SPP Harvester™ year in review – coming home with a wet sail
In its second full calendar year of operation, SPP Harvester™ investors gained access to 14 in-the-money Share Purchase Plans (SPPs), a considerable decrease from the 10-year average of 24. The lower number of SPPs was the main contributor to a total return for SPP Harvester™ investors of -4.2% for those that applied for the full amount in each SPP (noting scale-backs significantly limited funds actually invested). It is little solace for investors that the pre-costs, gross returns of the ASX300 (-6.1% in 2022) was worse.
The total return for SPP Harvester™ investors was calculated based on a $30,000 application into every SPP that was ‘in-the-money’ at the SPP Harvester™ Application Date, after average brokerage and before account fees.
A reduction in the number of Share Purchase Plans in 2022 was driven by inflation levels not seen since the mid-1990s, as Russia’s invasion of Ukraine and China’s Zero-COVID-19 policy fractured many global supply chains. As central banks across the globe reacted by raising interest rates, investor sentiment weakened and companies with strong balance sheets combined with a stronger real economy, were less inclined to raise new capital.
Furthermore, the limited number of Share Purchase Plans in 2022 was likely due in part to a mean reversion following robust capital raising activity that saw a total of 59 and 18 ‘in-the-money’ SPPs completed during 2020 and 2021 respectively, as companies took advantage of cheap capital to strengthen their balance sheet amid COVID-19 uncertainties.
However, lower equity issuance in 2022 was not only reflected in less Share Purchase Plans, but also the total capital raised via IPOs and follow on equity offerings by ASX listed companies was 54.3% less than the previous year.
The second half of 2022 appeared to beckon a recovery for follow-on equity raises, auguring well for 2023, as 7 of the 14 SPPs offered to SPP Harvester™ investors took place in the final quarter of the year.
Discounts & Returns
The average discount offered to SPP Harvester™ investors at the Share Purchase Plan announcement date in 2022 was 8.4%, slightly higher than the 7.8% average discount offered in 2021. Though, as shown below, the discounts announced by the company do not necessarily correlate with returns given the lead time between the SPP announcement and the allocation date of the SPP shares.
50% of SPPs displayed positive returns in 2022, headlined by the performance of Calix (ASX:CXL) in November where investors realised a 24.2% return on a full allocation. The strong performance of the CXL SPP came on the back of the company receiving a grant from the Australian Renewable Energy Agency, as well as confirming working multiple projects with global building materials company, CEMEX. These announcements saw the CXL share price increase 33% over the SPP offer period.
Other Share Purchase Plans in the second half of 2022 including De Grey Mining Ltd (ASX: DEG) (26.5%) and Cleanaway (ASX:CWY) (7.6%), returned well. Although, returns on both SPPs were constrained by the scaling back of allocations, with $30,000 ASX:DEG and ASX:CWY applications only returning $500 and $1000 allocations, respectively. This reflected a wider theme in 2023, where companies scaled back SPP Harvester™ allocations to an average of 53% of their application. A blemish among the flurry of SPPs in the backend of 2022 was Australian Strategic Materials (ASX:ASM) (-14.5%), which reflected ASM’s sustained share price fall experienced in 2022.
Despite a small number of outlier SPPs in 2022 that generated high and low returns, the majority of returns were modestly positive, again emphasising SPP Harvester™’s model enabling investors to recycle their capital via the aggregation of marginal gains to produce positive returns over time. As capital markets begin to recover and investor sentiment returns, we expect this to be reflected in the total return for SPP Harvester™ investors.
Outlook for 2023
Looking ahead, we expect that highly leveraged companies with larger international exposures to undertake capital raisings to recapitalise their balance sheets as debt costs rise. These may even come at larger discounts to attract institutional investors.
With interest rate increases forecast to pause midway through 2023, pending a favourable inflation data release in late April, capital markets could well normalise in the latter half of 2023. If so, companies may look for new capital in pursuit of growth and expansion plans amid a clearer horizon. This will be beneficial for SPP Harvester™ investors as a prerequisite for returns is a strong pipeline of Share Purchase Plans.
Against that backdrop, we anticipate that the number of SPPs issued by SPP300 companies will return closer to the long-term average in 2023. With Q4 2022 providing momentum into the new year and 2023 already off to a positive start after the Dominos Pizza Ltd (ASX: DMP) SPP generated a 5.8% return, a strong pipeline of SPPs will be an important determinant for SPP Harvester™ performance in 2023.