In an earlier post on another stock I hold, I outlined some information about the criteria for inclusion in the ASX300 index; set out below is a re-hash of that information which may help in understanding the position generally and as it relates to LTR:
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.pdfI think we can safely assume that LTR is an eligible stock for inclusion in the indexper se, and hence in broad headings of the criteria for inclusion (as others have already mentioned in part) appear effectively relate to: (a) market capitalisation; (b) liquidity.The next ASX300 index rebalance will occur in September 2021 (with the index being rebalanced twice a year in March and September).
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 LTR is presently hovering at about 273rd place based oncurrentmarket capitalisation alone, and indeed as far as ASX300 index inclusion is concerned it would be higher because one needs to excluded Exchange Traded Funds (ETFs) and the like:
https://www.marketindex.com.au/asx-listed-companies
And LTR specific information here:
https://www.marketindex.com.au/asx/ltr
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. LTR has had a significant rise in share price and market cap over the past 6 months or so - on 30 December 2020 its share price was sitting atcirca$0.335. Accordingly, I think it is reasonable to assume that for the purposes of assessment for ASX300 inclusion based on its current position, LTR's daily average market capitalisation might be materially lower than where it presently sits.
Provided LTR can maintain or continue on its stellar trajectory, it also follows that its daily average market capitalisation come September 2021 will be materially higher than it is now.
b. The Investable Weight Factor (IWF) is another complicated issue to consider. The relevant extract from the guidelines is rather 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." In my respectful view, this is likely to represent LTR's "short suit" in terms of satisfying index criteria and its IWF may be on the lower end of the scale compared to some (noting there is a minimum free float threshold of 30% for a stock to warrant inclusion in the S & P / ASX indices).
In particular and as we know, Tim Goyder and "associates" (as well as other directors and associates) hold a very substantial position in LTR. I presume that the shareholdings of the members of LTR's board would be disregarded in determining LTR's IWF, on the basis these would likely be deemed as "controlling and strategic shareholders / partners". Considering the top 20 which holds some 44% of the company (per the company's most recent presentation release), on one view it may be taken that a significant portion of LTR's issued shares could be viewed as not being "freely available for trading in the market". It would arguably be difficult for any person or fund to acquire a significant holding on market (or certainly without sending the price into the stratosphere!).
None of the comments above obviously factor in how LTR's broad market capitalisation (using the criteria mentioned above) and IWF may be placed relative to the other companies that may also be vying for inclusion in the ASX300 at the next rebalance.
However, as is often the case with these things, those that determine index inclusion no doubt retain ultimate discretion and can play some wild cards. 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 LTR's current position.
3. Next point is around liquidity, and in this regard we need to look at LTR'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.
It is difficult to predict how this will relate to LTR. However, I again wonder if this could be a draw-back for LTR given the stock has been tightly held by many longer term shareholders (again to reiterate the fact that the top 20 shareholders in LTR own 44% of the company). In my observation, trading has generally been pretty light.
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 foradditionis 274th by float-adjusted market capitalisation, while the rank buffer fordeletionfrom the index is 326th or lower. So again, these "buffers" raise the bar yet further still in terms of a company 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.
Things are currently looking good for LTR on this basis; based on current market cap it is already above the current rank buffer (at 273rd and which would be even higher once you remove ETFs and the like from that list). If it continues to maintain this position then it should at least be able to satisfy the rank buffer criterion.
Conclusion: As stated above, if LTR can maintain a market capitalisation at or about this level between now and the September 2021 rebalance, its position in terms of daily average market capitalisation would be high and which lends itself to ASX300 inclusion. However, in my view the factors that may work against ASX300 inclusion for LTR relate to: (a) the significant holding by directors and associates, and which shareholdings may well be disregarded as they do not form part of the "free float" used for calculations as to index inclusion and may impact on its Investable Weight Factor; (b) by the same token, its Relative Liquidity may be on the low side given reasonably light trading on average and the limited free float.
Anyway, let us see what happens come September 2021 when the next ASX300 rebalance will occur. I would look to buy more LTR shares in my industry superannuation fund if LTR is included in the ASX300, however, I must say I have mixed feelings about the company's inclusion within the index (and noting it seems to have done perfectly well not being a constituent of that index, whereas once index funds come on board we might see issues such as shorting and the like come to the fore).
As always, this represents my personal commentary only and it is intended for the interest of LTR'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.
Very best to all LTR shareholders.