Cadence Capital Limited (CDM.AX) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the year-end webcast ended June 2025 for Cadence Capital Limited. For the year, the company earned $6.3 million and was up 3.4%. The fund performed strongly in the second half of financial year being up 7.3%, reversing some of the first half underperformance. The top contributors to performance were Evolution Mining, Netflix, QBE Insurance, Robex Resources, Boss Energy, New Gold, West African Resources and Suncorp. The largest detractors were Whitehaven Coal, Alcoa, Yancoal, Capstone Copper, Stanmore Resources and BHP. The All Ordinaries Accumulation Index performance for the year was driven by a small number of large capitalization companies that did not meet Cadence investment criteria with low earnings growth per share and high price earnings multiples. Commonwealth Bank, Wesfarmers, Westpac, Telstra and Brambles are five such examples, which were responsible for around half of the rise in the index in 2025. In our 2024 webcast, we highlighted that the Australian dollar gold price has been rising and that because gold mining companies are leveraged to the gold price, their share prices should have outperformed gold price movements. At that point, they had underperformed and this continued for most of 2024. We have recently seen gold company share price catch up to the gold price. Our Evolution Mining investment has performed well for the fund with the share price up 123% over the past 12 months while the Australian dollar gold price was up 44%. Robex Resources, New Gold and West African Resources have also performed well for the fund, particularly over the last 6 months of the financial year. Market moves over the last 6 months of the financial year have also created opportunities to add to several new positions in the portfolio. This slide is an accumulation of dividends paid, and you can see $1.92 of gross dividends have been paid out of this fund since inception. The most recent final dividend was $0.03, partially franked at 50%, bringing the full year dividend to $0.06. The full year dividend equated to an 8.8% annualized yield or 10.7% gross yield based on the share price on the date of this announcement of $0.68 per share. Importantly, this equates to 7.5% yield or a 9% gross yield based on the NTA of $0.85 on the date of this announcement. After paying this final dividend, the company still had $0.065 per share of profit reserves to pay future dividends. The ex date is the 15th of October 2025 and the payment date is the 31st of October 2025. The DRP is operational for this final dividend and will be priced at the weighted average share price over the relevant period. At the time of writing this presentation, CDM share price is trading at a pretax NTA discount of around 18%. Participating in the DRP is an efficient mechanism to add to existing holdings in the fund without paying brokerage. If you have not registered for the DRP and would like to, please contact Boardroom. The company will continue to buy back shares issued under the DRP when the share price is trading at a discount to pretax NTA. Here is a list of the portfolio at the 31st of July 2025, including both long and short positions. We continue to add to our gold exposure over the past 12 months. Recent market moves have created opportunities to add several new core and trading positions into the portfolio. Some of our older positions, QBE, SUN and ORG, no longer meet our fundamental criteria but remain in the portfolio as trades as their share prices continue to rise. At some stage when those share prices roll over, we will exit the positions as we always do. Over the past 6 months, there have been an increase in trading activity in the fund due to an increase in capital raisings. Stock examples include CU6, JHX, S32 and WTC. This slide goes back to 2007, and so there's quite a lot of history here. In fact, over the next 2 years, there will be 20 years of history showing that listed investment companies trade at both a premium and a discount, premium, discount, premium, discount. And each of these green bubbles represents an extreme event that occurred in the global marketplace. The first one is the global financial crisis. The second one was COVID which, interestingly enough, caused our shares to go to a bigger discount to NTA than the global financial crisis. And the third is Liberation Day and the uncertainty that, that has created in the stock marketing. Importantly, buying at a discount to NTA creates opportunity. And we, as always, discourage paying too much of a premium to NTA for buying shares for listed investment company shares. But we can show -- illustrate here over a period of nearly 20 years that the company has oscillated between a discount and a premium. And we see now that the discount after this difficult Liberation Day period is starting to contract. The second half of this financial year was a highly volatile period for the All Ordinaries Accumulation Index, moving in an 18% range, which unsettled investors. After adjusting for dividends, CDM's pretax increased 8% during the 6-month period from the first 1st of January to the 30th of June, whilst our share price fell 4%. That is a very big disparity for our fund and tends not to happen. These things tend to travel in tandem. As we write this webcast, CDM is trading at a pretax NTA discount of 18% whilst holding some cash. Excluding the cash in our portfolio, the portfolio can be bought at a 21% discount to underlying value. We're currently trading at our third highest discount in 19 years. As I outlined, we only traded at large discounts during the GFC and COVID. This presents an opportunity to buy shares at a discount and the current portfolio -- another way of describing this can be bought for $0.82 in the dollar. At these discounts, the company will be buying back its own stock in CDM on the on-market buyback program. Directors have also been adding to the CDM shareholders at these discounted prices and participated in the recent DRP by buying shares on market. This is a very important slide. Once again, we've shown this slide at the last half year results. What we're looking at here is the light blue line, illustrating that the rolling average EPS growth for the last quarter was, in fact, negative. That means there was no growth for the ASX shares. Whilst the PE for those shares has expanded dramatically from 17.5x to nearly 22x PE. In order for this to be the case, obviously, a lot of stocks are trading on a high PE multiple with little to no earnings growth and a number of those stocks are on high PE multiples with negative earnings growth. By contrast, gold stocks have started to perform well as the gold index on average has started to catch up to the move in the gold price. Importantly, we would like to point out, and the best way to do so is just with one of Ed Seykota's quotes, which says that, "Commodities are the purest form of trading in the world and resource companies are a leveraged version of that." What that means is that if the gold price goes up 1%, a well-run gold company should have its profits grow by significantly more than 1%, say, 3%. So in actual fact, gold stock profits should be a multiple or a leveraged version of the gold price movement. And all else being equal, we should expect to start seeing many gold companies producing very high operating cash flow numbers in the short to medium term at these gold prices. Our core position here is Endeavour Mining, a Canadian gold mining company, with a diversified asset base of 5 producing mines in 3 different jurisdictions producing more than 1 million ounces of gold per annum. A new management team is now building a track record of consistently delivering. The company has recently transitioned to cash being cash flow positive and is now in the midst of a cash harvesting phase, now with unhedged production, CapEx subsiding and free cash flow yields for the foreseeable future improving to in excess of 15% free cash flow yield. These characteristics have led to a strong balance sheet with very conservative leverage. We expect an acceleration in buyback and dividends, both of which are already in place. On the left-hand side of the screen here, you can see the attractive multiples that this company is currently trading at. The company's share price has been performing well recently. Amplitude Energy is a domestic East Coast gas producer with a well-established gas field and associated infrastructure in Victoria. This company is led by a highly regarded team that have delivered an exceptional operational turnaround in Orbost, taking historical average processing rates from 40 to 50 TJs to 68 TJs per day. With significant regulatory impediments on new gas production, the value of this existing operation with exposure to rising gas prices is a highly valuable asset. The company trades at a 12x PE with significant EPS growth. Free cash flow yield and operating cash flow yield in the year ahead are very strong, and the balance sheet is in a good position for what is going to be the big growth campaign at the ECSP project. And this is expected to deliver 65% more gas production for the group. The share price has performed very well over the last few years as well. Samsung is a relatively new position in our portfolio. The share price in this company fell by around 40% in late 2024. And the company's computer memory and consumer electronics business were going through a cyclical downturn, and its computer chip reduction business was underutilized and losing money. We purchased these shares when the company was trading at a 20% discount to its NTA and the share price has started to trend upwards on an improving outlook. Computer memory demand and pricing is improving as customers prioritize high-bandwidth memory for AI data center GPUs with Samsung winning new contracts from AMD and Broadcom. Demand for mobiles and electronics has picked up with new smartphone products being released and Samsung's latest Galaxy smartphone gaining market share. Samsung has recently won a $16 billion order to produce Tesla's next-generation A16 chip, which will improve utilization and profitability for Samsung's computer chip production segment. On the left-hand side, you can see the strong EPS growth for this company relative to its PE and very good operating cash flow and free cash flow yield. No debt on the balance sheet and net cash. And here, you can see what that share price has done after the negative period around late 2024 and since. Turning now to the outlook. Global markets, of course, remain caught between the slowing growth we've been describing, political uncertainty and central bank policy easing. U.S. President Trump's tariffs have added further pressure to global economies, prompting central banks worldwide to respond with interest rate cuts. The RBA reduced rates by 25 basis points in August while the U.S. Federal Reserve is widely expected to follow suit in September. Despite short-term rates falling, we do see upside risk to longer-term interest rates and inflation. Loosening monetary policy and growing fiscal deficits are laying the groundwork for inflationary pressure to reemerge. These forces may lead to a devaluation of currencies and elevate the safe haven characteristics of gold, with gold equities remaining a core exposure within the fund on relatively inexpensive valuations. The financial press is once again starting to discuss stagflation, which really is negative earnings growth combined with inflation. In economic terms, this is considered the worst of all worlds and, no doubt, policymakers should be turning their minds on how to prevent this. Across the border ex resources market, we continue to see evidence of PE expansion outpacing earnings growth or, in the case of the ASX, we've seen earnings contraction in this period resulting in increasingly more expensive equities. Recent interest rate reductions may see this trend continue in the near term with increased market volatility providing more trading opportunity. We continue to focus on implementing the Cadence process that has served us well through different market cycles. Ladies and gentlemen, if you have not done so and would like to receive our monthly newsletters, could you please register at the address below, not only to receive a newsletter but also our webcast and periodic results. Thank you once again for your time, and we look forward to talking to you in the near future. Thank you.