Australian Foundation Investment Company Limited (AFI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Australian Foundation Investment Company shareholders briefing conference call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host today, John Paterson, Chairman. Please go ahead, sir.

Thank you. Good morning. I'm John Paterson, the Chair of Australian Foundation Investment Company. Welcome to the shareholder briefing. As you'd be aware, until the onset of COVID, we had shareholder meetings around the state capital cities every March. We planned to try and restart these this time. Given COVID still remains a strong presence in the community, we've opted once again to hold a webinar, which we've done over the last 2 years. We are, however, very keen to resume our direct contact with you as soon as possible. At this point, we anticipate this to be next October in association with the Annual General Meeting. In turning to the details of today's webinar. I have joining me today Mark Freeman, Chief Executive and Managing Director; David Grace, Portfolio Manager from the Investment Team; Nga Lucas, from the Investment Team; Matthew Rowe, our Company Secretary; and Geoff Driver, General Manager, 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. If you're accessing by phone only, the PDF of the slides with page numbers is available on the website. Finally, please note, following the presentation, there will be time for questions and answers. You can ask your question either via the webcast or through the operator. I'll now make a few brief comments prior to the presentation. In investment markets, we are faced with issues that we haven't seen for some time. This includes rising inflation, particularly in the mining and food commodities, now flowing into wages due to full employment. We see a regional war in a developed part of the world and we face the prospect of quick interest rate rises. Your Chairman, having nearly 5 decades' experience in equity markets, feels that many of these things have a familiar ring to him. I saw the 1970s mining and agricultural price boom in a highly inflationary environment alongside sharp wages growth. I saw a gold price boom as Russia amassed forces to potentially invade Poland to quell the Solidarity movement in 1981. And I saw the bond market crash as the Fed quickly raised rates in 1974. What lessons seem relevant? In a quickly rising inflationary environment, business costs and prices do not move in tandem. Costs move first. So the August 2022 and February 2023 results periods may see some disappointing results. However, when inflation stabilizes at higher levels, managing cost increases becomes easier. Industries that are regulated or rely significantly on government funding will be particularly vulnerable as price increase relief is delayed significantly. These industries include aged care, private hospitals, private health insurance and some regulated utilities. The 1970s were characterized by buoyant markets for oil, metals, gold and food commodities. As we are seeing again, Australia is well placed in most commodities. The runway for metals used in decarbonization is strong and most likely will be long. But these cycles often have peaks that are not seen again. In 1981 at the end of such a run, [ Madison Mines ] was Australia's biggest stock by market capitalization, bigger than even the banks or BHP. That peak was never seen again. In 1981, there was a high risk that Russia was about to invade Poland to crush the solidarity movement in the Gdansk shipyards. Fortunately, that didn't occur. The current war in Ukraine will have prolonged effects on energy and food prices. It will also put greater urgency on Europe to replace fossil fuels with consequent benefits for metals such as lithium, copper, aluminum, et cetera. 1994 saw a sharp and unexpected series of interest rate rises. This impacted fixed interest markets particularly hard, but equities also experienced a sharp adjustment. However, equities responded strongly after that phase, but that is dependent on world economic growth remaining sound. Companies with strong business franchises, good pricing power and low gearing will be best-placed in such an environment. I'll now pass to Mark Freeman and his team, who will outline the fact that our portfolios are focused on those attributes.

Okay. Thanks, John, and good morning to everyone, and like John, it's disappointing that we are unable to do face-to-face meetings. And again, as John pointed out, hopefully, in October, we'll be out and about to meet our shareholders. So we'll move to the presentation, Slide 2. Just our usual disclaimer here to say we're here to talk about the company, not to give any advice. Then on to Slide 3, the agenda. I'll just give a bit of an introduction and talk through our objectives and a bit about the process we use for investing. Then I'll pass over to David Grace and Nga Lucas to talk through the portfolio and outlook. Moving to Slide 4. We've just incorporated photos of the investment team so you can see who we all are. They are real people and probably highlight the depth of experience within the group. On to Slide 5, just a bit about AFIC and the company. We primarily invest in Australian and New Zealand companies. And we look for quality businesses, taking a long-term view. We are the largest listed investment company on the ASX at around $8.7 billion, over 160,000 shareholders. And being a listed -- a public-listed company, shareholders have the benefit of full transparency and an independent Board of Directors that provides strong governance. Importantly, the shareholders own the management rights to the portfolio, so there is no external funds management business deriving any income from the portfolio. As such, the management expense ratio or the cost to shareholders is around 0.15% with no performance fees, and those obviously differentiate AFIC quite considerably from most of the portfolio management products out in the market. We are a long-term investor with low turnover. We do understand that tax has a negative impact on returns. So with our low turnover, we are trying to reduce the impact of tax to our investors. And we also aim to have a portfolio and share price that has lower volatility than the index, but also with stability and growth in the dividends we pay out. Just also to note, the same investment team manage 3 other funds, Djerriwarrh, Mirrabooka and AMCIL, which have different focus in terms of the area of the markets they look at. And this adds significantly to the effectiveness of the overall investment process and idea generation. So just moving to the next slide, Page 6. We always like to point this out, where is the share price in relation to the NTA so investors are very -- have a clear understanding of that relationship. So at the moment, you can see that the share price is trading at quite a significant premium. We can't control the share price, but we also want to make shareholders aware that, as I said, the share price is trading at quite a large differential to where the fair value is or the NTA of the portfolio stands. Just on to Slide 7 and 8. We'll go straight there, the objectives. So AFIC's focus is on having a diversified portfolio of primarily Australian, New Zealand stocks, seeking to provide attractive income and capital growth to shareholders over the medium to longer term. And we achieved this with low cost, low volatility than the market and with low portfolio turnover. So on a bit on the process on Page 9. As I pointed out, we're there for the long term, we're not traders of share prices. We're investors in businesses. And as such, what we're seeking to do is identify quality companies that have sound growth prospects, and we seek to buy them at reasonable prices. This supports our belief in the power of compounding returns from great businesses. Therefore, our research process is built on observing the key characteristics of the company that our experience indicates will produce strong investment returns. Now on to Slide 10. ESG is an important part of the investment process. It's not separate to what we do. It is actually integrated into our investment frameworks. So ESG factors are important inputs as we establish the quality and sustainability of a business. As a long-term investor, we seek to invest in companies that have strong governance and risk management processes, and this includes consideration of environmental and social risks. And we regularly review companies to ensure ongoing alignment with our frameworks. As part of this process, engagement with companies we invest in is important. Voting on resolutions is a part of that. It's a key function that a shareholder has to ensure better long-term returns and management of risk. We conduct our own evaluation of the merits of any shareholding resolution, but we do take input from proxy advisers, but we form our own opinions and vote accordingly. We will actively engage in companies when we have concerns if resolutions are not aligned with shareholder interest. And with that, I'll pass over to Dave and Nga to talk through the portfolio and markets.

Thanks, Mark, and good morning, everyone. So moving on to Slide 12, just to talk through current market conditions. The ASX 200 performed strongly in calendar year '21, up over 17%. It was the second year of strong market performance post the onset of COVID and reflected improved economic activity supporting strong corporate earnings. In calendar year '22 to date, the ASX 200 has declined 4.3%. At a sector level, there has been a significant rotation away from previous winners in information technology, consumer discretionary and health care into energy, utilities and materials/resources. The operating environment is now more challenging as strong economic growth is proving inflationary. Freight rates are rising and supply chains are constrained and a shortage of available workers in many industries is resulting in meaningful wage inflation, all this while central banks contemplate raising interest rising rates to cull inflation. The war in Ukraine is resulting in large increases in commodity prices as markets fear potential supply shortages. The net effect is the short-term earnings outlook for many companies is now less certain. Accordingly, investors want to pay lower prices reflective of this risk. As long-term investors, we've been using the recent sell-off in many quality companies to add to our existing holdings. The heightened short-term volatility is providing opportunities to add to our preferred companies at reasonable prices. Our focus, as always, remains the long-term opportunities for the companies that we invest into. Moving on to Slide 13. As mentioned earlier, the energy and resources sectors have rebounded sharply in calendar year '22. Given Russia is a meaningful producer of commodities, the war in Ukraine is sparking fears of supply shortages, particularly in oil, natural gas, coal and aluminum. The share prices of portfolio holdings BHP, Rio Tinto, Woodside and Santos have all rallied strongly in recent months. The chart on the slide shows the example of the 50-year performance of Brent oil. We know commodity prices are driven by hard-to-predict macroeconomic events. And accordingly, prices can fluctuate aggressively over the short term. The chart compares the spot oil price to the longer-term trend. Prices recently moved to 2x the 3-year moving average. This has only happened 5 times in the last 50 years. And like now, the first 4 were associated with a geopolitical event that threatened major supply disruption. It's impossible to predict how long the current disruption will last, but we know commodity prices are mean-reverting. Until the situation becomes clearer, for now, we are happy to hold on to our current commodity exposures. Regarding our holdings in the energy sector, production from Woodside and Santos is predominantly natural gas. We have long viewed natural gas as a transition fuel to renewable energy sources. Moving on to Slide 14. Markets will experience periods of uncertainty and heightened volatility from time to time. Despite this, the chart on the left-hand side shows, over the long term, share markets deliver meaningful growth to shareholders. The chart shows the recent pullback in markets is small in the context of long-term returns. We spoke to you in January at a results presentation that our view at the time was markets were fully valued. As the chart on the right-hand side shows, with the recent rotation, the earnings multiple of the market has reduced from extreme levels in December to something more reasonable today. Moving on to Slide 15. So this slide shows the relative performance of the portfolio against the ASX 200. Including franking, over the last 12 months, the portfolio delivered a return of 11.7%, slightly below the market return of 11.8%. Performance for the 3- and 5-year periods are ahead of the market with the 10-year performance slightly below, as shown on the right-hand side. The returns shown for the portfolio are on an after-tax basis. Tax has been a drag of approximately 0.7% in the last 12 months, following the realization of material capital gains in Milton Corporation and Sydney Airport as a result of recent takeovers of these companies. Moving on to Slide 16. In setting the portfolio, we're not attempting to capture all short-term swings in underlying economic conditions. With war in Ukraine and inflationary cost environment and challenging supply chain conditions, there remains a wide spread of potential outcomes for company earnings in the near term. We're investors in quality companies, companies that offer a sustainable competitive advantage that are well managed, generate growing free cash flow and have strong balance sheets. We look to buy and hold our investments. In later slides, Nga will talk about the benefit to shareholders of holding quality companies over the long term and the impact that compounding earnings growth provides. Often, the best buying opportunities in quality companies are during times of bad news. Following the recent market rotation, we are now seeing some value emerge for companies that meet our investment criteria. Shown on the slide are the companies in which we've increased our holdings in the last few months. All these companies generate attractive returns on capital and all have meaningful opportunities to continue investing while maintaining attractive returns. It's this investment that will drive earnings growth over our long-term investment horizon. So looking beyond the short-term market uncertainty. We know more cars will drive on Transurban's unique road network. More people require CSL's market-leading, life-saving therapies. More customers will require Goodman Group, one of the world's largest developers of warehouses, to build an industrial accommodation. More U.S. houses will be cladding James Hardie's market-leading products. And more people will require sleep treatment from ResMed. These companies have several attributes in common. All have a market leadership position, all generate really strong margins as a function of the pricing power that market leadership provides. All are well managed, all generate significant free cash flow and all have strong balance sheets. And finally, we often speak about the importance of dividends to total returns that shareholders receive. On the right-hand side, we show recent investment in companies where we believe earnings growth is set to improve. We believe all these companies will pay an increasing dividend profile over the medium term. So at this point, I'll hand to Nga to talk through portfolio positioning.

Thanks, David. On Slide 18, we provide a framework of how we construct the portfolio to achieve the dual aims of growth and income. Our approach to portfolio management is centered around identifying a specific purpose that each investment brings to the portfolio and how it contributes to meeting our dual investment objectives. Starting from the top of the slide. We look for companies with excellent long-term growth prospects and sustainable competitive advantage. We look to take meaningful overweight positions at reasonable prices. We are confident that companies in this category will drive long-term portfolio performance and view the recent pullbacks as an opportunity to top up quality stocks at lower prices. We believe businesses with dominant market positions, pricing power and quality management teams are better placed to navigate through volatile operating conditions and deliver superior growth and returns to shareholders. The second group of companies we look to invest in are ones that offer solid earnings growth and a growing stream of dividends. These businesses and their brands are likely familiar to you. They tend to be more established but play a very useful role in providing yield for our shareholders alongside the big dividend payers like the banks and resources stocks. In more volatile markets like we are experiencing, these provide a defensive and stabilizing element to the portfolio. And finally, in the tail of the portfolio, we take modest positions in companies that we think have the potential for significant long-term growth. Stocks like Netwealth, a leading independent investment portfolio -- platform; IDP, a leading international student placement and English language testing service provider; Temple & Webster, a pure online furniture and homewares retailer; FINEOS, a software provider for the life, accident and health insurance sector; and PEXA, Australia's leading cloud-based property settlements platform, to name a few. In the following slides, we want to illustrate the advantages of being a long-term investor through some examples. We look to identify good quality companies that we can invest in for the very long term, allow them to compound for us and add to those positions when others become too pessimistic. Starting with REA on Slide 19. REA, or realestate.com.au, is Australia's leading online real estate classified business that you would all be very familiar with. We've been shareholders in REA since 2016. AFIC's holding in REA has produced very strong returns for shareholders with an annualized return of 18.4% versus the index of 10.8% over the same period. We remain confident that REA can continue to grow over the long term by leveraging its dominant market position to extend services it offers customers and real estate agents. Longer term, they are looking to investments in Property Bureau in Southeast Asia, REA India and Move in the U.S. for future growth. The company is run by an experienced management team with a track record of generating high returns, strong cost control in downturns and a balance sheet that provides them with ample capacity to manage through any market condition. Over on to Slide 20. CSL is a global leader in the development of therapies to treat rare diseases and influenza. We have built our position in CSL over 23 years. Our holdings have delivered an annualized return of 20%, which is twice the return of the ASX 200. This is an incredible return for shareholders, which included $23 in dividends along the way. We think the long-term growth prospects for CSL remain strong. One of the key features of an investment in CSL has been the consistent delivery of a strong return on invested capital over many years. The company has an excellent track record of successful capital allocation both within its own business and externally from acquisitions. The company invests more than 10% of revenue in R&D with new product development a key driver of growth in the business. In December, CSL announced the acquisition of Vifor Pharma, a European-based midsized pharmaceutical company. Vifor's focus is the treatment of kidney disease and iron therapy, a step-up from CSL's core business. The market for both areas are forecast to grow substantially over the medium term. While the true value of the acquisition remains to be seen, we're highly encouraged by the strong track record of the CSL Board and management team successfully investing capital and delivering significant value for shareholders over a long period of time. Over on to Slide 21. We think Transurban is a great example of a stock that delivers growing dividends to our shareholders. As we have previously highlighted, we have been adding to our position in Transurban in recent times. Transurban owns a high-quality diversified toll road portfolio that has strong pricing power, resilient earnings and has long-term optionality. Management have done a good job growing the business through sensible growth projects while not overpaying for acquisitions. Dividends in FY '22 have been temporarily impacted by the extended Sydney and Melbourne lockdowns but we are starting to see evidence that traffic and earnings are starting to recover. Despite the headwinds created by the rising bond yield environment, we believe Transurban remains an excellent long-term cash flow and dividend generator for shareholders with a solid pipeline of potential future growth projects in Australia and North America. Slides 22 to 24 outline the top 30 holdings in the portfolio. We have provided this list before and include it here again for shareholders' reference. Should there be any questions in relation to any of the portfolio holdings, the team will be happy to answer these during Q&A. At this point, I'll hand back to Dave for some outlook comments.

Thanks, Nga. So moving on to Slide 26 with some outlook comments. Current operating environment for many companies is challenging. Cost inflation is widespread for both raw materials and labor. And supply chains are disrupted, leading to higher costs and reduced availability. While the demand environment in most sectors of the economy remains healthy, the full implications of the war in Ukraine and a slowing growth environment in China are yet to be determined. In our investments, we're less concerned about how our companies are performing in 3 months and focus our research efforts on how we think the company will be performing in 5 to 10 years. In the prevailing environment, it's reasonable to assume equity markets will remain volatile. However, often, these times present the best buying opportunities for quality companies that are well positioned to deliver many years of compounding earnings growth. So at this point, I'll hand to Mark for an update on our investment in international companies.

Thanks, Dave. And on to Slide 27, again, just a brief update, we've touched on this previously. We've invested about 1% of AFIC's funds, so a very small amount of the portfolio of, at the moment, around 39 stocks. So far, the performance has been very encouraging, but we take our time with these things, and we want to build out a track record. The process we're going through in terms of the portfolio of international stocks is to adopt the same approach we have with AFIC more broadly, which is to focus on high-quality companies with strong management teams, strong sustainable competitive advantage and often underpinned by long-term secular growth trends. But I think with that, we will now open up for questions.

Okay. Thanks, Mark. It's Geoff Driver speaking, I'll handle the coordination of the questions. So John, I might pass this one to you first in terms of, I guess, dividends and dividend policy. So the question is, "We all appreciate the consistency of dividends, but the yield has declined markedly. I guess the question is when are we going to think about start paying high dividends and wind down the dividend of reserve to some degree?" And before John answers that question, we'll probably get a question on the level of reserves of franking credits that we have. To cut a long story short, we probably have a year's worth of franking available, independent of any further dividends paid to us, can cover dividends. So John, I'll hand over to you.

Thanks, Geoff. Traditionally, we've aimed to pay pretty well all of our earnings out. But in the sort of immediate term, nothing more than that, taking the view that we would like the capital to continue to compound and grow for shareholders. When we earn additional franking credits, particularly from realization of things like our investment in Sydney Airport, we've found it very useful to keep those franking credits for a rainy day. So if you have a look at the GFC, if you have a look at the COVID setback, we've sustained dividends through those periods even though our earnings have fallen quite significantly below for a year or 2. So we think it is important to keep those to give you consistency of earnings through dividend stream rather than having a policy of topping up beyond our earnings over time.

I suppose the other point there is, John, that when -- we did dip into our reserves in a couple of previous occasions, both post the GFC and -- or during the GFC and also during the recent COVID decline in dividends that we receive. So the reserves actually have been used to support dividends over the last 12, 10 years.

Certainly, correct. Yes.

So I've got a few questions on individual stocks here. "Can we comment on Qube and NEXTDC?"

Yes, I'll start with Qube, thanks, Geoff. We don't own Qube in the portfolio. And the reason that we disposed of that, I think, towards the middle of last year, a large part of our investment case was really around the Moorebank inland port that Qube was developing in Metropolitan Sydney. So we saw a great opportunity for that to be a long-term transport interchange between rail and truck. With the company having sold out of that asset, the quality of the remaining assets, in our minds, had deteriorated. So we sold out of Qube to take those proceeds and invest into businesses where we felt that had better long-term growth prospects. And Nga, do you want to talk about NEXTDC?

Yes, I'll take that one. We have a good position in NEXTDC, and we like the business and the industry tailwinds that, that business has behind it. The use of data and the shift to cloud by corporates is a strong tailwind for them. Admittedly, the rising interest rate environment is a valuation headwind. But long term, we're confident in the assets being in good locations and the quality of the assets in the customer base is going to drive strong growth for the foreseeable future.

Okay. Thanks, Nga. And just whilst we're on stocks, Ramsay Health Care and Cochlear, any specific comments around those 2 as well, please?

Yes. We own both of those in the portfolio. We feel positive on Ramsay in a sense that it's been hampered over the last couple of years with elective surgeries having been canceled in all the geographies that it operates in. We're now starting to see that open up. So the restrictions around surgeries, particularly in Australia, are now starting to be eased. So that should see some volume growth come through for this company, which has been a particularly challenging period for them. Cochlear, we really like this business. It's got a fantastic market leadership position, invests significantly more in R&D than all of its competitors. That's really been able to maintain the position that it holds, which is around about 70% market share, so it's quite often bringing out the best products in the market. The underlying market appears to grow around 10% per annum. And Cochlear has been able to grow in line with that as a function of just how big their position in the market is. So we really like Cochlear and see it as a fantastic long-term opportunity in the portfolio.

Dave, I'll pass this question to you as well. "What are the main stocks, which -- what are the main stocks will have an impact on the high fuel prices current war? So what stocks in the portfolio will be impacted by these particularly high fuel prices?"

Yes, I think high energy prices really impact all parts of the economy. So we're keeping an eye out for how that flows through and we seem to be learning more and more about this every day. But certainly, high energy costs really impact pretty much every area. In terms of the positive situations, what we're seeing in oil and gas is a large spike in the oil price and the LNG price given the fear of supply shortages out of Russia. So we've seen a really strong run for Woodside and Santos within the portfolio. And we've spoken for a long time about the transition fuel that LNG will provide for these businesses as we move to renewables over time. I think the other thing on those businesses is this has come at a pretty good time for both of them in that they're going through mergers with Santos having merged with Oil Search, Woodside in the process of merging with BHP Petroleum has put both businesses' balance sheets in much better shape. It creates significant optionality around the timing of when they invest capital within their existing assets. And for both companies that are looking to sell down some of those assets, the environment of a high oil price gives them a better opportunity to be able to realize some capital. So that would be the two, Geoff, that I'd say that are favorably exposed and the negative is just the rising costs across most sectors of the economy.

Thanks, Dave. So a broader question around that someone's raised, future in terms of particularly the German experience, where a country that relies on another country for energy and is looking to move to more renewables. What does that mean in terms of Australia and energy security from its perspective, and particularly in terms of how we look at that from the portfolio side of things?

Yes. Long term, we'd say that this accelerates the push to renewable energy. We don't think that, that's going to happen anytime soon, but it certainly would put that on the agenda for those countries that probably weren't fast-tracking that. So we'd see that, that would be, I guess, the longer-term outcome. However, we still see the demand for LNG, in particular, will remain healthy over many, many years. So that transition fuel that I mentioned will be in high demand for quite some time before we can transition to renewables.

Thanks, Dave. So we have a question here, John, on potentially a share purchase plan. "Could we give a consideration of share purchase plan, particularly given that the share price is trading at such a high premium to NTA?" And the ability for people to gain more shares close to NTA is probably the behind that question.

Thanks, Geoff. Look, we have a look at this, I would say, at least once every 6 months. There are a number of considerations we have. One is -- the first question we have is -- for the investment team is if we raise more capital through an SPP, do they think they can invest it productively? Another consideration is the fact that because we're large and have a very low management expense ratio, there are no particular advantages to us in reducing that through having a bigger company. So that benefit doesn't exist in our case to any significant degree. And probably the other issue that we balance is because a share purchase plan is not a pro-rata issue, we need to be careful of the balance between the various shareholders on our register so that we're not diluting anyone. And I think it's fair to say, it's usually simpler if the share price is trading nearer to NTA than when it's at a particular extreme. But look, it's something we're open to and we look at regularly. And I imagine, from time to time, we will do so.

Thanks, John. [Operator Instructions] Operator, are there any questions on the telephone at this point of time?

I am showing no questions on the phone lines at this time.

Okay. Well, we'll continue on with the web questions. Yes, sorry. Please.

I'm sorry, we did just -- we just got a phone question. Would you like to take it first?

Okay. Yes, please. Thank you.

All right. And our first phone question comes from the line of [ Jeff Thomas with Longbore ].

[Audio Gap] On the international portfolio and what the long-term plan is for that. Because as Mark said, it only represents 1% of the portfolio, but I was wondering if the plan is to have that as separate entity because quite often, we prefer to invest in Australian shares and international shares separately.

Yes, thanks for the question. And it's just sort of been noting it that the intention is if we sort of build out a good track record, certainly can we develop our -- another LIC product. And really, the purpose of it would be, again, aligned with the way we approach our other 4 LICs, can we produce an investment product for shareholders that has very low cost compared to the alternatives in the market and with no performance fees and to be tax-aware, so low turnover. So if those sort of elements stack up, which we think we -- it could be, then there's a potential product. So at the moment, it's a very small part of the overall AFIC portfolio. But as I said, there are 39 very high-quality companies. So in that sense, we don't mind them at all being part of the AFIC portfolio. But again, as we stated, we want to keep building out a track record in the short term.

Thanks, Mark. Just any other questions from the operator on the phone?

I'm showing no further phone questions at this time.

Okay. I'll proceed with the web questions then. And so Woolworths Group, we received some Endeavour shares when that business was separated from Woolworths. David, what's the analysis of Endeavour? And perhaps you can comment on it, please?

Sure. Thanks, Geoff. We have sold our stake in Endeavour Group. So our thought process there is really just around the long-term concerns about pokies and what it represents as a percentage of the earnings within the hotels division for Endeavour Group. So we see Dan Murphy's has been a really strong business and really strong market share. But with pokies generating a large percentage -- or sorry, the pubs generating a large percentage of earnings from pokies business, we see that structurally challenged over the long term. So we have sold out of Endeavour Group.

All right. Thanks, Dave. And whilst you're in the hot seat, FINEOS, could you perhaps comment on FINEOS and what's happened to the share price over the last few months?

Thanks, Geoff, I'll take that one.

Okay. Thanks, Nga.

So just a reminder, FINEOS is a software to the life insurance industry, and they benefit from the trends of shifting to automating legacy tech platforms. And certainly, the stock has come off with the tech sell-off. And those that are less profitable are disproportionately impacted in the sell-off. Add to that, FINEOS had some COVID impacting the timing of project delivery and service revenues. So the stock's back to attractive levels. And we note recently the founder and CEO was buying in the market. But longer term, we're very comfortable with the long-term growth in that business.

Yes. And I think just in context, so FINEOS is a very small holding within the portfolio. And it's the nature of sort of startup technology businesses, is there is a lot of volatility around their earnings but also the share prices. So with the rotation that we've seen in the market in the last few months, we've seen FINEOS fall quite aggressively over that period. We don't feel this is anything structural. We really like the business for all the reasons that Nga pointed out.

All right. Thank you, David. A question on, I guess, a broader issue around the investment approach. Do we look at sectorial diversification or is it a matter of finding quality stocks irrespective of the impact on the diversification of the overall portfolio?

Thanks, Geoff. So we absolutely do. We think about it in the context of the objectives that we're trying to deliver for shareholders. So we're trying to deliver attractive returns over the medium to long term, but we're also conscious of trying to pay a growing dividend profile over the medium to long term. So in that regard, we'll have a mix of companies that are in the portfolio for their growth attributes. And we also have a mix of companies really there for the purpose of income. So trying to deliver on both of those objectives really allows us to have quite a broad spread across all sectors of the economy and really capturing the growth and income attributes to be able to deliver on those.

Thanks, Dave. We've got a question here about the management fees of AFIC. Can we explain them? I'll just quickly make a couple of comments. The management fees, as Mark said, there's actually no external management fee. It's basically a recovery of costs, both in terms of employing the staff through our AICS, the management -- or the company that sort of houses the investment team and the rest of the staff, and the other costs are really made up from cost of the shareholder base, the cost of other administration fees, those sorts of things. So there's no exclusive, no percentage base fee going back to any external party in terms of managing the portfolio. That's why they're actually so low. But John or Mark, did you want to make any further comments on that?

Probably the only comment I would make, sitting behind that in any investment operation is -- the main cost is the wages of our investment team and our executives and staff. We make sure that we've got highest-quality staff, they're well paid. But we are careful not to try and match some of the people in the industry who pay very high wages and salaries and bonuses during boom periods. The other aspect is the structure of having 4 companies, AFIC probably doesn't get a lot of necessarily cost advantages out of that, but we do get a big advantage of having specialist small-cap people, specialists in options and other characteristics that add to the performance of the portfolio.

David, just so I might pass this question to you. So obviously have CSL and realestate.com in the portfolio have done very well relative to the index, which means there's probably been some that haven't done so well in the portfolio. Perhaps you'd like to comment on those. And secondly, as part of this question, did we sell our Milton or keep the Soul Pattinson shares that were on offer?

Sure, thanks, Geoff. So there's a number of things in the portfolio that we haven't heard that have done particularly well. So in recent times, I think about the drag on performance has just been -- so resources that have done well, where we are underweight that sector. So that would be offsetting some of those gains that we've had in CSL and REA. And then thinking over the long term, there's a meaningful holding in the banks. From a capital growth point of view has been a drag long term for the portfolio. But as I spoke to earlier, they're providing really meaningful income to the portfolio that it's enabling us to pay the level of dividends that we do. In relation to Milton, we elected to take cash. So at the time of that transaction, the Soul share price was trading, I think, a 35% to 40% premium to NTA. And much as we point out, with the AFIC share price, we believe the share price should broadly track the underlying asset base. So at that point in time, with that premium, we felt the right thing was to take the cash, given too much risk on the capital side, and we could then invest those proceeds into better opportunities.

Thanks, Dave. So I have a question here, John, about potentially paying quarterly dividends or distribution of dividends, like some ETFs and some LICs, NAREITs are starting to do. Do you have any comment on that, please?

Look, this is a question that comes up quite regularly. We've looked at this. One of the things when you've got a share register of about 160,000 people, there are costs every time you pay a dividend. And so we think twice a year is actually a good balance of providing income to our shareholders without having a cost effect. So we've tended to say no to the concept of more than twice a year, but we think that's pretty useful for our shareholders.

A comment or question here about Auckland Airport, how it was looking pretty good pre-COVID, perhaps maybe less so now. But David, do you want to make any further comments on Auckland Airport? Or Nga?

Yes, thank you. Our view on Auckland Airport is that you want to be buying airport assets at a time when people aren't flying. So our view is that the travel or certainly a large percentage of travel will return and that this business remains really well positioned to be able to benefit from that. So it's a freehold asset, which is unique in the infrastructure world. It's the gateway to New Zealand. Once travel does pick up, we certainly feel confident that it will on the leisure side, maybe not to the same degree on the corporate or business side. But we still feel the asset will deliver quite meaningful earnings growth over the medium to long term as travel returns.

Thanks, David. So I have a question here about our position in BHP and our underway position. Is that likely to change given it was close to market weight prior to the dual-listing collapse recently?

Yes. No, thanks, Geoff. So we were overweight prior to the DLC collapse. With that event, the index weight of BHP increased to around 3.8%. So we haven't bought any more shares since then. We were a buyer late last year at below $40. But with the index event, with the strong run in commodity prices really driven by the conflict in Ukraine, at these levels, we're not looking to add to our holding in BHP. However, we feel this is a fantastic business. Its operations are performing incredibly well. It's got a really strong balance sheet and operating Tier 1 low-cost assets. So we do really like the business, but valuation at current levels is holding us back from adding to that holding. But if the share price was to fall from here, we'd be happy to reassess that.

And I'd just add another comment. We -- while we do look at the index, we're basically stocked because -- and when you look at Slide 22, you can see BHP actually is the second-biggest holding in our portfolio. So while it might be underweight the index, we actually have it as one of our biggest holdings at the current time.

Thanks, John. A comment on one of the stocks we don't have in the portfolio, Lendlease. Any comments there from David or Nga on this particular company?

We have followed it very closely. The company is going through quite a meaningful transition as it seeks to have more of the business coming from these urban renewal projects. So those projects have been particularly successful while they're a smaller part of the business, but that transition is expected to happen over the course of the next 2 to 3 years. So we're just watching how that unfolds. In the current environment with what's happening with construction costs and inflation, it's challenging for a property developer to be able to deliver meaningful returns. So we have owned it in the past. We think if they get this transition right, it could be something that would be of interest to us, but there's just too many challenges, in our view, to get through before it would be attractive to us.

Okay. Thanks, David. Just checking with the operator, I don't know if there are any further telephone questions.

We do have a question from the line of [ Andrew Prior ].

Yes. Just a question, realizing the significant holdings in BHP and Rio, but no holdings in Fortescue Metals. Have you got any comments on that?

Sure. We feel BHP and Rio, being high-grade products, are in a better position than Fortescue in relation to the iron ore and also the diversified nature of BHP and Rio is attractive to us with Fortescue being a pure-play iron ore producer. The other thing that holds us back on Fortescue is just the level of investment that they're doing in FFI or the future-facing industries is quite significant in the context of Fortescue. And we're struggling to see what sort of return profile that investment is going to generate for shareholders. So we see BHP and Rio being favorable on both those metrics.

I'll just add to that, we are expecting iron ore to come out of Guinea at some point in the future. It's a reasonable-sized resource, and it's actually very high-quality iron ore, so you're going to have more high-quality iron ore coming into the market. It is becoming an increasing focus, particularly from the steel manufacturers as the world focuses more on emissions and the demand for high-quality iron ore goes up. So we have seen in the past a range of pricing or the spread between high- and low-quality iron ore can vary quite a lot. So again, taking that longer-term view, sort of our bias has been with the companies that have the highest-quality iron ore.

Thanks, Mark. We've got a very broad question here about the potential of the upcoming election and potentially an ALP victory. What could be the likely impact on key stocks within the portfolio?

Look, I'll have a little go this. I don't know if I'm an expert on this. Elections traditionally are a little bit disruptive to economies. People tend to be a bit more cautious on spending. So may not be helpful in the coming 2 or 3 months. I think when you've got a government that is running significant budget deficits, there may be some sweeteners in the election, but it's difficult to see anything that will be major change to -- and structurally to benefit or be averse to our companies in the short to medium term. So it's something we have to live with, but I don't think you could see definitive changes that will impact our stocks.

I will say, one thing to that is just to remember last time, there was the issue around franking credits and proposed changes to franking credits, and there was concern about then if there was a change to the approach to franking credits, which sectors in the market would that impact. And if you look at the banks, most of the return there comes from the dividend you received in the franking credits. Obviously, that became -- I mean, we are obviously very public about that in our support of maintaining the current approach. We presented it in front of the inquiry to present the view from the shareholders' perspective and how important it is to shareholders, particularly in retirement, so we haven't changed our view. So I'd just flag, be on the lookout for that. And it did become quite a big issue in the last election. However, we've seen this come up time and time again, and I expect it will come up again in the future. So I would advise our shareholders to be diligent and to make sure if you get any sense of a change in view, if you support the current franking credit policy, make sure you express yourselves, get the word out there to your local politician, and we'll certainly be keeping a watch on it as well.

Thanks, Mark. A couple of questions or one question here, John, about what are our current thoughts on how the other LICs are performing in comparison to AFIC, noting a few of them have increased their dividends in the last payment while AFIC didn't.

Well, I think quite a lot of the ones that are in a trust structure effectively distribute capital gains and have to under tax laws. So they tend to have higher distributions during buoyant periods. They have more volatility in distributions. So they are sort of a different group from what you would say the traditional longer-term groups like ourselves and Argo and originally Milton, which have more stable dividend flows, but yes, good dividend growth over the longer term. So I think our view is that AFIC is a product that is a combination of a good yield and capital growth. And I think the capital growth is important for our shareholders.

I'll just add to that, Geoff. We do always have to remember that when we have down periods in the market, we've had a track record of sustaining our dividend where we see others around us cut. But then we face the problem that in subsequent years, we see that our competitors lifting and growing their dividends off a cut level whereas we try and sustain that and provide a more consistent flow. So we often get that feedback there. The other thing I'd like to point out too is that we paid a special dividend, I think, it was pre the last...

Early last year.

2019, I think it was, yes.

Yes, which is quite substantial. And so you really have to look at those 2 answers, the special we paid and the fact that we sustained a high level through the downtimes, and look at a longer-term comparison with our peers. But when you look at that basis, I think it's been okay.

Yes. Thank you, Mark. Comment on Mainfreight and the impact on increased fuel prices on its business?

Yes. Thanks, Geoff. Mainfreight is benefiting from very strong demand in the logistics space and a very strong pricing environment. Just a reminder that they use owner-drivers who drive their own trucks. Also note that the environment has been very good for them to pass on pricing increases because customers really are just keen to get their freight to their locations.

Thank you, Nga. A question here on the share price premium to NTA. What level of premium is considered reasonable, bearing in mind that most LICs are trading at discounts? Well, I think as we pointed earlier on, we're certainly not comfortable with very, very high premiums, as Mark showed in that chart earlier on in the presentation. I think it's, in some ways, testament to the, I guess, the dividend policy and keeping dividends consistent that the premium has been in place more recently. And I think also the fact that we've got over 160,000 shareholders. So there is ongoing demand and liquidity in the shares that certainly helps provide support when the share price gets closer to NTA. But as Mark said earlier on, I think we were a little bit uncomfortable with the share price trading at quite a significant premium as it is at the moment.

But I think the long-term average, Geoff, has been about 2% to 3% as opposed to 3%.

Yes, that's right.

That's where we are. That -- I mean, the market makes that view. But yes, I just want to reiterate what Geoff said, it does make us somewhat uncomfortable.

Yes, I think also when the market moves so quickly, as it did over the last couple of months, the share price tends to change a little bit later on as well. So you can get those in the month periods where in fact it is trading at quite a large premium, but over time, it moves back to a more reasonable level. I note we're just coming up to 11:00. Operator, is there any other questions on the phone?

I'm showing no further questions on the phone line.

Okay. So one last question. I guess it's again a little bit out of left field, David or Mark or Nga. Our investments in renewables or alternative energy, I've got a question here on wave power, I've got a question here on clean tech -- coal, I should say, clean coal tech. In general, what are the opportunities around sort of emerging energy markets or sectors?

Yes. Thanks, Geoff. Really early days on the technologies you're talking about. So that we're keeping an eye on it. It's not easy to get exposure on the ASX to many of those technologies. I said a lot of these things are unproven at this stage, so we'll continue to monitor it. Our exposure in the portfolio, I think, best comes from our holding in Macquarie Group and really what they're doing on the renewable space. So this flows from the Green Bank investment that they made where they bought that business off the U.K. government in 2016 and Macquarie is clearly involved in most of the offshore wind farms that are now been established in Europe. So they've been able to take what was a U.K.-centric business. They've now been able to invest and develop a number of projects within the U.S. and also into Asian markets. So we see that as a really exciting long-term opportunity for Macquarie, but really just too early on many other technologies, but we are keeping an eye on them.

Thanks, David. I got a question now on WiseTech. Could you give us a bit of an update on how that's going?

Yes. Thanks, Geoff. Yes, we did talk about WiseTech as being a new investment. We dabbled in a little bit. Then since then, the market has fallen away, and there's been a lot of opportunities in a lot of other stocks as well. So we're still watching that very closely. And we like the long-term prospects that -- yes, always weighing up the different opportunities out in the market and with an eye on value.

Thank you, Nga. A question on the international portfolio. There's a few come through, Mark, in terms of what are the international shares we're invested in and noticed that, in fact, they increased our investment over the last 6 months in the portfolio. Just to note for people that the full list of holdings in the international are in our half year review, which was let out in February with the dividend payment. So there is information there. But Mark, do you have any further comments on that?

Yes. And obviously, we're nearly in April, so in July, we'll have our next annual report out and the full list will be in that. Yes, look, we always said sort of 1% to 1.5% of the portfolio, the AFIC portfolio, would be a good amount to have in it. And I said, we're at around 1% at the moment. So there's capacity to do a little bit more, but the team are really looking for, I guess, opportunities to see some -- we're seeing some better value in markets, then we'll certainly put a little bit more in. And the other thing I'd just add to it as well is that as it stands, we're -- many of our companies, even in the AFIC portfolio, are really global businesses these days. So if you look at the likes of ResMed, CSL, Sonic, Macquarie, James Hardie, the list goes on and on, these are really international stocks. So to have a focus elsewhere in the market on international companies, it adds a lot to the overall team in getting feedback and views of what's happening in the world and what other businesses are doing. So it's important to have those skills. So it's an extra element it brings to the group. But as I said, we need to just look at the track record and build out that first.

Okay. Thank you, Mark. Just we have gone past 11. So I think we'll get to the end of the questions. Any other questions that have been sent through, we haven't had a chance to get through, we will respond via e-mail to you. So with that, John, I'll hand back to you to close the meeting.

Thanks, Geoff. Look, I'd like to thank all our shareholders and people on the presentation for your participation and your questions. We value that experience. We like to hear what's worrying you or what things you, clearly, you'd like to know more about. If at all feasible, we hope to see you in person in October. That's usually our preferred model, but hasn't been the case in the last 2 years. So again, thank you very much, and we will finish up now.

This concludes today's conference call. Thank you for participating. You may now disconnect.