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

Thank you all for standing by, and welcome to the Australian Foundation Investment Company's full year financial results briefing. [Operator Instructions] Please be advised that today's conference is being recorded. And I'd now like to hand the conference over to your speaker, CEO, Mark Freeman. Thank you. Please go ahead.

Well, good afternoon, everyone. I'm Mark Freeman, the CEO and Managing Director of the Australian Foundation Investment Company. Welcome to this full year result briefing. I would like to begin by acknowledging the traditional owners and custodians from all the lands we are gathered on today and pay my respects to their elders, both past, present and emerging. I have joining me today on the webinar, David Grace, our portfolio manager from the investment team; Nga Lucas from the investment team; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; and Geoff Driver, GM 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. If you are 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 a question either via the webcast or through the operator. I'll now start the presentation, and the team will then run through the remainder of the presentation before we turn to the question-and-answer session. So just moving to the slides. Slide 2, we have our usual disclaimer just saying we're here to talk about the company, we're not here to give advice. Just moving to Slide 3, the agenda. After I've talked through a few slides, I'll pass to Andrew Porter to talk about the financial results. And then David and Nga will talk through the portfolio, the activity and the outlook. So moving on to Slide 5, just a reminder about AFIC. We primarily invest in Australian and New Zealand companies. We're the largest listed investment company on the ASX with over 160,000 shareholders with an independent Board of Directors. Importantly, the shareholders own the management rights to the portfolio. An outcome of that is a very low management expense ratio at 0.16% with no performance fees. We're a long-term investor with low turnover because we want to be tax effective. We also want a portfolio and share price that has returns that are less volatile than the index and with a history of stable and growing fully franked dividends. And just to let everyone know, the team also manages 3 other LICs being Djerriwarrh Investments, Mirrabooka and AMCIL. And moving on to Slide 6, the investment objectives. The company aims to provide shareholders with attractive investment returns through access to a growing stream of fully franked dividends as well as growth in the capital. Our primary objectives are to pay dividends, which, over time, grow faster than the rate of inflation; and to provide attractive total returns over the medium to longer term. And with that, I'll pass over to Andrew Porter to talk through the results.

Thank you, Mark, and good afternoon, ladies and gentlemen. So we're on Page 8 now, which we'll quickly run through. This highlights the results for the year. The first figure you see on the top left-hand corner, $360.6 million. So that indicates a profit up 53.4%. Now as ever, in accounting terms, it's not as straightforward as that. There is a $75 million of a merger dividend that we received when Woodside and BHP Petroleum merged. If you strip that out because that's a one-off event, then the profit was just under $286 million, so $0.233. Now that's still up 44% on last year's same basis figure, which indicates and shows the recovery of dividends that we had since that first drop-off when COVID hit. So at $0.233, that excludes realized gains. That's just the profit figure. The realized gains for the year amount to something like $0.106. The reason I'm highlighting this $0.233 figure is you'll see that is still below the dividend that we paid out. So we were once again using reserves, which includes that $0.106, $0.07 worth to top up the dividend. So dividend maintained at $0.24 shareholder return. So that is the shares plus the dividends assumed to be reinvested plus franking is slightly above breakeven, so 0.1%, and I'll come on to that later on and you can see the effect growth there. The portfolio return, down 6.8%. So that compared to the index of down 5.1%. This is just a 1 year's figure. If you look, last year was an outperformance and our longer-term performance still in terms of the 3 and 5 years, et cetera, are outperforming. So we're pretty happy, I would say content with where we are at the moment, and we believe we're well placed and David and I will come on to the reasoning behind that. Management expense ratio Mark has talked about, 0.16%. So that's $0.16 for every $100 invested. Yes, that is up on last year. There are a number of reasons for that. And in fact, last year, in the annual report in the AGM we called that out and said it was likely to increase. Part of that is having the international team on for a full year. They were only onboard for the part of the year last year. And the other part of that is, this is a calculation that is derived from the size of the portfolio. So when you have portfolio shrinking as it did in the second half of the year, that has an impact on the MER. And you can see that shrinkage in the figure on the bottom right-hand corner, the total portfolio, $8.2 billion, down at the end -- from the end of 2021 -- or financial year 2021, I should say, of $9.1 billion. So if you then look at the next slide, you'll see the premium or discount chart. So at the end of June, we were at a premium of 13%, and that was up from a premium of 5% the year before. And that reflects that disparity between the portfolio return and the shareholder return. And I should just point out, this is at a moment in time. This is as at the close of market on -- at the end of each month. So when you look at what that NTA figures and what the share price is today or yesterday, there has, of course, been market movement between there. So hopefully, that's come through. One thing I will mention because I know shareholders are interested in it, as a result of those extra dividends unrealized gains, at the end of June, including the tax that we would have to pay, we had essentially $0.37 worth of franked dividend that we could pay after the payment that was announced to the final dividend. So we would say that we are comfortably placed to be able to continue to support that dividend that we'll have in the future. But at the moment, we're comfortably placed. So with that, David? I'll hand over to the portfolio manager, David Grace.

Thank you, Andrew, and good afternoon, everybody. So moving on to Slide 11. The chart on this slide shows performance of the ASX200 over the last 3 years. The operating environment for companies over this period has been as challenging as we have seen for some time. In some ways, this is a typical economic cycle. However, what is not typical is how quickly this cycle has played out and the catalysts that have driven it. But on the onset of COVID in 2020, governments and central banks globally deployed procyclical policies to stimulate economic growth. Policies had the desired effect with the share market rallying strongly over the following 18 months. Easing policy, when coupled with tight supply chains, led to rapid inflation to the point where we're now seeing policy tightening and interest rates moving higher. Equity markets are always forward-looking. In anticipation of slowing economic growth, the share market has fallen sharply over the last 6 months. What we have seen is a transition for company earnings from FY '22, which still benefited from stimulus to FY '23, where economic growth is slowing. We want to stress that the balance sheets of the companies we own within the portfolio remain in very strong shape. We'll show some charts on a later slide showing that the valuation of the market is quickly adjusting to more reasonable levels. In managing the AFIC portfolio, we're not trying to pick economic cycles. The events of the last 3 years highlight how extremely difficult this can be. Even as we stand here today, the range of potential outcomes for the next 3 years is, in our mind, impossible to pick. We're long-term investors in quality companies, companies that own strategic assets, run by capable management teams and Boards and with balance sheets in strong shape able to self-fund their growth. In our experience, these companies deliver earnings growth over the long term regardless of any changes in the operating environment. Moving on to Slide 12. The pie chart shows portfolio diversification as we look to build a portfolio able to perform in a variety of economic environments. We want a mix of growth companies holding market leadership positions where long-term growth prospects remain strong. For example, Goodman Group, CSL, James Hardie and realestate.com. Cyclicals with strong balance sheets, favorably exposed to long-term economic growth, including resource companies, BHP and Rio Tinto. Stalwarts, companies owning difficult-to-replicate strategic assets, well positioned to deliver long-term earnings growth. These include the likes of Transurban, Wesfarmers, Auckland Airport and Woolworths. And finally, income stocks, companies with an attractive dividend yield as dividends play an important role in total shareholder returns. These include the banks, Telstra, Mirvac and JB Hi-Fi. As we look to deliver our investment objectives, we want to understand the attributes of each company and what purpose they bring to the portfolio. Maintaining appropriate diversification across these 4 factors allows the portfolio to perform under various scenarios. Moving on to Slide 13. Chart on the left-hand side shows the relative performance of the portfolio against the ASX200 over various time periods. Including franking over the last 12 months, the market declined 5.1% while the portfolio delivered a return of negative 6.8%. As a reminder, returns to the portfolio was shown after tax and expenses. Tax was a particularly large drag on performance during the year as a result of the takeover of long-held investments, Sydney Airport and Milton Corporation. We are pleased with the longer-term performance, particularly for 3 and 5 years, with both exceeding market returns. As we highlighted earlier, the variability of the operating environment over this time period has been as volatile as we have seen for some time. Chart on the right-hand side splits market performance by sector over the last 12 months. Utilities and energy were the best performing with supply shortages following the Russian invasion of Ukraine leading to a jump in oil and LNG prices. Both sectors are highly cyclical and trade around commodity prices. The materials sector led by resources outperformed the ASX200 with coal and lithium companies performing best. Banks were down 9%, underperforming the market return of negative 6%. As we highlighted earlier, operating conditions remained volatile with investor rotations in the market being accelerated. With interest rates now rising, sectors most exposed to slowing economic growth have fallen sharply in recent weeks, namely, the resources sector. We've used the recent sharp sell-off to add to our holding in BHP. Large declines in the information technology and consumer discretionary sectors were the biggest drag on market performance. Valuations in the information technology sector had reached extreme levels last year to a point where risk was being mispriced. While many of these companies have disruptive technology, the market is now starting to appreciate the level of investment required as they attempt to achieve scale while negative real wage growth has weighed on the consumer discretionary sector with a rise in the cost of living, reducing consumer demand for discretionary items. Moving on to Slide 14. The charts on this slide are a high-level view of overall valuation for the ASX200. We've shown both price to book and price to sales over the last 20 years. They are examples of charts we look at to quickly gauge the prevailing market valuation in a long-term context. Although they aren't peak stocks for us, they're helpful to understand market sentiments particularly investor risk appetite towards the broader market. On both measures, the market was fully priced at the end of 2021 with both price to book and price to sales well above long-term averages. Interest rates were still at very low levels with economic growth healthy. The recent market sell-off following interest rate rises has seen both measures move closer to their long-term average. While the starting point on valuation today is more in line, the outlook for earnings growth is more challenging as earnings move from stimulus benefits to a slowing economic environment. Our focus remains the fundamentals of the companies we invest into. Selectively, buying opportunities are emerging for several high-quality companies that, in our view, are attractive prices where the long-term opportunity remains significant. Now we'll talk to a number of these in an upcoming slide. Moving on to Slide 15. So the chart on this page shows performance of the ASX All Ordinaries index going back 80 years to 1940. We wanted to give some long-term context of the general trend in market performance from the bottom left to the top right-hand corner. Over the period, despite world wars, stock market crashes, the GFC and the onset of COVID, the All Ords has delivered an average growth rate pre-dividends of 5.8% per annum. Equity markets always face challenges from external events. The chart shows sharp pullbacks in equity markets is not uncommon. And when they occur, markets typically recover quickly. These events cannot be predicted and their impact on market performance varies. We don't profess to have the skills to frequently trade our company holdings around unpredictable economic events. However, we take comfort that over the very long term, equity markets deliver positive returns for shareholders. As history shows, buying in times of bad news delivers good returns for long-term shareholders. We want to be holders of quality companies that own strategic assets, positioning them well to maintain earnings growth despite the changing operating environment. At this point, I'll hand over to Nga to talk through recent portfolio activity.

Thanks, Dave. Good afternoon, ladies and gentlemen. Moving over to Slide 17, which outlines recent portfolio changes. The companies listed on the far left-hand side show businesses we have exited during the period. The decision to exit Qube and Endeavour Group reflects 1 of 2 views: we either consider the competitive environment is set to become significantly more intense or there is a structural shift occurring in the industry where the company is set to be at a competitive disadvantage. Sydney Airport and Milton Corporation were sold as a result of successful takeovers. On the far right-hand side, we show existing holdings that we have added to in the last 12 months. As highlighted previously by Dave, we look for buying opportunities in quality businesses that provide a range of attributes to the portfolio. Short-term share price weakness gave us the opportunity to add to our holdings in Transurban, CSL, Goodman Group, James Hardie, Domino's Pizza, Auckland Airport, REA Group, Carsales and BHP. We consider all to be high-quality companies that generate significant free cash flow run by strong management teams and have strong balance sheet able to fund future growth. Going into a little bit more detail with a few of these stocks. Auckland Airport is a high-quality infrastructure asset with capacity for long-term growth. We view Auckland Airport as an example of a stalwart investment. The freehold nature of Auckland Airport and its large undeveloped land bank sets it apart from other infrastructure assets. We think global aviation will progressively recover post-COVID. Airport profitability should broadly recover in line with passenger growth. The balance sheet is solid, and we are comfortable with the transition to a new CEO. CSL is an example of a growth business. We think the long-term growth prospects for CSL remains strong. CSL is a global leader in the development of therapies to treat rare diseases and influenza. The company invests more than 10% of revenue in R&D, which is a key driver of new business growth. 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. 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 in successfully investing capital and delivering significant value for shareholders over a long period of time. BHP is a cyclical company. In recent months, investors have become increasingly concerned about the slowing global growth. This has been a sharp fall in the resources sector as demand for commodities closely follows economic growth. We've used the share price weakness to add to our holding in BHP, a world-class operator of Tier 1 low-cost mines. While in the near term, Chinese economic growth remains uncertain, recent buying of BHP reflects a reasonable valuation, particularly in light of the company's near net cash balance sheet. In the new purchases column, we initiated positions in JB Hi-Fi, Mirvac and WiseTech during the year. All 3 businesses are leaders in their respective industries, and in the case of Mirvac and JB Hi-Fi, provide good income to the portfolio, and in the case of WiseTech, exposure to strong growth. Over on to Slide 18. We often talk about quality companies and our preference to invest in them long term. What do we mean by this? And why are quality companies such good compounders? Investing over the long term and creating shareholder value is ultimately driven by a company's ability to maintain earnings growth over an extended time horizon. Our investment process is designed to identify these quality companies, and when bought at reasonable value, can deliver outstanding returns to shareholders. We highlight 2 companies that have long been held within the AFIC portfolio, both of which have been excellent investments. Despite operating through numerous economic cycles, competitive threats, changes of company management and periods of overvaluation and undervaluation, both companies have been able to maintain a successful track record of earnings growth over the long term. We put this success down to management's focused efforts of investing in product innovation, which leads to increasing competitive advantage and growing free cash flow. This virtuous process, when sustained over time, makes it extremely difficult and expensive for competitors to try to enter the market or to compete against them. Many have tried and many have been unsuccessful over the years. Starting with ResMed on the left-hand side. ResMed earnings are up 18x over the last 20 years. ResMed is the market leader in the treatment of obstructive sleep apnea or OSA. ResMed has evolved from a small industry player 15 years ago to currently having more than 50% market share. They have been able to grow their share of the market and accelerate their market dominance via continued product innovation and investment. Generating consistent and strong free cash flow, ResMed maintains heavy investment in developing market-leading products and raising consumer awareness of the condition. ResMed estimates that OSA remains more than 80% undiagnosed providing a large unmet market for them to pursue. Long-term industry growth rates are forecasted around 7% to 8% per annum, and the opportunity for ResMed as the market leader remains significant. We rate the management team highly who have developed a long and successful track record of capital allocation, driving return on invested capital higher. Our second example is Carsales on the right-hand side. Carsales earnings are up over 4x over the last 12 years. Carsales is Australia's leading used car online classifieds business. The company operates what is known as an online marketplace. Marketplace businesses are notoriously difficult to disrupt as it requires scaling up both sides of the marketplace, in this case, buyers and sellers of used cars. The strength of the Carsales marketplace is a result of decades-long investment in brand awareness and product innovation for dealers and consumers. Carsales have a 5x audience lead over its nearest competitor and continually innovates on products that help dealers sell more cars at a higher gross margin. The value created for dealers translates to strong cash flow generation for the business. In recent years, the business has successfully expanded overseas via a number of acquisitions, including Encar in South Korea, a 30% stake in WebMotors in Brazil, and more recently, Trader Interactive in the U.S. As a result, Carsales have been able to cross-pollinate product innovation from these different regions and adopt them across their portfolio, staying ahead of the competition and industry trends whilst accelerating growth. We hope that these 2 examples help illustrate what a quality company is and why we are confident that when bought well, they can provide great returns to AFIC shareholders over the long term. I'll now hand back to Dave for some outlook comments.

Thanks, Nga. So moving on to Slide 20. We've highlighted the operating environment for many companies remains uncertain. Hopefully, the presentation has outlined we look to identify quality companies, hold them in a meaningful way and look to own over the long term to benefit from the power that compounding returns can deliver to shareholders. From a high starting point at the beginning of the year, valuations have pulled back sharply in the past 6 months to levels now more in line with long-term averages. Accordingly, buying opportunities are emerging as we have highlighted. Portfolio remains invested in well-managed, high-quality companies with strong balance sheets. At this point, I'll hand back to Geoff to coordinate the Q&A.

Thanks, Dave. So we have some time for some questions and answers. [Operator Instructions] So the first question, Andrew, which I think we've just addressed earlier on anyway, in terms of earnings per share was $0.233 per share. Obviously, the dividend was $0.24 per share. So the shortfall was funded through...

Reserve. We realized within those reserves about those $0.106 of realized gain we had for the year. So we continue to be, I would say, well reserved in terms both of profits, including gains and franking credits.

So this brings us on to the next question, which is a question about an increase in dividends. Been the same for a few years now and the yield is down to about 3% before franking. I guess the question is what's our view of our dividends going forward?

Obviously, the dividend is a matter for the Board, but I'll just make some observations. Obviously, once again, through a downturn, which we had through COVID, we were able to maintain our dividend. And this is something that we know our shareholders clearly see the benefits of. If you think back to the GFC as well when dividends were cut, we managed to maintain our dividends. Andrew pointed out that the reserves are very strong, so we're well positioned if another downturn occurs. But obviously, we are conscious that we want growing dividends over time and the Board is conscious of that. So we will have to see how the next financial year pans out, but we feel we're in a strong starting position heading into the year anyway.

Thanks, Mark. A question about the other LICs, and I guess, they are stable. How does AFIC differ from the other LICs that we're on, which are quite different in some ways.

Yes. AFIC is certainly the largest amongst the group. It's diversified portfolio of 60 to 65 stocks. David pointed out the sort of structure, that mixture of growth, income, stalwart type stocks, some cyclicals. So it's something that's more attuned to the overall market. When we push down, look through into Djerriwarrh investments, it's about an $800 million company. Our focus there is more on income. We want some capital growth as well, but the focus is clearly on producing franked dividends for the shareholders. So we get all of our shareholders in Djerriwarrh that -- particularly out of their super funds. Then Mirrabooka only invests in small to mid-cap stocks. So we exclude companies that are in the 50 leaders. And again, that has a different risk/reward profile. And finally, AMCIL is our high conviction fund. So we run around about 30-odd stocks and we're trying to pick the best companies, whether they are small, medium or large, and we tend to have a good spread between those 3 groupings.

Thanks, Mark. This question, I guess, is a related question about -- this is AFIC presentation. I guess in the context of running the 4 listed investment companies, what do you see as sort of the value add in terms of having the 4 running -- or 4 different investment vehicles within the group? And I guess that's in the context of, particularly Djerriwarrh, who's sort of underperforming recently in terms of the index, acknowledging the fact that it's more likely to be higher income with Djerriwarrh than capital growth.

Yes. Assuming that's the case with Djerriwarrh, we want to produce good income, and that's the primary focus. And if you're focused on yield, depending on where the market is heading, sometimes you have to give up a bit of capital growth there. But we did sort of adjust our approach a couple of years ago to help us get a little bit more growth out of the portfolio, and that seems to be working quite well at the moment. So if I look at the sort of the 2-year numbers, we are starting to get some good total returns along with the year. In terms of having 4 companies. They've each got a different risk/reward profile. So there's different types of shareholders that invest in the company. Sometimes we get people invest in all 4. Sometimes individuals are focused on one or the other or there are particular returns that they're targeting. So there is a difference between the 4. So we think that it's appropriate to run 4 separate companies. And particularly, we can do that out as one investment team. And then you certainly capture the economies of scale, which allows you to keep the cost down for the funds. And we know how important it is to -- for our shareholders to see low cost for all our funds. So that economies of scale is very important. And I think the other element to it is that by having funds that focus not only large-cap stocks, mid caps and even small caps, you're seeing the full range of businesses. And say, with Mirrabooka focused on earlier-stage companies, small and mid-cap stocks, we start to identify what we think are going to be the future winners, the future leaders earlier. And as we start to get confident, those sort of stocks can then spread more broadly into all the portfolios. So we think it adds a lot to be looking across the entire market, but obviously then picking investments that fit each of the investments to hold, but from the one team.

Thanks, Mark. So in previous conversations or previous presentations, we've talked a little bit about the international portfolio within AFIC. A couple of questions here about can we provide an update on the portfolio? And I guess, secondly, how does it sit in terms of potentially having another LIC within the stable going forward?

Yes. Well, we've got about 1% of AFIC funds in international. So it's still very small in terms of what it does to the AFIC portfolio, although that 1% are very good companies. Look, we continue to monitor. We always said that at AFIC we're patient, we're long term, we want to apply the AFIC process to investing in AFIC stock -- sorry, in international stocks. But there's a lot to learn along the way and we recognize that. So we're in no rush. We're hopeful that out of this, we might get a product because, obviously, our intention would be to have something that would be low cost, no performance fees, and that's the basis that we operate here. We think the portfolios done reasonably well since we first put in real money, I think it's probably performing around in line with the market in a very volatile time. And we've laid a lot, as I said. So this is -- this learning process will be ongoing and we will come to the market when we get that level of confidence. But at the moment, it's just head down. There's a reporting season coming up, there's a lot to do. I think ultimately, too, having people in the team that get that exposure to international companies, ultimately, many of our companies in -- within the Australian Foundation Investment Company are really international companies. And we look at the likes of Macquarie Group or our health care stocks like CSL and Ramsay, ResMed, Fisher & Paykel, James Hardie [ and building with care ], Computershare and the list goes on and on. These are actually international stocks and businesses. So as time has gone on, we see that having that capability to be looking international, domestic, they're all just businesses. And many of these are global and we can apply similar frameworks and hopefully get similar type returns, lower volatility in the market, more stable. And we get performance at lower fees. So -- but just head down and keep working away at this point.

Thanks, Mark. I understand we have a question on the phone, operator?

[Operator Instructions] Our first question will come from Paul Gustafson.

[ Paul Gustafson ] from Queensland. I'm missing you all in your physical [ office ] in Brisbane where we can break bread and have a cup of tea. Hopefully, that will all reoccur next year. I've been an investor in AFIC since 1992, and I'm now an old man, so I'm on your side. My 2 questions are, during that time, one of your objectives was to have parity between the second half and the first half in terms of dividend distribution. Is that still an objective? Second question, do you intend to have any capital management initiatives during the ensuing financial year, i.e. share buybacks and reduction of the issued capital and cancellation of shares?

Okay. Well, just on those, just the first question. Yes, look, it's the split between dividends. Currently, we're $0.14 final and we paid a $0.10 interim and we are -- we've just gone through the final $0.14. So the next time we look at the dividend will be the interim, which is currently $0.10. I think we've generally talked about and we've certainly had feedback that we'd like -- shareholders like a more even split. So I'm happy to share your view with the directors when we go into the next result, which will be the half year 1, but we certainly recognize that, that something more even would be preferable over the longer term. And then on capital management, in terms of share buybacks. Yes, look, we're not -- we've actually had -- we can do buybacks, but at the moment, the share price is trading at a considerable premium to NTA. It's very large, and we highlighted that in one of the earlier slides. So...

When we would be recognizing your excellent management.

Look, yes, I'm not so sure about that. I mean we are cautious on it because we prefer the share price to be closer to a fair value, but we would only be by looking to buy back stock if we saw a considerable discount, when we could -- persistent discount, and we haven't seen that for a long period of time. And so at the moment, we're a long way from buying back shares. So it's only productive to shareholders to do it at a discount. So it's not on the cards at the moment.

Yes. I'm in the same boat, when your NTA gets back to less than $7. I'm in the same boat.

Sorry, just wait there. One other thing is that we are planning to, at this point -- Geoff, do you want to talk about...

Yes. We are planning to do a shareholder meeting. It's about the third time we've tried to do it, but we are planning to do shareholder meetings in October after the AGM, so around each of the major state capital cities. So hopefully, we will be able to have a cup of tea with you in this year. We've got a couple of stock-specific questions, so about Endeavour Group. Now I'll throw this one to you or David. The price has now reached a record high for that stock. What's the market seeing that perhaps we didn't see within that particular business?

Yes, sure. So thanks for the question. So Endeavour's been a successful spin-off from Woolworths. And I guess the part of the business that the market does like is the Dan Murphy's franchise, which is a market leader within the area in which they operate. Our decision to exit the stock was really around our concern about the long-term sustainability within the hotels division of what poker machines represent the profitability of that business. So that's a large number today and we expect that to get smaller over time. I think what we've seen more broadly across the market is in a volatile environment like we're seeing, companies that are able to deliver a steady earnings profile, the likes of Endeavour Group have performed particularly well. Within the portfolio, we have benefited from Woolworths, Coles and Amcor, particularly but have made that decision to exit Endeavour Group with concerns around that long-term valuation, we felt the price that we exited was full for that earnings outlook.

I guess the second part of the question, David, is do we review those sort of sales post if something like this sort of happens?

Yes. Absolutely, we do. So anything we sell, it's still on our radar to be a potential buy later on. Specifically to this business, given our concerns about the long-term earnings profile for pokies, we'd need to see some change on that front for that to be of interest for us. But certainly on anything else that we've exited, assuming that quality is still there over a long-term time horizon, then we're happy to revisit anything we've sold. And sometimes, valuations do get to such an extreme level that we feel we're being asked to pay a value that really reflects sort of growth over a 5- to 10-year time horizon. And we feel if it's fully priced at that point, we're happy to move on but always keen to revisit.

Thanks, Dave. So a question about the ANZ takeover of Suncorp and the institutional placement that occurred there. Question is really what was our approach to that particular transaction?

So we note the rights were renounceable. So we elected not to take up our rights. We did get some cash for the renounceable nature of that transaction. The view is that we're happy with our holdings in the banks, not only ANZ, but more broadly across the banking sector currently. And we feel while credit growth is likely to slow for the banks, we're not anticipating there will be a particularly bad credit cycle. And despite house prices forecast to slow, we still feel relatively positive towards the banks and their ability to be able to maintain quite a strong earnings profile for us. And the banking sector makes up a significant portion of the dividend that AFIC is able to pay. So in the near term, we see dividends being sustainable, if not some growth coming and any interest rate rises are supportive of net interest rate margin for the banks. Over the long term, we do see competitive threats to that industry, so at some point we may need to address that. But for now, we feel pretty comfortable with how we're positioned.

Thanks, Dave. Question on infrastructure stocks. What's our sort of view about that particular sector of the market at this point in time?

Thanks, Geoff. In the infrastructure space, we've got 2 holdings. So the first is Transurban, which owns an irreplaceable network of toll roads on the Eastern Seaboard of Australia as well as assets in the U.S. And the good thing for Transurban is the toll increases they're able to put through provides them with some level of inflation protection where they've got annual toll increases. Now there is some concern in a rising interest rate environment about what the valuation might do under that scenario. But we saw the stock fall quite materially early on in the financial year and that gave us the opportunity to add to our holding at what we felt was an attractive price. So really well-run business with a great asset portfolio and a balance sheet suitable, in line with the steady cash flow profile that this business generates. The second one is Auckland Airport. So as the major gateway airports in New Zealand. This uniquely is a freehold asset in the infrastructure space where typically they'll be on longer-term concessions. There is quite a property play within Auckland Airport. There's quite an amount of excess land around the airport that's suitable for future development. And in the pandemic, clearly, traffic or passenger volumes have been depressed. We're starting to see a pickup particularly domestically within the New Zealand market, and we expect that to continue into international. And we're seeing some of the challenges of getting access to flights as passengers return. So we feel on a long-term view that this is a fantastic asset with plenty of upside. We just need to get through the pandemic and get back to the earnings momentum that the business had previously.

Any other potential stocks in that particular sector as well?

Well, I think, obviously, if we were speaking this time last year, we had Sydney Airport, which we reluctantly had to let go given the acceptance of the bid. So we elected to vote against that transaction. But the numbers were against us. So that was acquired last year. But at this stage, they're sort of -- the holdings that we currently have are the 2 highest quality within the infrastructure space. So they're the ones at the focus at the minute.

Thanks, David. So a question about what smaller stock holdings do we have in the portfolio. And of course, this can change over time as they become more successful, but perhaps you could answer that, Nga.

Thanks, Geoff. We currently have about 2% of the portfolio in what we call the nursery or smaller-sized companies, namely, we have Netwealth, Ryman, Temple & Webster, Nanosonics and FINEOS. Just to remind everybody, Netwealth is a retail investment platform. Ryman is an integrated retirement village developer. Temple & Webster is an online furniture delivery business with the unique drop-ship model. Nanosonics is a leading producer of high-level disinfection products, it's called -- product being trophon. And FINEOS is a software business in the life insurance industry. So over the last little while, small companies have been disproportionately hit in the pullback. We always have a small exposure to small companies, but always alert to additional opportunities. But it won't be a main driver of portfolio performance.

Unfortunately, some of those smaller companies got smaller over the last 12 months. That's really where a sector of the market that's been hit the hardest is businesses that are closer or have small levels of profitability have been sold off most aggressively. So they had run hard in the year prior to that, and that's really where the leverage has been over the last 6 months. So look, we feel positive on the long-term prospects for all those companies that Nga mentioned, but they have had a tough sort of last 6 to 12 months.

And we should probably add that we also have exposure to smaller cap in through our holding in Mirrabooka.

Yes. That's right.

And as I said before, some of the successful stock did start off quite small. It's in the portfolio, so it can move over time.

A question here about thoughts about the economy and about whether we think it will go into a recession. I'll throw that to Mark or David to have a crack at that one.

We're not really one to try and predict economic outcomes. I certainly can't do it. All we're trying to do is pick good companies and pick good prices to add them to the portfolio. I mean there's so uncertain -- so much uncertainty out there at the moment. I mean we've seen in the space of 6 months the outlook for the economy was stable. There's never going to be any rate rises for several years, and all of a sudden, things changed very quickly with inflation. And then really, the adjustment being happened at the moment is the outcome of many, many years of very loose monetary policy, very low interest rates globally and the payback is coming very quickly. So certainly, the market has several more rate increases for the rest of the calendar year. And I think most -- many participants in markets and generally in the economy wouldn't have seen an environment like this where interest rates go up so quickly. So we're -- although we're seeing fair value in stocks, we're still quite cautious of where the economy and earnings might take us. And we're particularly concerned about outlook comments. Some of the results coming through internationally that our team pick up is that margin pressure. And once again, the markets here in the U.S. are at record high profit margins, but we see reasons why they might come under pressure, which would crimp earnings. So not sure where the economy is going. I'm not sure where the market is going short term. But we just got to keep our eye on the ball about what are the good companies. And I guess one of the things we're looking for in the upcoming reporting season is which of our companies can maintain margins to the extent they can pass through cost increases. We think better quality companies will be able to do that. So it is a very uncertain period going forward.

A question on agricultural stocks we have in the portfolio and Select Harvests is usually one that comes up within this conversation. Any comments on that particular sector and company, I guess?

Thanks, Geoff. So we don't have any within the portfolio at the moment. If you think about the focus within AFIC, it's really looking for businesses that we feel, with a degree of confidence, they can have earnings growth over a 5- to 10-year time horizon. We recognize companies within the agricultural sector are deeply cyclical and there's a lot of things outside of their control that are just impossible to predict. And I'd just reference back to the presentation on the 2 charts that Nga talked to on Slide 18 with ResMed and Carsales. And one of the things that really attracts us to companies like that is the ability for those companies to continue to generate free cash flow and invest back into their business, which drives that competitive advantage and is sustainable over the long term. And then we compare that to, say, the agricultural sector, it's really difficult to have the same degree of confidence. So we recognize there's times when they're cheap, times when they're expensive. But for what we're really looking forward in the AFIC portfolio, they don't really fit the focus for us. And so no particular comments on Select Harvests in that regard.

[Operator Instructions] A question on potentially a share purchase plan. Do we have any thoughts on that? Given we had the discussion about buybacks. Looking on the other side, which is about share purchase plans raising additional funds?

Yes. Look, there's no formal decision on that, although we have used them in the past. So it's obviously something we understand the benefits of. I guess our starting point is, is this a good time to be putting money into the market and so we've been a bit cautious on that for a little while now. We are close to fully invested. We are starting to see some better prices on stock. So look, it's just something we've got to monitor going forward, but the starting point was can we see good value because we want to be able to put the money to work if we do raise capital.

The other issue, Mark, as you've said before, is would it be good for shareholders bearing in mind the premium that we're currently trading at. I mean shares at such a premium, yes.

And that's the other factor that we always look to, at what price. Because if we do these capital raising, we want it to be fair for everyone, fair for those that go in and fair for those that don't participate. We would suggest that you're normally looking to raise, well, when you do these capital raisings, something around NTA. At this point, we're at a massive premium. So it sort of has its challenges on that front at the moment. But it's something we keep looking at.

Thanks, Mark. I don't appear to have any more questions either via the operator or via the phone, sorry, operator or the webcast, I should say. So happy to hand it back to you, Mark, to close the meeting. Just to remind shareholders, we are looking to come and see everyone again at other capital cities around the country, and we've got the AGM again coming up in October. So with that?

Yes. Okay. We wish to thank everyone for joining in and just reiterate Geoff's comments. Hopefully, you'll get to see us in October we've got the AGM, another chance to get an update on markets and the company. I think we are looking to webcast that event as well. So either come and see us or jump on the webcast. But thanks again for your questions. I mean these are really important things for us to do to allow our shareholders a chance to ask questions about anything we're doing. It's your business and we're accountable to you. With that, thank you.

Thank you so much. Thank you all for joining. You may now disconnect.