Thanks for that post FrankMe - cogent points.I have previously...

Thanks for that post FrankMe - cogent points.

I have previously posted on the topic of ASX300 inclusion on other stocks I have held from time to time, and there is certainly a lot more to it than looking at DLI's market cap at any given point in time - so for everyone's convenience I extract that information below - for now my current feeling is that DLI's inclusion in the ASX300 is far from a "lay down misere" if it were to achieve a 300+ position based on market capitalisation and it is pretty unlikely to be included in the upcoming September 2023 rebalance. With a sustained re-rating over time this would of course change.

If we consider the basis of my view in a little more detail:

1. You can review the S & P / ASX Australian Indices methodology here:

https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-asx-australian-indices.pdf

I think we can safely assume that DLI is an eligible stock for inclusion in the index per se, and hence in broad headings of the criteria for inclusion appear effectively relate to: (a) market capitalisation; (b) liquidity.

Extracted below is the summary page from the methodology and that explains the criteria in further detail:




2. So if we turn specifically to the issue of market cap, it appears DLI is presently be hovering somewhat outside the top 300 based (number 460 at the time of writing) on current market capitalisation alone (albeit one needs to remove exchange-traded funds, listed investment companies and listed investment trusts from the count - there might be around 30-ish to consider?).

https://www.marketindex.com.au/asx-listed-companies

However, whether a stock is "institutionally investable" and meets the key market capitalisation requirements is not as straightforward as simply looking at the company's market cap and rather (my emphasis added):

"Except for the S&P/ASX All Technology Index, the market capitalization criterion for stock inclusion is based upon the daily average market capitalization of a security over the last six months. The ASX stock price history (last six months), latest available shares on issue, and the Investable Weight Factor (IWF) are the relevant variables for the calculation. The IWF is a variable that is primarily used to determine the
available float of a security for ASX-listed securities." Considering those relevant matters:

a. While DLI has had a decent rise in share price and market cap over the past 6 months, I think it is reasonable to assume that for the purposes of assessment for ASX300 inclusion, DLI's daily average market capitalisation might be materially lower than where it presently sits. As such even if it rises well into the top 300 before the September 2023 rebalance, it is probably unlikely to attain a daily average market capitalisation within the 300 over 6 months (and see my further comments regarding "buffers" below).

b. The Investable Weight Factor (IWF) is another complicated issue to consider. The relevant extract from the guidelines is pretty unhelpful (my emphasis added):

"Investable Weight Factor (IWF)

For more information, please refer to S&P Dow Jones Indices’ Float Adjustment Methodolology and S&P Dow Jones Indices’ Equity Policies & Practices Methodology. Exceptions to the standard treatment for the S&P/ASX Indices are detailed below:

Companies in the S&P/ASX indices – with exception of the All Ordinaries – are assigned an Investable Weight Factor (IWF). A company must have a minimum IWF of 0.3 to be eligible for index inclusion, however an IWF at or above that level is not necessary for ongoing index membership."

But looking at this document provides better insight:


So the IWF effectively appears to relate to the "free float" for the company:

"Free float can be defined as the percentage of each company’s shares that are freely available for trading in the
market. It may also be described as the contestable shares in the marketplace for each company.

For S&P/ASX index purposes free float is defined as excluding the following holdings:
- Government and government agencies;
- Controlling and strategic shareholders/partners;
- Any other entities or individuals which hold more than 5% of the stock (excluding insurance companies, securities companies, finance
companies and investment funds such as mutual and pension funds),
and;
- Other restricted portions, such as treasury stocks or strategic holdings." These factors may count against DLI with respect to index criteria in terms of its IWF, particularly with Idemitsu having a 15% stake (albeit still leaves substantial greater holdings above the minimum free float threshold of 30% for a stock to warrant inclusion in the S & P / ASX indices) and that would presumably be considered as a "strategic shareholder / partner"; and with Waratah Capital Advisers holding 12.1% as per the March 2023 investor presentation.

Nonetheless, there would appear to be a sufficient portion of DLI's issued shares as "freely available for trading in the market".

None of the comments above obviously factor in how DLI's broad market capitalisation (using the criteria mentioned above) may be placed relative to the other companies that may also be vying for inclusion in the ASX300.

However, as always with these things those that determine index inclusion no doubt retain ultimate discretion and have some mysterious "wild cards" to be able to play. In this regard I note the following S & P commentary as follows (my emphasis added):

- "A representative from Standard & Poor’s is the chairman of the Index Committee. Meetings are held on a quarterly basis as well as on an as needed basis should unusual corporate events warrant. The Index Committee reserves the right to use discretion to include, exclude, adjust, or postpone the inclusion of a stock, the shares, and the Investable Weight Factor (IWF) of a stock."

- "In times of high volatility the current market capitalisation of the stock may also be considered."

All of the above says to me in effect that: (a) the first step is for the relevant criteria to be applied; but that (b) thereafter S & P may apply their discretion to bump up or push down a stock based on what are likely to be somewhat subjective bases. Hence why we can only speculate and there can be no certainty of prediction for a stock in DLI's position when it comes to index inclusion.

3. Next point is around liquidity, and in this regard we need to look at DLI's "relative liquidity" in comparison to its peers.

Relative liquidity = stock median liquidity / market liquidity.

Stock median liquidity is the median daily liquidity for each stock over six months. Daily liquidity for each stock is the daily value traded divided by day-end market capitalisation adjusted for free float.

Market liquidity is determined using the weighted average of the stock median liquidities of the largest 500 domestic stocks. The six-months average market capitalisation used as part of the market capitalisation criteria is used for this purpose.

The market capitalization weight for stocks in the S&P/ASX 300 is float-adjusted, and ASX300 stocks require a minimum Relative Liquidity of 30% for inclusion. Any stock's Relative Liquidity that drops below half of the 30% threshold becomes ineligible and is removed at the next rebalancing.

4. Finally, it is important to note the concept of "buffers" with respect to ASX300 inclusion or exclusion and in this regard:

"Buffers.

In order to limit the level of index turnover, eligible non-constituent securities will generally only be considered for index inclusion once a current constituent stock is excluded due to a sufficiently low rank and/or liquidity, based on the float-adjusted market capitalization. Potential index inclusions and exclusions need to satisfy buffer requirements in terms of the rank of the stock relative to a given index.

The following buffers aim to limit the level of index turnover that may take place at each quarterly rebalancing, maximizing the efficiency and limiting the cost associated with holding the index portfolio...."

For the ASX300, the rank buffer for addition is 274th by float-adjusted market capitalisation, while the rank buffer for deletion from the index is 326th or lower. Adopting a simplistic approach, it would seem that the current market caps between 274th place (MAD) and 300th (BGP) range between about $1.14 billion and $953 million. These are obviously materially higher than DLI's market cap at present and would require the company to undergo quite the re-rating on a sustained basis even to get to 300th (i.e a share price of some $1.83 without any further dilution). I appreciate that I have not removed ETFs, LICs and LITs from this rough assessment.

So again, from my perspective these "buffers" raise the bar yet further still in terms of DLI qualifying for inclusion in the ASX300; put more simply, the buffers mean that a stock needs to work extra hard to secure its place at the table, however, it can slack off a little thereafter and still retain its foot in the door.

That said, a lot can happen between now and the next ASX300 rebalance (particularly if DLI can release some material price-catalyst news as we all expect) and there appears to be a "discretionary" element in the selection process that could potentially favour DLI moving forward.

The above represents my personal commentary only and it is intended for the interest of DLI's shareholders and discussion within the forum, and is not to be relied on as advice in any form. Please do not make investment decisions based on the information in this post and do your own research.