AMCIL Limited (AMH) Earnings Call Transcript

Hello, and welcome to the AMCIL Full-Year Financial Results Briefing. [Operator Instructions]. I'd now like to hand the presentation over to Mark Freeman, Managing Director of AMCIL.

Good afternoon, everyone, and welcome to this full-year result briefing. I'd like to begin by acknowledging the traditional owners and custodians from the lands we are gathered on today and pay my respects to their elders past, present, and emerging. I have joining me today on the webinar, Jaye Guy and Gilbert Battistella from the investment team; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; and Geoff Driver, our General Manager of Business Development. Before we start the presentation, a bit of housekeeping on the webinar. This briefing is based on the material available on the company's website. If you are using your computer to access the presentation via the webcast, the slides will change automatically. Finally, please note following the presentation, there will be time for questions and answers. [Operator Instructions]. And just to kick-off the presentation, I'll pass to Andrew, our CFO, to talk about the results.

Thank you, Mark, and good afternoon, ladies and gentlemen. So Slide 4 is the relevant slide in the presentation, and we start on the top left-hand corner where we see the profit for the year was AUD 7.5 million, down slightly from AUD 7.6 million the year before. The key driver of that was the decrease in dividends that we got mainly from resource stocks. For instance, BHP alone, we received AUD 700,000 less in the year just gone, the year-ended June '24 than we did in the previous years. And many shareholders with shareholdings in BHP, Woodside, et cetera, would have seen the same thing. So still, we think a pretty good result, notwithstanding that as other companies, banks, et cetera, did increase their dividends. So that led to the final dividend of AUD 0.025 plus a special dividend of 0.5%. So, when you include the interim dividend, that's AUD 0.04 all up for the year. There was a low level of capital gains this year as we had brought forward losses from the prior year that we had to use up before we could make any taxable capital gains, which would generate franking credits. The portfolio return of 20.5%, well ahead of the market, up 13.5% for the year, and we'll go into more detail on the portfolio performance later on. The management expense ratio of 0.56%, down from 0.66% the year before, that's AUD 0.56 for every AUD 100. Now the key driver of a management expense ratio is the amount of costs that it takes to run the company as a percentage of the average portfolio value. So the real driver of the management expense ratio will be the movement in the portfolio. Notwithstanding that, as we discussed at the AGM and shareholder briefings last year, the actual cost of running the company did decrease year-on-year and a large part of that was because of the underperformance in the prior year. It meant that essentially AMCIL got a refund or got a credit note for some of those costs this year, which helped drive it down. And we went into detail about how that would work last year. So AUD 0.56, down from AUD 0.66, I would expect because of AMCIL's performance this year that the actual cost will probably increase this year, '24-'25. So just to reiterate, the real driver of the management expense ratio will be that portfolio performance. Slide 5, the next slide, just have a look at the premium discount chart. This is important to draw shareholders' attention to because it says, "Are you buying the underlying assets at more than they're worth? Or are you buying the underlying assets at less than they're worth? At 30th of June 2024, the NTA was AUD 1.26, share price AUD 1.10. So you were buying, if you were buying it at AUD 1.10, a 13% discount to the NTA. Now a lot of LICs are creating deeper discounts than normal at the moment. Our suspicion is that this part is because a lot of asset managers are saying, you can now get a decent yield out of fixed interest if you'll be switching out of equities or out of some of your equities into fixed interest. We suspect that is having some impact. Overall, the market has been up about 4% so far this month. So, you'd expect the AMCIL NTA also to be up about 4% and the share price is AUD 1.15. So what that means is you're still able to buy AMCIL shares at a pretty good discount to their underlying value. And with that, I'll pass over to Mark.

And so we move on to the longer-term performance numbers, which is slide 7. And as Andrew picked up the 1-year numbers, he's talked through those. Longer term, 5 years, it's comfortably had the index 10-year. We're about in line, but we show this performance based on the franking credits which we have actually paid out. We still have franking credits in the company. If we were to pay out all those immediately, those performance numbers for AMCIL would be higher than what you're seeing. So we tend to show a conservative view of the performance numbers on the company. So we just move to the next slide, just to talk about some of the features of AMCIL. So it is a focused portfolio. The filter we want put on it is we want to invest in quality companies, index, waitings don't necessarily drive the size of our holdings. There's a strong alignment of interest. There's a low management cost of AMCIL compared to other, what we call, high conviction funds. There are no performance fees and there's significant equity ownership by directors and staff in AMCIL, so all the directors and staff, it's in our interest to see AMCIL perform over the long term. And we still try and keep our portfolio turnover relatively low. We know a lot of other more actively managed funds in the market are sharing their portfolios a lot. Being a high conviction fund, there's always going to be some turnover, but we never wanted to be excessive because that just generates tax at the end of the day. So in AMCIL, we are focused on a particular framework we're working towards, which is on the next slide, slide 9. This is the filter we put on our stocks, which we would say is a very true reflection of our or the team's investment process, which is to look for businesses that have unique assets that are hard to replicate or another way of talking about that is companies that have an industry leadership position or developing one, a sustainable competitive advantage. We're aware of companies where external factors can impact the business. The balance sheet is really important. So we don't want to own companies that have too much debt. We prefer companies that have consistent earnings streams and the people running the business is critical. So we want companies that are run by really good management teams, and we have a strong bias towards what we call owner-driver businesses or ownership alignment or founder-led companies where the people that started the business are running the company. We get a great success with many of those businesses. And we -- if you look to AMCIL's portfolio, we are full of owner-driver companies which we're really pleased about. So when you put those factors together, what that means is you're taking a view on sustainable competitive advantage. Companies that have that generally make higher return on capital, which means you generate more cash to reinvest in the business to drive growth. This enables you to capture opportunities and then ultimately leads to shareholder value through growing profit. So ultimately, what we're trying to do is set up a framework that helps us understand which companies have the best chance to grow earnings, profits, and earnings because ultimately, share prices follow earnings per share. And then we look to buy such companies when we see value. And if companies fail on any of these characteristics, we are usually sellers and then often, we will exit the business. So moving on to the next slide, which is about diversification, you can see it is a diversified portfolio across sectors, and there's quite an even balance between what I call the real large cap stocks, greater than AUD 50 billion, more the midcap type stocks, which is AUD 5 billion to AUD 15 billion, which is 24%, then another 37% in stocks that are smaller than that again. So we're happy to have a small, mid or large cap stock. They're all available to us. It's where we see the best opportunity and the way we structure the portfolio, we'll tend to be more precise in which large-cap stocks we want. So sometimes waiting is just larger in those, but we tend to have less of them. And when you get into the smaller cap stocks, we tend to have more diversification there because what you're trying to do is capture the future winners and therefore, the position sizes tend to be smaller in nature. So PPI is out of the large caps and have a better spread in the smaller companies that have the characteristics that our experience tells us is most likely will lead to a good business for the long term. So just moving on to the -- some of the recent activity overall, some of the stocks we've exited, we've exited Santos and Computershare. Computershare we basically had put in there a little while ago, more as a trade, and we've made some profits. So we moved on. The stock has continued to trade up, but that was its purpose. Santos at the margin, we're starting to see, I think, some better buying opportunities in Woodside. LTM was a takeover. So those that have been listening to these webinars for the past 18 months will remember us putting in this [indiscernible] LTM was a stock that lined up really well against the framework, so we bought it and probably no surprise that there was a significant takeover bid. So that proved to be a very successful investment. [ AMH ] ASX is a company that we decided to step away from. It still has a lot of the characteristics we look for in terms of its market position. There seem to be a number of issues the company is dealing with. We want to see those issues go away before we go back into the stock. IPD group was another owner-driver stock. It was a small position we had, and we made some money out of it, so we moved on, but nothing, no real concerns about the business as such. It's still interesting for us, but it was a small holding that we moved away from. And then some of the stocks we've reduced. You can see NAV, Commonwealth Bank, and banks have been incredibly strong in the market, and we're starting to struggle with the valuation metrics. The PEs in these businesses are trading on extreme when you look through history. So if we see extreme pricing, we're happy to take some money out of those businesses. Likewise, with Wesfarmers, we still got a big holding in Wesfarmers. We still do have a holding in CBA, NAB as well but again, the multiples are looking very pricey and net well [ REO-recent CSL ]. We just took a little bit out on valuation metrics, but still big stocks in the portfolio. And then businesses we've added on the other side of reducing NAB and CBA, they produce great franked dividends for us, and we've put some money into Telstra, which we think is more fairly valued. It gives us franked dividends and Woodside we've been gradually stepping into, again, that's going to produce good franked dividends. So just trying to go where we see a bit more value in the companies that generate yield for us. We've seen ongoing weakness in IDP, so we'd continue to add little bits to that. Woolworth had been through a period of quite negative news. Again, if you looked at these results probably 12 months ago, we've quite significantly reduced our Woolworths in the high AUD 38, around AUD 38. It looked really expensive and has been through a period of really bad news. The stock got down to AUD 31, AUD 32. So, we went the other way and added some back. Then there are some of our smaller stocks. These are owner-driver businesses. Objective Corporation went through a period where it was sold off. There was a large seller in the market that wanted to get out. That was a great opportunity for us to add to that one. Macquarie Technology, they had a capital raising to support the development of a data center at a very attractive price, so we're happy to go into that. Mineral Resources, we've been picking up bits and pieces on the way. So those last 3 stocks are all owner-driver or founder-led businesses that we're happy to buy when we see value. And to the new stocks, as I said, we touched on Telstra. Jaye will talk about that shortly. Then Tech One, Block, Redox, and PWR. Again, Gilbert and Jaye will talk to those shortly. And then we've taken a small position in SBC because we think the growth in data centers is interesting, but it's only a very small position. And likewise, we think the market's [ trying ] to anticipate a cyclical downturn. So taking a very small position there. We'd only build up those 2 stocks if we saw better value in the market. So just moving on to a few slides, just talking through some of those acquisitions, and I think we'll start with Gilbert to talk about Tech One and Block.

Starting with TechnologyOne, TechnologyOne is an ERP software provider specializing in the local government and higher education verticals in Australia, New Zealand, and the U.K. Customers use TechOne software to run their businesses. As a result of Tech One's strong customer relationships, they have sustained a world-class customer retention rate of 99% per annum over the past 10 years. These existing customers also tend to increase their spending with Tech One over time, which is driven by customers increasing the breadth of adoption of Tech One's products and modules. The customer base is highly economically resilient with over 90% of revenues recurring, which allows Tech One to continue to grow throughout the economic cycle. Block is a fintech conglomerate. The key assets are Cash App, which is a peer-to-peer money transfer app with 57 million U.S. customers, Square, which is an integrated payment offering consisting of payment terminals, software, and financial services used primarily by small businesses and Afterpay, which they acquired at the wrong point in the cycle but is now a small component of the total Block business. We initiated a position in Block as we are observing Block winning market share in the large markets that they serve, combined with improving cost discipline, which is driving a material improvement in earnings. Block also has a large net cash position and is led by owner-driver CEO, Jack Dorsey. Given the higher risk profile of this investment, it is a smaller position in the portfolio. On the next slide, PWR Holdings. PWR Holdings designs and manufactures advanced cooling solutions used in high-performance automotive and industrial applications. With its grassroots in motorsports, PWR are expanding by applying their advanced cooling IP and expertise to the aerospace and defense markets. The key characteristics we are attracted to in PWR are the owner-driver CEO, Kees Weel, strong margins, a high return on equity, net cash balance sheet, significant R&D investment, and unique IP in advanced cooling technology. I'll pass over to Jaye to talk on Redox now.

So continuing on Slide 13, we highlight Redox here. It's not necessarily a household name, but there will be some connection to the everyday items that you buy, say, in the supermarket. So essentially what Redox does is they're a leading distributor of chemicals and ingredients. They have a really strong market position in Australia and a growing presence in the United States. They act as an important link between suppliers of chemicals and ingredients and purchases such as manufacturing companies that make products we use in our day-to-day lives, such as shampoo. The company was established in 1965, and the founding family remains heavily involved in the business following the IPO in mid-2023. They have a significant presence on the management team and Board and are aligned with us as shareholders with a substantial shareholding in the business. Raymond, the CEO of Redox started in the business as an 18-year-old. So obviously, has a lot of experience in the industry and space. They have a strong track record of growth. So over the last 30 years, they've grown sales at a 12% compound annual growth rate. We see latency on the balance sheet. The company pays a solid dividend yield and generates an attractive return on capital. As Mark highlighted, we've also initiated and added 2 positions in larger companies where we see value. We've provided charts on these slides that highlight our purchasing activity in those 2 companies. So Telstra, many on the call will be familiar with the company. They're a leading telecommunications provider in Australia. We think they're well placed to benefit from the increased use of data and society's increasing requirements to be digitally connected. I think Telstra is well positioned to deliver sustainable earnings growth, an attractive, growing, fully franked dividend. Management have a well-considered plan to improve returns over the coming years, and the nature of Telstra's business means that the company generates defensive, fairly predictable cash flows, and they also have a solid balance sheet. Moving on to Woodside. During the period, we added to that position. This gives us further exposure to a globally unique portfolio of hard-to-replace, high-quality liquefied natural gas and oil assets. These low-cost assets underpin strong free cash flows into the future, which we believe are underappreciated by the market. Additionally, Woodside also has a strong balance sheet, which gives the company optionality, which was recently evidenced by a recently announced acquisition of New York Stock Exchange-listed Tellurian, for book value, which improves the company's production profile and increases their exposure to LNG. As Mark noted, the company also pays an attractive dividend yield. I'll now pass back to Mark, who will talk through the outlook section.

So just moving to the outlook, we've started with the portfolio, and this is the same template we've used the last couple of meetings. Just in terms of how we think about the companies that we hold, we do have a significant range of growth companies, and I touched on that some of these are smaller companies. So, we are more inclined to hold more of them. So, I said we want to give ourselves a better opportunity to capture structural compounding winners when we do that. And then we have more of our store businesses and then income companies. So starting with income companies, as I said earlier, the banks look quite expensive to us. They provide great franked dividends but in terms of sourcing franked dividends, we're seeing better value in Telstra and Woodside at these prices. Steelwork companies, these are businesses that we're happy to hold for the long term. So these are companies which we think have got privileged positions in their markets in which they operate and then growth stocks and I'll try and pick out the founder-led businesses, and I may not get them all, but it is interesting, our focus here on those companies. If you look through this chart, Macquarie Technology, Netwealth, ARB, Brice, and [ Breville ] have those characteristics through the current CEO and he's holding. TechnologyOne is essential to second-generation family-led business. Goodman Group, Beamtree has characteristics, Temple & Webster [ series, Westpac ], men resources. Gentrack has the type of characteristics due to the CEO's position. Net Wealth, Mainfreight, Objective, PWR, ResMed, AGL, Xero is essentially what -- it's probably third generation now and Block is as well. So there's a lot of companies that have that characteristic. And as I said, we think this improves our chance of success in investing. So if you move to the outlook comments, our view here is the markets, I was going to say in the U.S., but now here in Australia, have reacted very positively to the prospects of interest rates being cut. So even today in the Australian market, inflationary figures and some softer retail sales numbers. The market is getting excited that there won't be more interest rate increases, that it might be flat and that sent the market through the roof. But I think the market sometimes forgets the reason for that is because there are areas of softness in the economy, and that eventually does impact profits. Sentiment around China has also been weak, and that's been a big impact on commodity markets as well. So we see the market trading at all-time highs, which we don't have any problem with, markets go up in the long term. Resources have been lagging. Our only note of caution though is valuations appear very high. So, if you look at price to sales, price to book or P.E. on the Australian market and the U.S. market, we're at the, what I call, upper levels, so through one standard deviation. Sometimes there are reasons for that, either profits are at a low point, and they're about to pick up. We don't think we're at that point. Maybe the structure of the market is different. There's more tech stocks that are higher returning and better. Perhaps there are some things in that but overall, when we see these levels, we just have a ton of caution. So therefore, despite the strong performance in the portfolio, we actually have a nice allocation to cash at this point. So if we go into a reporting season, we actually do get some opportunities. We have the ability to move on that. So we've got good stock, we've got some cash and we still delivered the performance. So just to go back to what we look for, when we look through our portfolio, we always want to be able to say we are holding good companies that have aligned management teams, the ability to grow earnings over the long term, and have strong and resilient balance sheet. And so that ends the formal presentation. Now we'd like to open it up for questions.

Yes. So Mark, I'll try and facilitate the questions. So again, just to remind people, there's a chance to actually ask questions to the team. So the first one I've got here is -- I think you probably touched on this, but as CBA is at an historic high, would [ answer ] place it with Macquarie Group within the portfolio?

Yes. So I mean, the PE on CBA is way beyond anything I've ever seen in my entire career. So as we've said, it makes sense that we've been trimming that position. We think it's a great company, it's a standout business, it makes good return on equity, but there's a price for everything. And we look at the dividend yield is now about 3.3% fully franked. If you add the franking credits, you might get 4.5%. So you need some pretty good earnings growth for it to be a sound investment from here. That may happen, but we are pretty cautious. So it's become quite a small stock in the portfolio. Macquarie is already a large position. Always have to buy more if the price is right, but it is quite a solid position, and that's probably why it hasn't appeared in the buying list this time around. We're just seeing other things to put money into. So we're hopeful that Macquarie can continue to perform in the long run because we've got a lot in a --

Macquarie actually is larger in the portfolio than CBA's.

Oh that is substantially high.

Third largest.

Question, I think Andrew would probably cover this but is the sizable reduction in the management expense ratio [ is like to ] permit? Or is it just to effect this specific to this year?

I would expect the actual costs in dollar terms to be slightly up this year for the reasons that I went through. But the actual ratio itself, as we discussed, will be dependent upon how the portfolio does. If the portfolio increases more than the rate of increase in the dollar cost, then the MER would come down. And obviously, vice versa, if it doesn't grow by as much.

[ Coming to Grant ]. Some companies claim that private credit investments have equity-like returns. What is AMCIL's assessment of the investment opportunity in this area?

Yes. Well, we're an equity investor. That's our core strength, that's what we do. We're not credit analysts. That's really a different field. It requires a different skill set and a different way of looking at the company. And we would certainly never put ourselves out as to be an expert on credit. So therefore, it's not for us. There are much better managers out there, people interested in investing in funds that specialize in private equity. I get the point, though, there is some private credit that can get returns like equity or better, but that's all an outcome of risk. The more risk you take on private equity, you'd expect to get a better return and likewise, equity, high-risk equity, you want a high return, with low-risk equity, you might expect a lower return. But it's just not our area of expertise.

Question here. I think this is about us [ asking on ] gold stock. But with improving gold price, will gold companies not have improved earnings?

Well, they certainly will. And we did look at one gold stock a little while ago. Always found gold price hard to predict. In fact, when you look back through history, if you're interested in gold, the best way to make money is buying gold, not by buying the equities, but it doesn't mean they go up when commodity prices go up. But the way we structured our portfolio, it's more about putting money in businesses that we can more readily see a reason why they can grow their profits over time. For me, the gold companies, [indiscernible] really taking a view on the gold price, and we just find that really hard to do. So it's something that we haven't done it yet.

Question about can we discuss individual company wait limits? So, whether you start to feel uncomfortable in terms of waiting within the portfolio or any particular [ one ] company? The AMCIL dividend policy and level of retained franking credits that we have, those are available.

Now I'll touch on the first wait and then I'll pass over to Andrew on our franking balance. Look, we don't have to have a formal limit, but our biggest stock at the moment is CSL. It's about 8.8% of the portfolio. We think there's some value there, but the index position is probably around 7%, high 6s. So we look at the [ waitings ] from an absolute level, but also relative to the index level because that tells us how our portfolio is positioned against the benchmark. I'd probably say that CSL position is probably a little bit high at this point because we think the stock has been undervalued. So, I would say that's pushing more of our upper limit. I think we've had times where we've had 10% in a stock but that was probably more the exception than the rule. So even at CSL at 8.9% is probably a little bit more than what we'd like. We'd probably like a bit more spread. So Andrew [indiscernible]

In terms of dividend policy, the Board will determine the dividend from year to year. I don't think that they would say they have a particular dividend policy as such. And in terms of the franking credits, after we paid the final dividend that we announced and the special dividend, essentially we'll have just over AUD 0.04 per share worth of franked dividend in reserve. So, the company has enough reserves to pay just over 1 full years' worth of ordinary dividends.

Yes. And in the context of the dividend policy, you commented on, we certainly appreciate the shareholders like fully franked dividends and we're obviously keen to get those out as best we can.

Andrew [indiscernible], you mentioned that AMCIL had brought forward capital losses, which reduced tax payable this year. Was there any one position that caused the realized capital losses?

Last year. That was done last year, we don't specify the capital gains tax position for any particular investment but what I can say is in '22-'23, and I'll let shareholders draw their own conclusions, the largest sales were in IRESS and PEXA Group, which we both sold out of last in the '22-'23 year.

A question here about mineral resources, given it's so exposed to lithium and iron ore, but with full in prices, what attracts you to them.

So Mineral Resources, there's a number of characteristics that we find attractive. So the business is founded by Chris Ellison, who currently leads the business. He has a significant equity holding in the business so is aligned with us as shareholders. The company has a few divisions. They have a mining services division, which has got a fantastic track record of growing volumes and have customers such as the large major mining companies. They also have an iron ore division, lithium and an emerging energy division. We are conscious that they are exposed to lithium and iron ore prices, which are out of their control but we think that they are growing production through their assets, which we think are good quality assets at the right point of the cost curve. So we're not purely relying on resource prices for them to generate earnings growth. They can do this through growing production sensibly. And we think that probably the mining services business, the earnings profile of that business is probably not as well understood as it should be by the market, and that provides a good, consistent earnings growth for the business. Keeping that in mind, given commodity prices are out of the company's control, we have kept that in mind in how we've positioned or how much of the stock we've bought. So it's a bit of a smaller position for the portfolio, and we definitely keep that cyclical nature of the business in mind in the future.

I think probably the other thing to add is that our holding is around 0.7%. So it is one of those smaller positions. And given the nature of the business, it's probably never going to be a business we take a really large holding in. But with those characteristics, it's enough for us to say we don't mind having a bit of shareholder's money alongside those family-led companies like we've seen Mineral Resources. And we're also significantly underweight BHP as well from an iron ore perspective.

A question here about realestate.com or REA Group, [indiscernible], how do you assess the potential of REA in your business, currently loss-making coming to a valuation for REA?

Yes. Look, it's really difficult to say what is the valuation. I actually went on a tour; they did an analyst tour of their business. So I went across to New Delhi last year, I think it was and that was very worthwhile. They're currently battling out with 2 other major players for leadership positions. And that's where the company is really trying to push the business is to try and pull away from their competitors. That's the strategy. That's always a strategy with these online businesses is you do tend to incur some losses, but it's important to try and get to the #1 position. And then once you get to the #1 position, you start to get all the rewards from having that large market position, and ultimately, some of them can start to get better pricing and make better returns. So we've seen that play out [indiscernible] REA in Australia [indiscernible] sales and the same overseas. So that's their position. India is a very, very large market, but clearly, it's more undeveloped. I think REA would probably say, well, maybe it looks a bit like Australia 15 years ago. They do have a good position, and it's not something they want to give away. So I think with the growth in that market, I think it's a good option for the business. And if it is successful, who knows what it's worth in the long term, but it doesn't add a lot in terms of the way we think about immediate value on the business, but it does add a bit in terms of how we think about holding that stock on a 10-year view. And if that certainly starts to play out, it will have a lot of value eventually.