when tied with the sheer length of time for this resolution to be arrived at and announced – surely the process can be improved moving forward given the detrimental impact to FUM net flows.

The significance of the investigation is that some research houses and some WRAP platforms as a matter of due course place all Regal investment vehicles, including RF1, on-hold during that period. That is, such vehicles are not able to be invested in. This matters less for RF1, being a listed entity, but it would have still restricted financial advisors from investing in RF1 that solely invested via such platforms.

It is difficult to know what impact this will have on RF1 but at the very least one would say to will serve as an incremental positive in relation to marginal buying interest.

More significantly, it clears what may have been a barrier to coming back to the market to raise additional capital for RF1. And in that regard, the timing could not be better. RF1 recently passed its two year anniversary, which matters regarding any potential additional raise. Any such development would have to be post the DRP election cut-off date (as that will determine the NAV drop post distribution payment).