Acorn Capital Investment Fund Limited (ACQ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is John Steven, and as Chairman of the Board of Acorn Capital Investment Fund Limited, I'd like to welcome you to this Annual General Meeting. As the time is now 10:00 AM, and a quorum is present, I will formally declare open the 2020 Annual General Meeting of the company. As you know, today's meeting is being held online via the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit votes. Thank you for joining us today, and we hope that this virtual format provides an opportunity for shareholders who might not ordinarily be able to attend to participate in this year's meeting. I'd like to take this opportunity to introduce my fellow directors, Judith Smith and David Trude, who are independent nonexecutive directors; as well as Robert Brown and Barry Fairley who are nonexecutive directors. Also present with me are executives of Acorn Capital Limited. Acorn Capital Limited is, as you know, the manager of the company, and Matthew Sheehan, the company's Secretary of Acorn Capital is also the company's secretary of the company. Robert Routley is Acorn Capital's Chief Executive Officer; and finally, Robert Bruce is a portfolio manager of Acorn Capital. They're all present here with me. I also welcome [ Brett Calio ], representing the company's auditor, Ernst & Young, who is available to answer questions in relation to the audit. The minutes of the 2019 Annual General Meeting of members are noted and are tabled here with me. The notice of meeting, outlining the business to be dealt with at today's meeting was dispatched to all shareholders and is also tabled. Now due to today's format, we won't wait until each resolution is presented for questions. Rather, questions can be submitted at any time. [Operator Instructions] Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open voting for all resolutions. At that time, if you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of those options. There is no need to hit a submit or enter button as the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed, which will be at the end of the meeting. I now declare voting open on all items of business. The polling icon will soon appear. Please submit your votes at any time until I declare the voting closed. I will give you a warning before I move to close voting. Now for the business update. Before we move to the formal business of the meeting, we will hear from Robert Routley, Acorn Capital's Chief Executive Officer; and Robert Bruce, a portfolio manager at Acorn Capital. Who will report to shareholders in relation to the company's operational performance for the financial year ended in June 2020. And before handing over to Robert Routley, I want to record thanks to you, our shareholders, for your ongoing support. Now I'll hand over to Robert Routley.

Firstly, I would like to acknowledge and welcome all ACQ shareholders here today, and thank you on behalf of Acorn Capital for your support. The current slide sets out some of the company's key highlights for the 2020 financial year and for the first 4 months of the 2021 financial year. For the 2020 financial year, the company recorded a profit after tax of $2.041 million and reported portfolio performance of positive 2.3% as compared to the Small Ordinaries Accumulation index of negative 5.7%. The overall return doesn't reflect the market volatility experienced throughout the year, particularly in the March 2020 quarter, where we saw a decline in the microcap sector of 34.9%, attribute to the market response to the global COVID-19 pandemic. Acorn Capital records indicate that for the microcap sector, that March 2020 with a return of negative 28% was the second worst monthly return since 1973. Unlike the GFC, which was characterized by a balance sheet crisis, the pandemic triggered a cash flow crisis as a result of the disruption to the level of activity in the real economy. This disruption was not uniform across the whole economy, with industry sectors such as tourism, travel and entertainment being the most affected, but conversely, other sectors such as e-commerce, communication and gold were beneficiaries. Acorn Capital believes that the company's investment strategy proved resilient through this period as a result of ACQ's industry diversification. The impact of COVID-19 was difficult, if not impossible, to predict and I would like to take the opportunity to complement our portfolio companies on the speed and decisiveness with which they responded to the crisis, which still continues on a global basis. The pretax NTA as at December 31 was $1.44 per share, and the post-tax was $1.34 per share, spread across 83 investments, including 21 unlisted or 22% of the portfolio. Over the past year, the ACQ investment portfolio has achieved a return of 18%, outperforming the benchmark, the Small Ordinaries Accumulation index by 20.4%. Encouragingly, we have seen an improvement in the share price relative to the NTA. ACQ is a listed investment company, providing investors with a unique opportunity to invest in Acorn's emerging growth strategy, not otherwise available to them. Acorn Capital's sustainable repeatable process is demonstrated with a 14.7% gross return since inception compared to a benchmark of 6.9%. In the last 12 months, ACQ has paid $0.075 a share in fully franked dividends, equating to a 5.3% yield at the closing share price on November 19, 2020. The LIC structure is suitable for providing access to an innovative listed but also unlisted companies in a single portfolio. The strategy is designed to deliver dividend income and capital growth. Risk is managed by diversification across industries and by different stages of development. Moving to dividends, ACQ has to date paid $0.257 per share in fully franked dividends since inception, with $0.075 over the last 12 months. A policy of sustainable dividends exists with the Board adopting a policy of paying at least 5% of the post-tax NTA annual dividends. The dividend reliability is supported by having $22.8 million in dividend reserves as at June 30, 2020, equivalent to $0.34 per share on the expanded share base. On 14 September, ACQ announced a 1 for 4 entitlement offer, providing shareholders the opportunity to acquire 1 new ordinary fully paid share in ACQ at a price of $1.10 per share for every 4 shares that they held. The shares issued under the entitlement offer were entitled to receive the $0.375 a share fully franked final dividend payable on the 27th of November 2020. The offer was strongly supported with over 900 individual shareholders participating, with $24.3 million in applications for the $14.7 million entitlement. The new shares commenced trading on the 14th of October, and we note the share price closed at $1.43 as at November 19, 2020. I would now like to hand over to Robert Bruce, Portfolio Manager, speak to the ACQ investment portfolio.

Thank you, Rob. And good morning, ladies and gentlemen. And thank you for your continued support. A portfolio update. The phrase, this time, it's different, comes to mind when looking at 2020 and the onset of the pandemic with a global impact not seen since the Spanish flu, a century ago. In the space of just 2 months, the microcap benchmark collapsed by 46% in 43 days from its peak at the end of January, the sharpest bear mark we have recorded. At Acorn Capital, we moved swiftly to stress test the portfolio and make necessary changes to the companies and sectors heading into a clear downturn. However, the Australian and global fiscal and monetary response combined led to an equally fast recovery, rising 93% by the end of October. I note that the S&P Small Ordinaries Accumulation index has recovered by a more moderate 65%, reflecting, in our view, a lower weighting in health care, IT and resources, which have all performed well since March. The portfolio has returned 29.5% net performance for the 4 months to the 31st of October 2020, with health care, industrials, ex capital goods and IT, all generating greater than 50% returns. The portfolio return of 18% for the year to 31 October, 2020, was pleasingly 20.4% above the S&P Small Ordinaries Accumulation index, which declined by 2.5% over the same period. The consistent performance of the proven strategy is seen with alpha generated over 1 to 5 years and also since inception. Since the start of the 2021 financial year, Aroa Biosurgery has successfully listed on the ASX on the 23rd of October. And ACQs largest investment, CleanSpace, also listed. Both of these are the significant premium to their IPO price. We remain optimistic about other unlisted holdings achieving liquidity events by the 31st of December 2021. Looking at structural growth and innovation, Acorn Capital continues to invest in areas of structural growth and companies that provide a sustainable competitive advantage often through innovation. It is well positioned in gold, health care, including med tech, the disruption of financial services and fintechs, battery minerals and clean energy as well as the ongoing digitalization of working and living conditions. The structural changes in growth and how we live, consume and work that have been -- that we've been investing in have accelerated massively with the onset of COVID. The ACQ portfolio is currently positioned to benefit both from the disruption of COVID, but also the acceleration of underlying industry trends with investments in e-commerce, online education, home fortification and modern digital communications. We believe that there are strong structural changes occurring in the health care sector, with the portfolio currently exposed to several themes we're investing in. Firstly, personalization of health care, where we have a holding in Telix, point-of-care diagnostic testing with an unlisted investment in Lumos Diagnostics. Reimbursement models moving to value-based funding. We think Aroa is well positioned to benefit from this shift and also novel therapeutic approaches to disease management. And we have positions in Immutep, Kazia and Ausbio. In 2016 to 2018, the electric vehicle metal boom was all about demand in China. We now see the next EV metal boom has been a globally driven one, seeing growing public awareness of climate change risk, mandatory government policies on emission standards, e.g., a ban on new petrol and diesel and hybrid cars in London from 2035. At least 30 new EV models scheduled for release in 2020 in Europe and the U.S. alone, Amazon buying 100,000 electric vans by 2024. Highlighting that electric vehicles are becoming cost-effective. We believe that the demand for specialty metals & minerals growth will be driven by advanced technologies, requiring higher purity metals and minerals like semiconductors and nanotubes. With the major banks burdened by legacy systems, high costs and increased regulatory scrutiny, there are a number of disruptors building growth and rapidly growing businesses like Moula Money in the SME lending market. Looking at Acorn's private investment capability. ACQ offers investors an opportunity to access some unique investment opportunities, not otherwise available to the broader market in a way that manages risk through portfolio diversification. Acorn Capital has spent 11 years proving its capital management in this space. Considerable returns have been driven by the recent listings of Aroa, Calix, CleanSpace and Telix. ACQ continues to hold significant investments in innovative private companies, including Cluey Learning, Moula, Elenium and Flare HR. ACQ currently holds 21 unlisted investments. It has achieved liquidity on another 22 investments with an average weighted uplift of 72%. Looking at the portfolio. This slide here provides some color around ACQ's investment portfolio. As at the 31st of October 2020, ACQ holds a total of 83 investments, 38% of the company's portfolio is held in the top 10 investments and 59% in the top 20 investments. We note that 9 of the top 10 investments are either current or were previously unlisted investments held by ACQ. This provides Acorn with a deep knowledge of these companies, their business propositions, growth potential and sustainable competitive advantage. ACQ first invested in Clean Space in 2015 at a $15 million valuation. We were attracted to the innovative product development and patented breath responsive positive pressure system technology. It is now benefiting from the strong demand for the protection of frontline health care workers, resulting in accelerated global sales. We really see this as a company-making event for CleanSpace, and following its strong IPO, clearly, the market also understands the great potential. Moula Money is a fintech company focused on capital solutions to small to medium businesses. Acorn Capital first invested in March 2017 and has seen the business grow into one of the largest nonbank SMB lending businesses in Australia. We are particularly excited by the potential of Moula, buy now, pay later solution, Moula Pay. We believe that Moula Pay is unique in its focus on SMBs and will pay -- will play an important role in increasing their access to capital. Telix is a global -- sorry, is a clinical-stage biotechnology company that is dedicated to developing a pipeline of advanced theranostic, which is diagnostic and therapeutic assets for a number of unmet needs in cancer care. The recent USD 25 million investment by China Grand Pharmaceutical and Health Care, lists our conviction and expands the addressable market in our investment case as well as removing the potential capital raising overhang. Next, Aroa Biosurgery is a commercial-stage soft tissue regeneration company. Aroa's core technology is derived from ovine for stomach and enables natural, high-quality tissue repair in an infection-resistant environment. The company has 5 approved and patented products that have a total addressable market in excess of USD 1.5 billion. The fifth largest investment RedBubble is unique on the ASX being a genuine global operator versus just an Australian online marketplace. RedBubble provides unique product to consumers, not otherwise available. And with revenue growing at 116% in the first quarter of FY '21, its sales volume is now generating significant operating leverage. While the COVID beneficiary, e-commerce is a strong structural trend and its biggest markets of Europe and the U.S.A. are far from easing restrictions. The portfolio is appropriately diversified across both industry and stage of development. And has significant exposure to resources, consumer discretionary, health care and industrial companies. As at the 31st of October 2020, 22% of the gross portfolio assets were in unlisted assets, Acorn Capital is actively considering a number of new unlisted investments in the areas of advanced manufacturing, software and medical technologies that will be potentially added to the portfolio in the next 3 to 4 months. We'd just like to reiterate what we believe are the benefits of ACQ. We believe that ACQ is an attractive investment option for investors. Firstly, ACQ has a proven strategy delivering outperformance since inception. Secondly, ACQ has an attractive income stream with a sustainable dividend yield. And finally, ACQ's strategy provides unique exposure to attractive emerging growth companies, who are capital hungry, creating strong potential returns in significant primary market opportunities. So thank you, investors, for your ongoing support, and we look forward to continuing to deliver returns for you.

Thanks, Rob, and thanks to the other Rob. Okay. Now turning to the formal items of business on the agenda. The notice of meeting has been made available to all shareholders and is available on the company's website. Rather than waiting until we have gone through each of the items of business in turn, I'm going to accept submitted questions on all items of the business now in the order that they were submitted, and we'll come to them in due course. I encourage you to submit a question on the online platform, if you haven't already done so. As I mentioned, the poll is open on all items. Proxy results for all items of business being voted on today will be displayed on your screen shortly. This will stay up for the remainder of the meeting just to allow a little more time for anyone who wishes to submit questions and complete their voting, I'm going to quickly go through the items of business and then take questions. 3 items of business are listed in the notice of meeting, 2 of them require a vote. As Chairman of the meeting, I confirm that I propose to vote all available proxies open to me in favor of the resolutions. The first item is the consideration of reports. This is -- item of business is to receive and consider the financial report of the company and the reports of the directors and auditor for the year ended June 30, 2020, as set out in the company's 2020 annual report. We don't have any questions as yet on that or others. The second item of business is the adoption of the Remuneration Report. Under the Australian Corporations Act, listed companies are required to include as part of their directors' report, a remuneration report, which includes specified information. A remuneration report to June 30, 2019, for the company is included in the annual report. The Corporations Act also requires companies to put to shareholders a nonbinding vote to enable shareholders to voice their opinion on matters included in the remuneration report. The company's remuneration report outlines remuneration policy and arrangements for the company's key management personnel. Now as the company has only non-executive directors and no employees, it therefore has no remuneration policy for employees. The Board unanimously recommends that shareholders vote in favor of the resolution to adopt the remuneration report, and I remove that the remuneration report for the year ended June 30, 2020, be adopted. Matt, are there any questions?

No. Sorry.