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

Hello, and welcome to the Australian Foundation Investment Company Limited Half Year Financial Results Briefing. [Operator Instructions] I would now like to hand the presentation over to Mark Freeman, Managing Director of AFIC. Please go ahead.

Good afternoon, everyone. I'm Mark Freeman, the CEO and Managing Director of the Australian Foundation Investment Company, and welcome to this half year result briefing. I'd 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. Joining me today on this webinar, I have David Grace and Nga Lucas from the investment team, who will run through the bulk of the presentation. Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; and Geoff Driver, who's our General Manager of Business Development. Before we start the presentation, a bit of housekeeping on this webinar. This briefing is based on the material available on the company's website. If you are using your computer to access the presentation via the webcast, the slides will change automatically. Finally, please note following the presentation, there will be time for questions and answers. You can ask a question via the webcast using the tab at the bottom of the screen. So I'll now move to the presentation and starting on Slide 2, just our usual disclaimer to say we're here to talk about what we're doing in the company. We are not giving any advice. On to Slide 3, just the agenda. I'll give an overview of the investment objectives of the company. I'll pass over to Andrew Porter, who will talk through the financial results. Markets and portfolio will be covered by David and Nga, and then David will give some outlook comments. So just moving on to Slide 5, just about the company. AFIC primarily invests in Australia and New Zealand companies. But obviously, we have a very small component in international stocks at this point. It is the largest listed company on the ASX with over 160,000 shareholders and the independent Board of Directors. Importantly, the shareholders own the company and they are under management rights to the portfolio. As there is no fee to a third-party, the management expense ratio has kept very low, currently sitting at 0.14%, with no performance fees. We're fundamentally a long-term investor with low turnover. This means that we'll be tax effective, and we joined the compounding impact of great companies. Historically, the portfolio and share price returns have also been less volatile than the index, and we've got a long history, growing and stable fully franked dividends. The investment team also manages 3 other LICs being Djerriwarrh Investments, Mirrabooka and AMCIL. So moving on to Slide 6. We aim to provide shareholders with attractive investment returns through a growing stream of franked dividends and growth in capital investment. We'd like to pay dividends, which, over the long term, grow faster than inflation and provide total -- attractive total returns over the medium to longer term. So with that, I'll pass over to Andrew Porter, our CFO, to talk through the results.

Thank you, Mark, and good afternoon, ladies and gentlemen. So for those of you following on screen, we're on Slide 8 now. And the profit for the year that we reported today was $150.1 million, so that's down $13.6 million or 8.3%. The main reasons for that, we actually foreshadowed at the full year briefing last year and at the AGM, which was that the resources companies were likely to pay lower dividend in this half than they had in the previous corresponding half. And that proved to be the case. To take one BHP, we have received $16 million less in dividend income in the half just gone than in the half the previous corresponding period. So if [ the profit's ] down $13.6 million and that $16 million has come out of BHP, that did mean that we had other stocks, banks, et cetera, where the dividends came up to partly make up some of that shortfall. The fully franked dividend $0.115. So that's up from $0.11 last year. That on the raw numbers, is up 5%. And we had said some time ago without giving any predictions to future dividends, but we were conscious that there was a desire among shareholders to start equalizing or move towards more equal interim and final year dividend. So we up it by $0.01 last year, and it has been up by $0.005 this year. The shareholder return, 8.4% is slightly behind the portfolio performance, which is 9%. You can see that on the other side of the page and the other column, which means that the discount on the share price went from 1.6% in June to 2.3% in December. So it's -- AFIC does occasionally trade at discounts and occasionally trade at premiums. But compared to many other LICs at the moment, that is a very small discount. On the next column, the management expense ratio of 0.14%. This is a measure just to remind shareholders of the total cost of running the company as a percentage of its average portfolio. Again, we did point out at the full year that this is likely to be up in total because last year's costs were artificially lowered by the unwinding of an executive incentive program. So that is $0.14 for every $100. And the actual expenses themselves, AFIC generally in line with last period apart from that redoing of the incentive scheme, which I talked about, that meant the costs were much lower last year than would otherwise have been the case. We've talked about the portfolio return and the total portfolio at $9.5 billion. So moving on to Slide 9, and you can see there what I was just talking about, rather discount now being 2.3% up or down from 1.6% in June and as we said. So I think does trade around at discounts or premiums. Both have their attraction in that if it's a discount, you can buy the shares cheaper than the underlying value of the NTA. And similarly, if it's at a premium, you can -- should you be [ minding ] to sell those shares. But, of course, we're not giving it by side the way it is important, we believe, though, to show shareholders that information so they can make their own decisions. Slide 10, in terms of the dividends and the earnings per share. I would like to make 3 comments on this particular slide. First of all, it does look -- and we have been paying dividends out more than the operating earnings per share, but these figures do exclude the capital gains that we made from time-to-time. That does add to the reserves. So at the end of June, for instance, our shareholders might recall, we had $0.40 worth of franked dividend that we could pay out should we need to after the final dividend. And essentially, if a shareholder were to assume, and it's not a bad assumption that the earnings per share are equivalent to a frank dividend per share that we could pay. We still think that we are adequately reserved for the future in terms of the franking credits that we have. And this is important because I'd like to look at the 2021 year, you'll see, although we managed to increase -- and it is an objective to, over the long term, to increase dividends faster than the rate of inflation. It's also very important, we believe, to maintain the dividend when times are tough. And you'll see in 2021 and in 2020, earnings have fallen as a result of COVID. AFIC because of those reserves was able to maintain its dividend, many others didn't. So we do think it's important to note that reserve capacity does mean that we can hopefully continue to maintain that dividend. And yes, it's still the objective over time to increase the dividend. And we're conscious that we have been in a higher inflation rate than usual. Okay. So with that, I will pass over to David and Nga. Thank you.

Thank you, Andrew, and good afternoon, everyone. So moving on to Slide 12, which shows the relative performance of the portfolio against the ASX200 over various time periods. We manage the portfolio to be low turnover. And accordingly, there will be periods where we underperform the market. We were over the long term, the core of the portfolio will be invested in quality companies with strong growth prospects. So including franking for the 6 months to the end of December, the portfolio was up 9%, while the ASX200 delivered a return of 8.3%. For 12 months, the portfolio was up 16%, outperforming the ASX200 return of 14%. The largest contributors to the relative outperformance during the period were James Hardie, CAR Group, ARB and Reece, and these companies were a drag on our performance in the prior year, and we used that weakness to add to several of these holdings. Returns for the portfolio are shown after tax and expenses, which over the 5-year period have been a drag of approximately 0.3% per annum, largely reflecting capital gains tax on profits realized. As Andrew just mentioned, we now have a significant balance of franking credits for distribution in later periods. The chart on the right-hand side splits market performance by sector over the last 12 months. The best performing sectors were information technology, which is up 31.3%, consumer discretionary up 22.3% and communication services, which was up 16.6%. What's interesting this time 12 months ago, these 3 sectors were the worst performing in calendar year '22. From an oversold position as we entered 2023, portfolio holdings car sales, REA Group, James Hardie and ARB, in particular, delivered significantly better performance. This reinforces the benefit of long-term investing using share price weakness to add to our preferred holdings at attractive prices and benefiting from compounding returns that come from long-term ownership. Now, we'll talk in a later slide regarding recent portfolio activity. The other notable point on this slide is the disappointing performance of the health care sector, which was up 3.8% against the ASX200 up 12.4%. Despite the 3 of obesity drugs, we believe portfolio holdings, CSL and ResMed, are well positioned to deliver meaningful earnings growth for many years to come. And we took the opportunity to exit both of these holdings in the last 6 months. Moving on to Slide 13. So before we talk to the chart on the slide, just a little bit about our investment process. We're long-term investors in quality companies. We're not trading short-term share price movements, and we look to use periods of volatility to add to our preferred companies. We want to own companies with a defined competitive advantage that generate free cash flow, maintain strong balance sheets that are run by capable boards and management. So the chart on the slide shows the volatility of the Australian market over the last 12 months. The biggest driver of investor sentiment has been the likely next move in interest rates and the future direction of inflation. Both measures are near impossible to predict. Couple that with large swings in commodity prices, the declaration of war between Israel and Hamas, it's not surprising that equity markets have been volatile in recent times. While we are always aware of the macroeconomic environment, we don't pick stocks, trying to guess the next point of economic data. We focus on bottom-up fundamentals looking to increase our holdings of quality companies when short-term sentiment provides an attractive buying opportunity. We look to buy at prices we consider attractive in line of the company's long-term prospects, and we're happy to remain patient as we seek to benefit from the value that compound returns provide to shareholders. So moving on to Slide 14. The chart on this slide shows the performance of the ASX All Ordinaries over the last 80 years back to 1940 or as far back as we could get the data. The red circle, we've shown on the far right-hand side puts last year's volatility into context. Meaningful, if you take a short-term view as we saw on the last slide, but next to were relevant for long-term investors. The general trend in the market performance is 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 Ordinaries Index has delivered an average growth rate pre-dividends of 6% per annum, including dividends, you get a more significant number. So the chart shows equity markets are always volatile over the short term, and the pullbacks in markets are not uncommon, and when they occur, they quickly recover. As history shows, binding times, bad news delivers good returns for long-term shareholders as markets typically go up. So just to recap, we want to be holders of quality companies that own strategic assets, positioning them well to maintain earnings growth despite the constantly changing operating environment. So on to Slide 15. Slide shows 2 valuation charts for the overall market, just to give a sense of where valuation levels stand today. We've shown price to book and price to sales for the ASX200 over the last 20 years. They're helpful to understand market sentiment, particularly investor risk appetite towards the broader market. And while they bounce around a fair bit, both measures indicate that the valuation of the overall market is slightly above long-term averages. While a helpful starting point, we know the operating environment today for many companies is more challenging with earnings growth harder to come by as leading economic indicators are slowing, while companies are left with suddenly high cost basis. Moving on to Slide 16. So over the long term, the company's ability to deliver sustained earnings growth is a large determinant of share price performance. Many companies held within the portfolio have displayed an excellent long-term track record of financial discipline while delivering significant value for long-term shareholders. This slide outlines 10 companies that have delivered strong sales growth and share price performance over many years. All of these companies hold a market leadership position within their core markets, all have strong balance sheets and all are run by excellent management teams and boards. The strong sales growth has been delivered over many market cycles, highlighting that well-managed quality companies with market leadership, deliver strong shareholder value over the long term. While over time, valuations of these companies have swung between fair value, undervalued and overvalued, all have maintained a strong profile of delivering shareholder value. All these companies own and operate highly strategic assets have a defined competitive advantage, generate meaningful free cash flow and have a long track record of excellent financial discipline, delivering strong shareholder returns. We believe long-term opportunities for all these companies continues to remain strong. And at this point, I'll hand over to Nga.

Thanks, Dave. Good afternoon, everyone. Over on to Slide 17. We've shown this chart before, but just to reinforce that in managing the portfolio, we look to own a diversified portfolio of quality companies that are able to perform in a variety of economic settings as we're not looking to predict what's happening next in the economy. We want a mix of growth and income attributes as we recognize that dividends play an important part towards total shareholder returns. In the portfolio, we won a mix of growth companies, holding market leadership positions where long-term growth prospects are strong. For example, REA Group, CAR Group and CSL. Stalwart companies, companies that own difficult to replicate strategic assets, well positioned to deliver long-term earnings growth. These include Transurban, Wesfarmers, Auckland Airport and Woolworths as example. Income stocks, companies with an attractive dividend yield. These include the banks and Telstra, and cyclicals with strong balance sheets, favorably exposed to long-term economic growth. Over on the next slide, I'll run through some recent transactions that demonstrate how we invest to deliver on this. So on Slide 18, as I mentioned, we look to own companies that can provide us with a mix of income and growth in the portfolio. We do this by looking for opportunities to add to our existing holdings or initiate new positions in quality companies that have good prospects that are underappreciated by the market. These opportunities often present following a temporary setback or negative news that impacts the share price in the short term. To capture these opportunities, we trim several holdings -- we trimmed several holdings where the stock prices have run to extreme levels or we look to sell out of companies where their long-term prospects are challenged. So on the left-hand side, we show some holdings that we have added to in the last 6 months. We used share price weakness to buy quality companies when we see value presenting. Short-term share price weakness gave us the opportunity to add to these. We added to Telstra as we think the market is not appreciating the upside in the mobile business and the quality of its infrastructure assets. We believe Telstra's mobile network superiority and rational mobile competition will allow it to lead price increases in the market. As a result, we expect the company to pay a growing fully franked dividend yield. We added to our NAB position as we believe Australian banks are well regulated and are well provisioned even in a tougher economic environment. The mortgage market is holding up better than expected, but earnings growth will be more muted going forward. Banks are a key source of fully franked income for our shareholders. We added to our position in WiseTech following a sharp pullback in the share price as investors reacted negatively to accelerated investment in R&D to build out their global logistics software product. We believe the long-term opportunity to become the platform for global logistics is undiminished and the company is executing well on their goal. We added to our ASX position as we believe the core exchange business remains a high-quality monopoly, and the negativity around the CHESS replatforming was factored into the share price. ASX recently announced a clear and more viable solution to replacing their platform. We added to our Woodside position, reflecting our view that the share price now reflects a more reasonable long-term oil price assumption, which will underwrite meaningful cash flow generation for the business. This should flow through to dividends for shareholders. There is some risk around the timing and the cost of the Scarborough project, but we believe this is well understood and is offset by the potential upside to oil prices in an environment of rising geopolitical risks. The sharp pullback in ResMed share price was driven by concerns around obesity drugs impacting the demand for ResMed sleep apnea mask. This gave us the opportunity to increase our holding at attractive prices as we believe the size of the addressable market for ResMed remains significant and underpenetrated. Whilst the availability of obesity drugs will be positive for improving health outcomes for patients, we believe the growth prospects for ResMed remains undiminished. We added to Goodman Group as we continue to like their global portfolio of quality industrial assets and development sites. The growth in demand for data centers offers a meaningful growth opportunity for the business. Management have an excellent track record of disciplined capital allocation led by Founder and CEO, Greg Goodman. We added to our CSL holding on the back of competition concerns weighing on the share price, which we believe was overdone. We think the prospects for the business remains positive through their market leadership position in plasma fractionation and the company has a proven track record of delivering higher returns than competitors. Recent capital investments should drive increased capacity, efficiencies and higher returns. In new purchases, we added 2 new stocks after recent share price weakness. Mineral Resources is an Australian mining services company and an iron ore and lithium producer. We like their lithium thematic given the strong demand from electrification longer term. We believe the company now has a clear and sound strategy of engaging with EV manufacturers directly to secure long-term demand for their lithium. However, like other commodity prices, lithium can be volatile. Another new stock is Region Group, who owns a portfolio of high-quality sub-regional shopping centers anchored by supermarkets like Coles and Woolworths. These assets are more resilient due to its defensive tenant base and having less exposure to online shopping. Region operate an internally managed structure and have a disciplined management team with a strong balance sheet. We purchased our holding at a material discount to asset backing and at a price offering an attractive 7% dividend yield. The companies listed on the right-hand side shows stocks we have trimmed or exited during the period. We trimmed our positions in James Hardie, Reece, CAR Group, Computershare, Woolworths, Austbrokers and Commonwealth Bank. We trimmed these stocks to allow us to invest in other quality companies showing value while still retaining a core long-term holding. We exited Ansell and IRESS as we believe the long-term prospects for these companies will be increasingly challenged as competitive intensity increases. In the case of Ansell, significant new supply has entered the industry, challenging the sustainability of prices as a driver of revenue growth. Whilst for IRESS, the company is increasing investment in its technology platform to improve functionality as competition has increased. However, we believe the returns for this investment remain highly uncertain. We exited FINEOS, reflecting our concerns over the ability of the business to demonstrate attractive long-term economics and the drag on earnings from upfront investment needed to onboard new customers. At this point, I'll hand back to Dave for some outlook comments.

Thanks, Nga. So just on to Slide 20, regarding the outlook. So we've had a period post COVID lockdowns where government stimulus efforts have supported consumer spending. Corporate profits have remained healthy despite interest rate rises, allowing many companies to pass through cost inflation to their customers. More recent evidence suggests that consumers are starting to feel the pinch as the rising cost of living takes effect. While inflation appears to be easing, the market has rallied sharply in the last few months on expectations of meaningful rate cuts in 2024. With economic growth forecast to moderate, earnings growth for many companies may slow. With this backdrop, market volatility is likely to continue. As we early discussed, volatility often provides opportunity to buy quality companies at attractive prices. We continue to focus on those companies best positioned to deliver meaningful earnings growth over the long term. And in this regard, the portfolio remains invested in well-managed companies owning strategic assets with strong balance sheets. At this point, I'll hand over to Geoff to coordinate Q&A.

Thanks, David. So, just as a reminder, you can ask questions at the bottom of the screen in terms of submitting those. And also, I will amalgamate some questions that we received from participants if they sort of cover off on the same topic. So the first question I have is, can we invest in shares other than oil and gas companies? I prefer if we didn't support these companies that are contributing to climate change. And, I guess, on the other side of that question is the second one from another shareholder. What is AFIC's current policy and position on investments in companies developing renewable energy?

Thanks for the question. Thanks, Geoff. So just in regards to the energy stocks, we do own Santos, we've added to Woodside in the recent period, as Nga mentioned. So both of these companies, the majority of their production is from LNG as opposed to oil. And our view is that, LNG set to remain the key transition fuel over a long period of time before we fully transition across to renewable energy sources. And I think the other thing we keep in mind with these 2 companies are both committed firmly to reducing their carbon footprint have stated policies in place. And in that regard, we'd rather these assets be in the hand of responsible owners in jurisdictions that require them to meet their commitments. Both companies have gone through mergers within recent times. So Woodside in relation to the BHP Petroleum assets and Santos in relation to Oil Search, and that positions both companies' balance sheets in a much stronger position, and that's not only to fund future production growth, but also to be able to fund the commitments that they've made around renewable efforts. And just in relation to Woodside, they've made a commitment to invest up to $5 billion into new energy projects, if you like. The first of those is a hydrogen project that they've got coming out of the ground in Oklahoma. In relation to the merger of those 2 assets, just a future question may come up. But we see the strategic merits in these 2 companies getting together. I think from a Santos point of view, they could use a better balance sheet to be able to fund their growth projects. And from a Woodside perspective, they could do with the production profile that comes from the Santos assets. So while there is strategic merit, history has shown that any scrip merger has been complicated and really difficult to be able to set the final merger ratio to satisfy both boards and both sets of shareholders. So in that regard, we think there's a fair bit of water to come under the bridge before a deal is to conclude. In relation to new energy assets, I guess, our largest exposure in the portfolio is through Macquarie Group, and they've got a long history now of, not only facilitating, but also funding a lot of the projects within the renewable sector and a number of wind farms in Europe where they've been a key player within that regard. So we see that as being a significant driver of earnings growth from Macquarie going forward. And we think the company is really well positioned within the industry to do very well.

Thanks, David. So, again, a couple of questions, I guess, around a similar topic. There's shareholders noted our position in Mineral Resources in terms of -- obviously, in terms of future lithium prices. But comments on the fact that there's perhaps been a downturn in demand for electric vehicles, particularly out of the U.S. and there's different technologies available. So the question then becomes sort of what's our view on lithium going forward? And I have a related question in terms of new economy Minerals in terms of what's the view around nickel as well? So I think we can put those 2 in a similar category.

Yes, sure. Thanks, Geoff. In relation to lithium, so just in terms of the history. So the sector was very immature a couple of years ago and had rapid growth in 2021, where you saw the share prices rally quite aggressively. And at the time, the immature nature of the industry meant there was quite a scramble to be able to secure our lithium units. And you saw the lithium price rally from less than $1,000 up to $8,000 a tonne in that year, and the share price has correspondingly had a really good period. We're now seen, as the industry is approaching or getting more mature than what it was, that there's a period of destocking going through the industry. So that scramble for lithium units is now in the past, and many players now have adequate inventory, and that destocking has meant that they're not in the market, they're actually buying new products. So we've seen the share prices fall in line with the lithium price this year, and prices have fallen up to 80% in terms of the underlying commodity. So we haven't invested in it despite the momentum in 2021. We've been waiting for more attractive entry prices. We made a small investment in Minresources this year. And in hindsight, it was a little bit early, but it was about 30% off where it traded at its peak. And I think our view is that, the medium-term outlook or long-term outlook really for lithium remains strong. I think we're too far gone in terms of the car market for us not to be driving electric vehicles at some point in time. But I think our view is that, it's just going to take longer before that transitions across. And while we are aware of alternate technologies, we still believe that lithium has a role to play. Minresources is attractive to us. It's not only a lithium company, it has iron ore and mining services divisions within the company as well. And the iron ore space, they've got an asset coming online within the next 12 to 18 months, which is set to generate meaningful cash flow. And the mining services business has been operating for many decades and has a long track record of delivering meaningful growth, and we see that business being really well positioned to continue in that regard. And then just on the nickel market, look, we've looked at that sector for a period of time. But with the supply that has come on to the market, particularly from Indonesia, we're very cautious around the prices. And even though the nickel price has fallen materially, we see that, that market does remain in surplus. So that means that there's more supply than demand out there, and we think that the price is likely to stay under pressure for the foreseeable future.

Thanks, David. Andrew, I think you commented on this before, but it's a question about growing dividends faster than the rate of inflation, also a level of reserves. And perhaps you can just remind shareholders what the interim dividend was this year versus last year?

Yes. So interim dividend $0.115 this year, up from $0.11. So, that's up 5% in and of itself. And in terms of growing faster than inflation over time, that's still an intent of the company. We did pay a large special dividend in February 2019. So sometimes that gets discounted when looking at it. If we put that over the years, the increase would have been larger. But notwithstanding that, it is still an objective. But I would also stress, although it's not public, we believe there is still a strong demand requirement and desire from shareholders cost to maintain that dividend when times are tough. So that's something the Board has to bear in mind.

Thanks, Andrew. Quite a number of questions about the international portfolio, Mark, and what are our intentions there? I guess, what are we sort of been doing in that particular subset portfolio? And also, why there's sort of no Japanese stocks in the international portfolio at this point in time?

Well, we continue to work away. And we've been pretty consistent saying that we take a typical AFIC approach. We're taking a long-term view of building out the processes and the team and trying to get a track record. And pleasingly, as we announced the portfolio, it's beating its benchmark in the 6-month, 12-month and since inception now. So that's one of the strategy we put in place for us to build out that investment performance first, and we always talked about our long-term intent to potentially get another LIC up whether being listed or unlisted or eventually listed. So, look, we just continue to work away with that. And we wanted to take our time and get that track record and get everything working. So, as I said, it's been very pleasing to date with the performance, and we just looked to keep that going.

Thanks, Mark. A question here about PEXA and we're still confident in that investment.

I'll just add to that. I mean, obviously, the intent about why we'd want to have and I see around the international, I guess, in terms of managed products in the market, most of them charge pretty high fees and high performance fees. And our intent was always about a product where we could be compared to our peers much lower fee and a fixed fee with no performance fees. So that's always the background with lower turnover. And pleasingly, another factor that's seeing behind the good performance numbers, the team actually produce it on very low turnover as well. So consistent with the AFIC approach of taking a long-term view on quality stocks. So...

Yes. Thanks, Mark. Sorry. So back to PEXA. Nga, just any thoughts on our current investment in PEXA?

Thanks, Geoff. Yes, thanks very much for the question. Just to remind you, PEXA is the digital property transaction platform business. It has a dominant position in Australia and is developing a similar platform in the U.K. It's been a disappointing investment for us. The U.K. platform progress has been slower than we had hoped, getting banks to sign on and bringing all the stakeholders together has been a bit slower. We're still hopeful that, that will still occur, and it has incurred a higher level of investment to do so. The current share price, we believe, we're not paying for the U.K. auction, and we still like the quality of the Australian business, which has CPI-linked pricing. So it does offer some protection in an inflationary environment. And with the recovery in the property market, the business should do a bit better. We have a very small position in the portfolio.

Thanks, Nga. A question here about will the directors and executives disclose how many or how much shares they own and what percentage of the total shares they actually own? We're actually disclosing in the annual report every year, both in terms of directors and executive management. So -- and it would be fair to say that there's a reasonable holding across those particular individuals. Comment on Nanosonics, the size of the holding in Nanosonics. Any thoughts on the quality of management there?

Yes. So we -- a number of shares we own is 5.7 million shares. I think in the question, it was a similar number. So Nanosonics actually provided a trading update last night after market that was disappointing. So within that, their earnings outlook has come through materially below what the market was expecting, and the share price has fallen over 30% today. So, while it is a small holding within the portfolio, it's enough to cause some pain on the day that, that sort of news is released. So, at this stage, we're just assessing our thoughts around that. We haven't had a chance to catch up with the company to fully understand exactly what's happened. But in terms of the release, the company is stating that the hospitals that are ultimate buyers of their product, there has been a lag in terms of their budgets in buying their products over the last 6 months, and that's what's really caused the disappointment in the earnings. So, we'll look to catch up with management in the next day or so and just really understand the deferral of their capital intentions or whether it's something beyond that, and this is something that's more structural to the business and we'll assess that over the next 24 hours.

Sorry, Dave, just to put it in context, the holding was about 0.25%. So it was a very small position. We'd sort of call it a nursery position where we take a very small amount and monitor how it goes. So, in the context of the portfolio, yes, small holding.

Thanks, David. A question about IDP Education. Would we be looking to add any more, now the stock is trading at a similar level to where when our initial investment was made, particularly given the announcement on cuts to study permits in Canada?

Yes. Thanks, Geoff. Thanks for the question. We have actually recently added to our position in IDP just observing the same that it's back to where we initially invested in it. Again, this is a relatively small holding within the portfolio, but we do really like the long-term outlook for this company in terms of students traveling international to study. And a large part of the thesis gets back to the profitability of the universities where international students play a large part in the profitability that they're able to achieve. Given the Canadian announcement in the last couple of days, it just sort of tempers our enthusiasm on the size of the portfolio, so the size of the holding rather in the portfolio. So it is, as I said, only small, but we never want that to be too large because regulatory risk and the ability for governments to change their policy around international students is forever present within this company. But what we really like is what they're doing in terms of investment and digitizing more streamlining the processing of students, and that's really setting them apart from their competitors. So we think with the regulatory changes at the moment, it positions IDP to come out of this a stronger business relative to competitors over the medium term.

Thanks, David. Question on James Hardie, it isn't a good dividend payer, sorry? Is there a problem? Or is this a problem?

Yes. So James Hardie actually cut their dividends in the last 6 months, and now they're not paying one at all. It was never a large part of the returns we got to shareholders. But, I guess, it always gets back to one of the slides that Nga spoke to just about the mix within the investments that we make that some of their for income, some of it for growth. And while James Hardie, as I said, was never a high dividend payer, it's really there for its growth attributes. While we'd like all companies to pay us a dividend, we do recognize that some companies in our position to be able to invest that cash flow into growth projects. And in that regard, James Hardie has a really long track record of delivering excellent returns for shareholders as it's invested within its manufacturing expansion projects and R&D. So, return on invested capital from this business is sort of above 35%. And while they've got those opportunities to add medium- to long-term shareholder value, we actually feel that it's the right thing that they should be doing. But it means we need to get our income from other investments within the portfolio.

I think that's -- Dave, that's a good point about going back to the dividends and the dividend growth in AFIC. What I have observed that certainly over the sort of last 5, even 10 years, increasingly, more of our stocks have probably been positioned in slightly lower yielding companies. But the market has changed. And if you want to invest in a great business, it's going to grow profits, so earnings per share and profits over the long term, more and more that these are companies that are internationally exposed. And increasingly, they generally pay lower dividends in the rest of the market. And if you think of stocks, some of the ones we've touched on today, ResMed, CSL parties, which has now cut their dividends to 0. The more money you put into these, it does hold back your dividend why you're doing that portfolio. But we think these companies will ultimately give you stronger growth in dividends because we believe these businesses will grow their profits faster than the rest of the market. So we do think good profit growth will come from our portfolio. But sort of this period where we've sort of grown a number of global stocks has probably sort of held us back in terms of getting that growth that we would normally expect.

Thanks, Mark, and David. Third question here about how many shareholders have our marketable parcels and should there be, like a compulsory buyback of these parcels? I think we go just over 4,500 shareholders or marketable parcels.

At the end of June, it was 5,500 [indiscernible].

Yes. Thanks, Mark. So at the end of the day, we have a lot of children and grandchildren investing in the fund. So in a sense to actually have a compulsory buyback, we're not sure that's going to successfully really reduce those numbers. And these days, you can actually launch sort of parcels under $500 as well. So there are ways to dispose of the shares through that process as well. So we don't believe that a compulsory buyback is worth a while at this point of time. So the other couple of questions about, I guess, the shares. How about buying shares in the market for the DRP is they're trading at a discount? And then on the other side of that question, what are our plans for offering a share purchase plan?

Discussions around, I guess, share purchase plans is something that's always on the agenda. We've done it before. It's actually quite an attractive way to take advantage of opportunities in the market because one of the problems we have is, if we trim and reduce the stocks that were in gains from, we realize capital gains tax. And we -- I mean, if we find a business that we don't like any more, we should weed it out anyway. But the balancing act for us is around what's the right time, the amount of opportunities we see, where the share price is trading around fair value because if we do something, we want to do it at a price we think is fair for everyone. So these are some of the things we take into consideration. But certainly, the share purchase plan discussion is a regular topic with us. And we certainly think at the right time, it's a good thing to do for our shareholders. And I think the other one was buying back shares...

The DRP. But, I guess, the share price discount is relatively small in the scheme of things. So we wouldn't be looking to buy back these shares at this point of time.

No. I think -- I mean, we do have -- I mean, some of them you might picked up, we do announced that we have a buyback in place, but we don't tend to buy back any shares. And, I guess, that's really there for extreme and extreme situation where there was -- we felt the market was low and something was happening to the share price. That might be a time we would utilize our buyback. And I think that's happened in my time, probably once in about 20 years.

That's right.

We saw that event happen where we did buy some stock. But we always just thinking no one know what's going to happen, so we have it in place. But we would rather a market to sort out where the price should be and investors have the opportunities to invest when perhaps a period where there's a big discount on offer.

There is discounts, that's right, and the market does tend to sort of sell out of time. So a related question here, I guess, is that, the share price performance since June 2021 hasn't been strong, but clearly, we were trading very strong premium at this point of time. So that's really the answer. The shares are trading at a very high premium and now they move back to a slight discount. So...

And, I guess, that's the reason why we publish those numbers regularly, where we say what the NTA and what the share price is. We do it every month because we want investors, whether you're a buyer or seller to be fully informed of where those 2 prices. And certainly, if you look back a couple of years ago, we were scratching on our head as to why it's such a large premium. And we don't like actually seeing that because when people buy into the company at such a large premium, if that premium unwinds as it has, they can have perhaps not a great experience. But I just keep encouraging people to look at the share price, look at the NTA if you're looking to do any activity.

Yes. Thanks, Mark. So a couple of related questions here in terms of -- with the energy transition volatility and uncertainty of outcomes, and I guess, does AFIC have any exposure to Origin and AGL? Do we have an opinion on both those stocks? And will we ever think about increasing our investments in oil, gas and coal given the uncertainty of volatility around energy transition?

Yes. So we do look at Origin and AGL, but we don't own either of those in the portfolio at the moment. And our thinking there is just there's a fair bit of uncertainty in terms of how long the wholesale electricity prices can stay elevated, and that's a big driver of earnings and cash flow that these companies generate. So they've had a pretty good run in that regard. We just questioned about the longevity of that revenue in a long-term time horizon. And then secondly, as the coal-fired power plants are now scheduled to close, there's a transition going on with both companies looking to invest into renewable energy projects. And it just remains highly uncertain about what the total investment in terms of capital dollars will be, but then equally what sort of return they get off that investment. So due to those areas of uncertainty, we continue to monitor, but we don't own either at this point in time.

Thanks, David. A question here about why has CBA hit new highs for the last 5 years? And the comment about how [ oncologist shrunk few shoulders and in place ] stuff if I know. But, I guess, in context of that CBA and also the general banking sector, are you worth having discussion around that?

Yes, it's a great question. We also started to reconcile the recent strength, particularly in the CBA share price. So, just more broadly, in relation to the sector, we think these sectors trading towards the top end of a fair value range, and it's not on its own in that regard, as we said earlier, that there has been a strong rally in markets over the last 2 to 3 months, and the banks have been part of that, along with a number of other sectors. So it's towards the top end of fair value range, we wouldn't say it's excessive valuations. Our thinking though around the banks is just they do contribute a meaningful part of the AFIC dividend. So the total weighting we have for the banking sector is currently around 20%. But combined, they contribute more than 20% of the income of which we pay our dividends out of. And so, even though we think the earnings outlook is for low growth for the banking sector, we still can collect high fully franked dividends. And just in context, it goes back to the James Hardie question, where we've seen them cut their dividend. We do need to have sources of income coming through for the portfolio and the banks play a large part of that.

Davis, we got a question here about our thinking behind trimming Reece in the portfolio?

Yes. Great question. And again, it's with a heavy heat that we did trim some of Reece. So we still really like the business and the long-term opportunity, but it's really just around the strength that the share price has had. So in the last 12 months, the Reece share price is up 60%. And while we do still like the longer-term opportunity, we just felt that you're being asked to pay for that at the multiple that the share price has got to towards the end of last year. And we really want to make sure we're balancing trimming excessive valuations. We've been able to have capital available to capture opportunities when they present. So when we see bad news come through in the likes of ResMed and CSL, we do want to make sure we're capturing them and we enter those -- sorry, those periods of bad news, holding more shares than we entered. So, as we go through that transition, we need to find the funding from somewhere. And the strength of having Reece meant that we trimmed a small component of the holding.

Question about Auckland Airport and where do we see value there?

So Auckland Airport is clearly the gateway airport into New Zealand and why we're attracted to this asset, it's a freehold infrastructure asset, which is very rare. And it's particularly important in the case of Auckland, where they're undergoing a major redevelopment, not only of the terminal facilities, but also adding an additional runway. So, not being a leasehold in nature, certainly makes that a lot easier to do. They're going through a negotiating process at the moment just to determine what return they get on that capital investment, but that looks like it's going to be a reasonably attractive number. So all of that will be to meet future demand for passengers to transit through the terminal facility. So we see over the medium- to long-term, there's a good opportunity for this company to continue delivering meaningful earnings growth. And outside the airport, they've got quite a large parcel of excess land when they're doing commercial development, office buildings and shopping centers, et cetera. But I think just more broadly, I think this is indicative of how we're feeling about the market more generally is, Auckland Airport has equally had such a strong run in the last few months, along with the large sectors of the market, and it really needs to have a period now where the earnings growth comes through just to grow into that multiple of where it's trading at the moment. So, a fantastic long-term opportunity, but we're not adding to it at current prices.

Just to revisit of the international market, and I'll ask these questions sort of together. How about keeping the international portfolio with AFIC instead of opening a new LIC? Do we have a cap on the number of senior capital percentage of the total portfolio in terms of overseas? And is it hedged -- is this portfolio hedged?

No, we don't hedge the portfolio because we're not trying to sort of play with the currency as such, and we wanted to keep it a simple product. Just in terms of the size, it's about 1.3% of the portfolio. That was about -- we sort of landed on with the Board of Directors at this point. We thought that made the portfolio big enough for us to be able to sort of get a track record of performance. So it's like a single stock, as I said, around 1.3%. And we constantly look at how we use that, whether we continue to run money within AFIC either direct holdings or through a company or an unlisted company or we look at listed companies, we're constantly assessing a range of options. I guess, the thing we have landed on though is that, when we look out 10 years, we think increasingly, markets and investors will be discussing international stocks that will be more accessible, easier to invest in, easy to follow. So we're sort of taking a strategic view that having a footprint in international is a good thing for the group overall and our learnings and understanding of stock. So -- but how we eventually -- how it manifests itself when we work through the range of options. And I think there was a question earlier about Japan. We don't have any Japanese stocks at the moment. They are potentially on our list. We've got about 43, 44 stocks. But so far, we've landed more on U.S. and European stocks in terms of getting into businesses that fit our criteria, easy to follow, easier to understand and are simple.

And the question here also -- it's another question here about India. Do we look for -- is that as an investment opportunity...

Look, it's probably...

On this subject.

Again, it's probably less likely. We're not trying to really be in emerging market. Look, anything is possible in the long term. But, I guess, where we are, we just see plenty of opportunities still. And we're still building out our capabilities even within the U.S. and Europe. And when we think about the factors we apply to assessing stock, thinking more broadly about emerging markets, et cetera, is independent from outside influence. And when we identify it as a risk, if it does play out, it can be quite damaging to your investments, and we just think there's so many opportunities within the other markets for companies that fit our criteria in a cleaner fashion, that's probably more our focus at this point.

So a question on the iron ore market, how likely is iron ore follow the pattern of the nickel market, especially when suppliers from Guinea and Africa come online? So, Dave, do you want to comment on that?

Yes. I don't think the impact will be as pronounced as what we've seen in the nickel market, but maybe just a comment about our thoughts around iron ore more generally. So, in relation to Simandou and the Guinea asset that Rio is bringing to market with its joint venture partners, that will add about 7% to 8% to global supply. And while it doesn't sound like a large number, i.e., commodity is really driven by any new supply coming into the market. So that will be enough to cause the price to fall. So in the short term, it's near impossible to predict where the iron ore price goes, but it has had a really strong run over the last 6 months. Medium term, we see with the new supply coming on board, which will be in 2026 and we are approaching near peak steel capacity within or steel production rather within China. So we don't see much in terms of demand growth. And so, our expectation over the medium term is the iron ore price would start to trend down from current levels. So we don't feel that where it's trading at currently, will be sustainable over the medium term. Just in relation to BHP, however, we feel really positive about their copper assets. So, at the moment, it's about 30% of the portfolio. But BHP and Rio, for that matter, are investing quite heavily within their copper portfolio. So we see copper has been a commodity where supply is going to trail demands over the medium term. We see a very positive outlook for copper in both BHP and Rio are well positioned to capture that.

Question here about Mineral Resources and the price we pay and when do we buy it?

Yes. Look, we don't tend to sort of say, tell the market exactly when we bought and when we bought and sold stocks. But I'll just sort of say it was well off the peak, but it was a little bit above where it is now. And again, reconfirming it, we've only got a smallest position at this point.

So lessons learned from the purchase and sale of FINEOS.

So FINEOS, just to recap, it was a very small investment in the portfolio. And the reason behind that was it's an early stage company with quite an innovative technology going to the life insurance industry. It was taking the process and the data processing from sort of excel-based technology into the product that FINEOS was releasing to the market. So it's quite innovative. And we think it will be the long-term solution for the industry. The challenge that they've got is that, those capital decisions are largely out of their control. So when the customers ultimately decide to deploy that technology, they can't control and they need to incur quite significant costs as they're waiting for that. And when you're an early-stage company that can eat into profitability quite materially. So look, our thinking there was the long-term margins of this business is likely to generate were likely to be less than what we initially thought when we bought the business. And with a whole range of other opportunities at the time, we just saw better uses for that capital at that time. And that was really, as I mentioned earlier, the likes of CSL and ResMed, they forwarded the grid that they had, we need to find the capital from sources to be able to add to those.

So what we're trying to do is, constantly line up stocks against our frameworks and really the appeal there was an owner driver business, which is something we like, large market potential, annuity style revenue streams. We're exhibiting some leadership capabilities. So, it was -- and at the time, they had no debt. So it had some characteristics that we sort of look for. But what it wasn't quite fulfilling, where as a couple of other characteristics, and we're hoping that they would improve such as financial strength, in particular and the growing profitability and return piece, and that's the bit that's really struggled to meet up to our expectations. So some characteristics that we like that fit our frameworks, a couple that didn't, we thought they would start to hit those, but we're sort of really starting to see how that might occur certainly over the foreseeable future, so we exited the position.

With the current rental -- and I'll sort of trying to wrap up in a few more minutes. But the current rental crisis in Australia and the shortage of properties coupled with the projecting decrease in RBA cash rates over the next 1 to 2 years, are you considering increasing your position in this sector? Dave?

Yes. So, I guess, our exposure to that within the portfolio is really through Mirvac, it's one of the largest apartment developers in Australia, and they have a build-to-rent part of that business, which is really targeted towards a rental market and bringing new products. So that's really set to come to market over the next 2 to 3 years. But that's really been our exposure at the moment. And, I guess, that's really valuation-driven about whether we look to increase that. But Mirvac is a diversified business. It's not only about residential. They also have other asset classes in their portfolio being office and retail primarily.

So a related question here about, do we actually see an easing in the Australian real estate market?

Really hard to call.

I think it's probably invested comment on that one. A question here about, I guess, on a more strategic level. What's that risk mitigation strategy for potential impact on the market of Middle East or...

Yes. Look, and I think that's -- we had the chart there that showed what happens when we get significant dislocations in the market. The markets do tend to bounce back. So we don't try and predict the outlook. We're just trying to being good companies, and we ride the ups and downs of the economy. We ride the ups and downs of any event that comes along. All we can say is history says sticking with them is the best we can do and trying to predict sort of events is not something that we think is particularly healthy for trying to be a good investor. But we use every dislocation in markets an opportunity to sort of uplift the quality of the portfolio when we get -- if we get opportunities. So that's the way we sort of...

Sure. There's a question here about why is Argo share price pulling away from AFIC?

Yes, I can't really --. It goes in cycles, of course, clearly, but...

I'd also say you've got to look at -- the share prices don't start at the same point of view. Argo has fewer shares on issue. So it's share prices net asset value per share are higher than AFIC.

Comment back on PEXA. Nga, how patient can we be in a stock like this?

I think with the share price being where it is and the quality of the Australian business, we can afford to be patient with the U.K. because it's effectively now a free option, and we're comfortable with the quality of the Australian platform.

Okay. Thanks, Nga. I'll make this the last question, given we've just got on an hour. Did management look at Altium when it recently dipped below $40? So back to you, Nga.

Geoff, I think we're always monitoring of these high-quality businesses. Just as a way of background, Altium is a PCB design software business for PCB designers and PCBs are printed circuit boards that go into everything that's electronic. They have a dominant market position in the mid-market segment. And one of the -- part of their strategy is actually to move into the very important enterprise segment of the market. One of the key trends in the industry is the convergence between mechanical and electrical engineering, and Altium has a unique asset in that respect and have been very attractive to other players in the market. They received a bid from Autodesk a few years ago, and there's certainly a lot of industry consolidation. There was a recent announcement of Synopsys bidding -- acquiring Ansys. So we had some reservations about their ability to grow into the enterprise market, both from a product market fit point of view, as well as their go-to-market strategy, but they have surprised the market recently announcing a large contract win with the chipmaker Renesas. So certainly on our watch list.

Thanks, Nga. Well, with Mark -- I'll conclude the questions. If there are any other questions come through, then we'll respond to them individually. But, Mark, I'll hand it back to you.

Yes. So thank you, everyone, for joining this briefing. We hope it's useful. It's a great way of keeping everyone informed. And just to remind everyone, as we go into this year, obviously, this is the half year result webinar, there will be a full year result webinar in July. In March, we are going around the country to all the major cities to do a shareholder information meeting. That's where we just talk about stocks in the portfolio. So you'll see an indication on that and everyone's welcome to come along and meet with us, and we think it's an important part of us being accountable to come along and ask questions. And obviously, the full year -- sorry, with the AGM that will be webcast. And obviously, we'll be doing that in Melbourne as well. So there's sort of 4 key points throughout the year to get access to us and hear what's going on in the portfolio. So thank you.

Thank you. That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.