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Expert Insights Shares Small Cap

Kogan’s Profit Margins Improving with Sales Growth and Lower Inventories

Like for many other retailers, we expect an unusual combination of factors distorted Kogan’s recent trading performance. These include relatively volatile sales, heightened supply chain uncertainties and costs, and lockdowns in Australia’s two most populous states. Term retail industry sales growth to be weaker as consumer spending is redirected to entertainment and travel.

Company’s Future Outlook

The headline figure of no-moat Kogan’s trading update of strong gross sales growth sent shares prices up sharply to nearly match our unchanged AUD 11.70 fair value estimate. The 8% growth in gross sales in the core Australian Kogan.com segment in the first quarter of fiscal 2022 was slightly below our expectations. Nevertheless, any sales growth is a solid feat in the quarter versus the September quarter of 2020, when gross sales grew by more than 100% at Kogan.com. However, sales profitability hasn’t fully recovered yet. Despite greater gross sales, underlying EBITDA margins are well below the previous corresponding period, down some 66%.

Discounting to trim Kogan’s remaining overhanging inventories, intensifying competition post COVID-19-boom in consumer electronics, and mix shift of gross sales to Kogan’s marketplace from its higher margin third party brands have weighed on gross profits in the first quarter. The active customer base at Kogan.com grew by 4% relative to the June quarter 2021, but at the group’s New Zealand Mighty Ape business the customer count dropped off slightly, declining by 2% against the prior quarter. Although active customers were lost, Mighty Ape sales still grew by 15% quarter on quarter.

Company Profile 

Kogan.com is an Australian pure-play online retailer. The firm primarily caters to value-driven consumers through its private label products, spanning multiple categories including consumer electronics, furniture, and fitness. For brand-conscious consumers, Kogan also offers a wide range of products from well-known third-party brands such as Apple, Samsung, and Google. In addition, Kogan competes in the online marketplace industry, providing a platform and customer base for approved sellers in exchange for a commission. Finally, the firm sells multiple white-labelled products and services including prepaid mobile phone plans, insurance, and travel packages.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Technology Stocks

Facebook faster growth in cash flow during the next five year by owning to operating leverage after 2022

along with the valuable data that they generate, makes Facebook’s platforms attractive to advertisers. The combination of these valuable assets and our expectation that advertisers will continue shift their spending online bodes well for Facebook, as the firm generates strong top-line growth and cash flow. Facebook has attracted users and increased engagement by providing additional features and apps within the Facebook ecosystem. 

The firm’s Facebook app, along with Instagram, Messenger, and WhatsApp, is among the world’s most widely used apps on both Android and iPhone, smartphones. Facebook is taking steps to further monetize its various apps, such as providing interactive video ads and tapping into e-commerce. It is also applying artificial intelligence and virtual and augmented reality technologies to various products, which may increase Facebook user engagement even further, helping to further generate attractive revenue growth from advertisers in the future.

Financial Strength

In an industry where continuing investments are required to remain competitive and maintain market leadership, we believe Facebook is well positioned in terms of access to capital. The firm has a very strong balance sheet with $62 billion in cash, cash equivalents, and marketable securities and no debt. The firm generated $39 billion cash from operations in 2020, 7% higher than the prior year. Facebook’s strong operational and financial health is demonstrated by the 28% average free cash flow to equity/revenue during the past three years. We project average annual FCFE/sales to be in the 35%-40% range through 2025, as a result of strong top-line growth and slight operating margin expansion beginning in 2022. The firm may use some portion of its cash, as it remains active on the merger and acquisition front.

Bulls Say’s

  • With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable data for social network online advertising.
  • Facebook’s ad revenue per user is growing, demonstrating the value that advertisers see in working with the firm.
  • The application of AI technology to Facebook’s various offerings, along with the launch of VR products, will increase user engagement, driving further growth in advertising revenue.

Company Profile 

Facebook is the world’s largest online social network, with 2.5 billion monthly active users. Users engage with each other in different ways, exchanging messages and sharing news events, photos, and videos. On the video side, the firm is in the process of building a library of premium content and monetizing it via ads or subscription revenue. Facebook refers to this as Facebook Watch. The firm’s ecosystem consists mainly of the Facebook app, Instagram, Messenger, WhatsApp, and many features surrounding these products. Users can access Facebook on mobile devices and desktops. Advertising revenue represents more than 90% of the firm’s total revenue, with 50% coming from the U.S. and Canada and 25% from Europe. With gross margins above 80%, Facebook operates at a 30%-plus margin.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Technology Stocks

IBM’s Q3 Disappoints With Weak Software and Kyndryl Sales

even when omitting its poor-performing Kyndryl business to be spun off soon. As IBM nears the spinoff of its managed infrastructure business, to be known as Kyndryl, we think that the real drivers for the remaining company lie in IBM’s consulting and software businesses. While consulting revenue surpassed our expectations (and consensus’), IBM’s software revenue missed—leaving us wary of the remaining company’s performance after the spin-off.

IBM reported revenue of $17.6 billion in the quarter, marking flattish year-over-year growth. While IBM’s global business services segment was a standout, growing at 12% year over year, the rest of IBM’s businesses disappointed. The cloud & cognitive software segment grew only 3% year over year. And while global technology services, part of which will be spun off as Kyndryl, with revenue down by 5% year over year.

IBM reported operating margins of 9% in the quarter, down 310 basis points from the prior year period. Non-GAAP earnings per share for the quarter was $2.52.

It is expected that Kyndryl will continue its downward top line trajectory as mass migration of workloads to the cloud have enterprises opting for cloud vendors to manage their cloud infrastructure, rather than traditional IT services providers, like IBM. This makes the worst performance in the quarter a matter of only acceleration of such decline. For software, on the other hand, we believe it, along with consulting (known as global business services) are the main growth drivers for IBM post spinoff. . We formerly expected a stronger relation between consulting and software sales—with the former driving the latter.

We’re maintaining our fair value estimate of $125 per share for narrow-moat IBM. Shares are down 4% upon results, which has moved IBM into fair value territory. As a reminder, IBM plans to spin off shares of Kyndryl after market close on Nov. 3, so our $125 fair value estimate reflects the value of IBM’s stock pre spin-off.

Company profile

IBM looks to be a part of every aspect of an enterprise’s IT needs. The company primarily sells infrastructure services (37% of revenue), software (29% of revenue), IT services (23% of revenue) and hardware (8% of revenues). IBM operates in 175 countries and employs approximately 350,000 people. The company has a robust roster of 80,000 business partners to service 5,200 clients–which includes 95% of all Fortune 500. While IBM is a B2B company, IBM’s outward impact is substantial. For example, IBM manages 90% of all credit card transactions globally and is responsible for 50% of all wireless connections in the world.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Tabcorp’s Wagering Business expected to Recover as Restrictions Ease

Tabcorp’s lotteries are underpinned by long-dated state-based licences throughout Australia (with the exception of Western Australia)- an enormous scale that adds a degree of earnings certainty. Even when Tabcorp’s state-licenced exclusivities end, the scale of the business is such that new entrants will find it extremely hard to compete against Tabcorp’s distribution network and national jackpot pool size. 

With the ubiquity of smartphones, Tabcorp’s previously entrenched physical locations are increasingly competing with online players, where barriers to entry are much lower. Retail outlet exclusivity has little value when punters can place bets with competitors from their phones while in TAB-exclusive venues. Trend towards digitisation has been accelerated by COVID-19 shutdowns, as forced closures and social distancing requirements weighed heavily on Tabcorp’s retail venues and most betting ordinarily made at retail locations has transferred to online platforms.

Financial Strength:

Tabcorp’s balance sheet has strengthened following the AUD 600 million capital raise in August 2020 and improved earnings in fiscal 2021. Fiscal 2021 gearing (gross debt/EBITDA) of 2.4 below the firm’s target levels of 2.5-3.0. Sustainable leverage metrics are displayed especially for a company with still relatively defensive earnings and healthy free cash generation. Such a healthy financial position is necessary ahead of what is likely to be a disruptive future. It is one in which Tabcorp is likely to face increasing competition, facilitated by relentless innovation in online betting services, and potential diminution in the power of its physical retail distribution network. Tabcorp reinstated dividends during fiscal 2021 as earnings recovered. The firm is now targeting a dividend payout ratio of 70%-80% of underlying earnings, from 100% previously.

Bulls Say:

  • Tabcorp’s retail exclusivity and extensive brick-andmortar distribution presence places the company in a strong position to migrate its large wagering customer base to an omnichannel environment. 
  • Long-life wagering, lotteries, and keno licences furnish Tabcorp with a stable earnings and cash flow profile, underpinning a relatively high dividend payout ratio. 
  • The scale of the lotteries business is such that new entrants will find it extremely hard to compete against Tabcorp’s distribution network and national jackpot pool size.

Company Profile:

Tabcorp operates through principally three segments: wagering and media, lotteries and keno, and gaming services. The firm conducts wagering activities under the TAB brand both online and physically in every Australian state and territory other than Western Australia, reaching 90% of the population through a network of retail venues. Tabcorp also operates regulated lotteries in every Australian state except Western Australia. In addition, Tabcorp Gaming Solutions provides services to electronic gaming machine venues.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Technology Stocks

Omnicom’s Q3 Results Display Growing Demand for Ad Holding Firms Services

the firm has attained that position less through acquisitions and more through organic growth. With very well-recognized creative agencies and sub-holding companies such as BBDO and DDB, we expect Omnicom to maintain its market position as it generates competitive organic growth, continues to make acquisitions, and increases focus on the faster-growing emerging markets and the overall digital ad markets.

Through various acquisitions, the firm has transitioned from traditional advertising toward becoming a complete solution provider with digital (including online video, social media, and mobile), along with other services such as public relations. Compared with its peers, Omnicom has been relatively quiet on the acquisition front since it ended merger talks with Public is in 2014. However, top-line growth has been in line with or above the other ad-holding firms.

Financial Strength

Omnicom reported mixed third-quarter results as revenue slightly missed the FactSet consensus estimates while the firm beat bottom-line expectations. With strong double digit organic revenue growth, the revenue miss was mainly due to Omnicom’s disposition of ICON in June. Solid organic growth of 11.5% and favorable foreign currency exchange rates were only partially offset by negative impact from agency divestitures (negative 5.9%). Management guided to 2021 full-year organic revenue growth of 9%, which is slightly below our 9.5% projection. Operating margin of 15.8% during the quarter was slightly higher than last year’s 15.6% due to top line growth and lower costs associated with less occupancy and lower travel expenses. The firm expects full-year 2021 operating margin above 15.1% compared with our 15.1% assumption.

Omnicom has a net debt of $210 million, with debt/EBITDA and interest coverage averaging 2.5 and 9, respectively, during the past three years. These ratios will average around 2 and 14 during the next five years. While Omnicom has not been nearly as aggressive in pursuing the acquisition route as some of its peers, cash allocated toward acquisitions and dividends during the past three years has been equivalent to 4% and 32%, respectively, of the firm’s free cash flow.

Bulls Say’s 

  • Omnicom’s management team is very experienced and has delivered solid results over an extended period through a variety of economic environments.
  • Omnicom’s agencies, such as BBDO and DDB, are some of the most acclaimed in the business.
  • The strength of Omnicom’s three major global networks allows the firm to retain even dissatisfied clients by switching them from one award-winning network to another.

Company Profile 

Omnicom is the world’s second-largest ad holding company, based on annual revenue. The American firm’s services, which include traditional and digital advertising and public relations, are provided worldwide, with over 85% of its revenue coming from more developed regions such as North America and Europe.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Technology Stocks

Aristocrat outspends rivals on research and development improving its competitive position

Aristocrat’s research and development expenditure is unmatched by peers. This investment is the lifeblood of any electronic gaming manufacturer, especially given rapidly changing technology, and allows Aristocrat to maintain game quality, differentiate products from lower-end competitors, and defend its narrow economic moat.

Aristocrat is among the top three global competitors in the highly competitive EGM market, alongside International Game Technology and Scientific Games. EGM sales have been particularly hard-hit as coronavirus-induced shutdowns, social distancing measures, and travel restrictions weigh on the firm’s customers. With less turnover likely up for grabs in the near-term, heavy discounting could weigh on Aristocrat’s profitability in the fiercely competitive electronic gaming machine industry. Aristocrat operates in a market protected from new entrants as stringent regulatory licensing requirements in major markets create barriers to entry for new players.

Financial Strength:

The fair value of Aristocrat has been increased by the analysts by 9% to AUD 36.00 following the announcement of a AUD 5 billion acquisition of U.K.-listed Playtech, AUD 1.3 billion equity raising, and virtual release of fiscal 2021 results.

Aristocrat Leisure is in strong financial health. At March 31, 2021, the company had AUD 1.3 billion net debt, equating to net debt/EBITDA of 1.2- down from AUD 1.6 billion in net debt, equating to net debt/EBITDA of 1.4 at Sept. 30, 2020. EBITDA interest cover is comfortable at over 9 times. With the AUD 1.3 billion capital raising, Aristocrat’s balance sheet is well-capitalised to absorb the AUD 5 billion acquisition of U.K.-listed Playtech, with pro forma net debt/EBITDA of 2.6. Aristocrat is expected to return to paying out dividends from approximately 30% of underlying earnings from fiscal 2021, ramping back up to 40% by fiscal 2022.

Bulls Say:

  • Aristocrat operates in a market protected from new entrants as stringent regulatory licensing requirements in major markets create barriers to entry for new players. 
  • Unlike the mature electronic gaming machine industry, the fast-growing mobile gaming market provides an avenue of strong growth for Aristocrat. 
  • Already boasting a portfolio of highly regarded electronic gaming machines, Aristocrat outspends rivals on research and development allowing the firm to improve its competitive position and protect its narrow economic moat.

Company Profile:

Aristocrat Leisure is an electronic gaming machine manufacturer, selling machines to pubs, clubs, and casinos. The firm is licensed in all Australian states and territories, North American jurisdictions, and essentially every major country. Aristocrat is one of the top three largest players in the space along with International Game Technology and Scientific Games. Through acquisitions of Plarium and more recently Big Fish, Aristocrat now derives a significant proportion of earnings from the faster growing mobile gaming business.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Carnival’s planning for ship deployments drives improved visibility on return to breakeven profits

The global cruise market has historically been underpenetrated, offering long-term demand opportunity. Additionally, in recent years, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing tactics. 

However, global travel has waned as a result of COVID-19, which has the potential to spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers slowly resume cruising after a year-plus no-sail halt, cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising. On the yield side, Carnival is expected to see some pricing pressure as future cruise credits are redeemed in the year ahead, a headwind partially mitigated by a measured return of capacity. And on the cost side, higher spend to implement tighter cleanliness and health protocols could initially inflate spending. Aggravating profits will be the fact that the entire fleet will likely have staggered reintroductions, crimping profitability over the 2021-22 time frame, ceding scale benefits. For reference, as COVID-19 continues to wane, 61% of capacity (50 ships) is expected to be deployed by November.

Financial Strength:

The fair value of Carnival is USD 26.50 which has been raised by the analysts from USD 25 with a view that more than half the fleet (50 ships, 61% capacity) is expected to be deployed by the end of fiscal 2021, giving the better visibility on the return to profitability.

Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with $7.8 billion in cash and investments at the end of August 2021. This should cover the company’s cash burn rate over the ramp-up, which is set to increase from the roughly $500 million per month experienced in the first half of 2021 as ship start-up costs arise. Carnival has raised $5.9 billion in debt, $1 billion in equity, and has repriced its $2.8 billion term loan (2025), bolstering financial flexibility. Additionally, Carnival eliminated its dividend ($1.4 billion in 2019), freeing up cash to support operating expense. An additional $3 billion in current customer deposits were on the balance sheet. The company has renegotiated much of its debt, with less than $4.5 billion in short term and current maturities of long term debt coming due over the next year versus $30 billion in total debt.

Bulls Say:

  • As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate if capacity limitations are repealed. 
  • A more efficient fleet composition (after pruning 19 ships during COVID-19) may help contain fuel spending, benefiting the cost structure to a greater degree than initially expected, once sailings fully resume. 
  • The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Profile:

Carnival is the largest global cruise company, set to deploy 50 ships on the seas by the end of fiscal 2021 as the COVID-19 pandemic wanes. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Expert Insights Shares

State Street Performing Well, Driven by Asset Appreciation and New Client Wins

Assets under custody or administration grew to $43.3 trillion versus $42.6 billion in the previous quarter and $36.6 in the year-ago period, driven by market appreciation as well as new business wins. 

Fee revenue grew 9% from the year-ago period with servicing fees growing 7%. We attribute the bulk of the servicing fee growth to market appreciation with the remainder from net new business partially offset by fee compression. Assets under custody or administration grew 18% to $43.3 trillion with new servicing wins contribution $1.7 trillion, a healthy number in our view. Management fees grew 10% year over year and 4% sequentially. Money market fee waivers continue to be a headwind but appear to be moderating. Charles River Development, which the firm acquired in 2018, saw annualized recurring revenue growth of 12%.

The firm continues to manage expenses well with expenses down 1% sequentially and flat year-over-year excluding notable items and foreign exchange effects. Looking ahead, we think low-single-digit expense growth is more realistic as productivity growth is balanced with the need to invest in its business and some inflationary pressures.

Given the strong business momentum and equity market tailwinds, State Street raised its full-year outlook with just one quarter left. State Street now expects fee revenue to be up 5% for the year with servicing fee growth of 7.5%-8.5%. Net interest income is expected to be in the range of $475 million-$490 million for the fourth quarter, which implies $1.90 billion-$1.91 billion for the full year. The firm’s tax rate is expected to be on the low end of the 17%-19% range.

Company Profile

State Street is a leading provider of financial services, including investment servicing, investment management, and investment research and trading. With approximately $38.8 trillion in assets under custody and administration and $3.5 trillion assets under management as of Dec. 31, 2020, State Street operates globally in more than 100 geographic markets and employs more than 38,000 worldwide

 (Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Technology Stocks

Ionis’ Antisense Technology supporting a narrow moat

which seeks to prevent clinical manifestation of ALS in pre-symptomatic patients diagnosed using SOD1 and filament levels. While we could see a path to approval for the drug, either with continued follow-up from the Valor study or with data from Atlas, we continue to see failure as slightly more likely. Biogen’s broad neurology portfolio and pipeline as warranting a wide moat and Ionis’ antisense technology supporting a narrow moat. 

Comapany’s Future Outlook

The Valor study focuses on a small subset of ALS patients: those with the SOD1 mutation, who compose roughly 2% of ALS cases globally. Biogen and Ionis are also studying several other potential ALS drugs that are in earlier stages of development, including BIIB078, in phase 1/2 in patients with the C9Orf mutation (7% of cases, initial data expected in 2022). Biogen and Ionis are moving additional therapies for familial and sporadic (nonfamilial) forms of ALS into testing; for example, a phase 1 study of ataxin-2-targeting ION541/BIIB105 in sporadic ALS (which could address more than 75% of the broader ALS population) started in September 2020. 

Ionis is independently testing ION363 in patients with the FUS mutation (even rarer than SOD1), with phase 3 data expected in 2024. In cardiometabolic diseases, Ionis has several programs in late-stage studies, including the wholly owned APOCIII program (data in 2023, 2024), and Novartis-partnered Lp(a) program (2024 data). Ionis is also poised to enter phase 3 for its PKK-targeting therapy in hereditary angioedema, a competitive niche indication where Ionis has potential to be best in class.

Company Profile 

Ionis Pharmaceuticals is the leading developer of antisense technology to discover and develop novel drugs. Its broad clinical and preclinical pipeline targets a wide variety of diseases, with an emphasis on cardiovascular, metabolic, neurological, and rare diseases. Ionis and partner Biogen brought Spinraza to market in 2016 as a treatment for a rare neuromuscular disorder, spinal muscular atrophy. Ionis subsequently brought two additional drugs to market via its cardiovascular-focused subsidiary Akcea, including ATTR amyloidosis drug Tegsedi (2018) and cardiology drug Waylivra (Europe, 2019).

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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LICs LICs

Future Generation Investment Company Announces Bonus Options Issue

Smiling young social worker sitting at table with senior lady and explaining document content to her

Their Fully Franked Full Year dividend is 3.0%. The value of the management and performance fees forgone by the fund managers for the period totalled $3.9 million (June 2020: $3.4 million) and the value of the service providers, including the Board and Investment Committee working on a pro bono basis, totalled $0.7 million (June 2020: $0.5 million).

On 3 September 2021, FGX announced the issue of Bonus Options to shareholders on a one-for-one basis. The options will have an exercise price of $1.48 and can be exercised at any time up until the maturity date of 28 April 2023. The options will be listed under the code FGXOA. 

The options are intended to be issued on 4 October and commence trading on the ASX on 5 October 2021. Options that are exercised on or before 17 November 2021 and shares held at the dividend record date of 22 November 2021 will receive the fully franked interim dividend of 3cps. 

The exercise price is in line with the pre-tax NTA of the Company at the time of the announcement and represents a premium of 3.5% to the closing price at the close of the trading day before the announcement. 

Assuming 100% of shares on issue are held by eligible shareholders on the Record Date (1 October 2021), the maximum number of options that may be issued is 401.26m and if all options are exercised the Company would raise $593.9m.

Investment Portfolio Performance 

investment portfolio performance .png

Company Profile 

Future Generation Investment Company Limited is an investment company incorporated in Australia. The objective of the Fund is to provide exposure to a group of prominent Australian fund managers in a single investment vehicle. The Fund will invest in funds managed by a number of Australian fund managers with diversified exposure to Australian equities.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.