Cadence Capital Limited (CDM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Webcast Audiocast for March 2020 for Cadence Capital Limited. As I'm sure you're no doubt aware, the global financial markets have fallen over 30% in the last 4 weeks, signaling that major indices have entered their first bear market since the global financial crisis. Investor sentiment has swung from greed to fear on the back of the economic impacts of the speed of the coronavirus. The market fall over the past 4 weeks can be broken down into 3 stages roughly. Investors initially largely dismissed the extent of the social and economic impact of COVID-19. And stocks that had led the market higher in recent years largely held up, in actual fact, investors saw this as a buy-the-dip opportunity. The second phase was an acceptance that the coronavirus may be much more serious than was initially thought and have more serious economic consequences, and in general, all stocks sold off. The current phase that we've been through, in particular in the last week, has been initial levels of panic, where the market darlings have sold off heavily. For example, the anointed WAAX stocks have sold off heavily; from the top, Afterpay down 70%; Wisetech 60%, Appen 31%; and Xero 30%. In general, some of these selloffs in the last week or 2 have been very, very large. The fund has moved from being 80% invested or 20% in cash on the 31st of January 2020 to 44% invested or 56% cash as at the 19th of March yesterday. We are currently holding 50% in cash and tax assets. The current cash balance, excluding our cash asset, now represents approximately $0.37 per share compared with the CDM share price on the close of business yesterday of $0.35 per share. In other words, the fund is trading at below cash in the bank or on our balance sheet, and attributing no value whatsoever to our portfolio. Many of the stocks inside that portfolio have already fallen significantly, and so these are the portfolio at reduced share prices and valuations. The portfolio declined by 6% in February, as are you no doubt aware from the newsletter, while the All Ordinaries Accumulation Index fell 8%. As of yesterday evening, our pretax NTA was 61.5% (sic) [ $0.615 ], and our estimated post-tax NTA was $0.849. And on Monday, the 23rd of March, you will once again be getting an update of our weekly NTA via the usual ASX release. Our fund goes ex dividend on the 29th of April for $0.02 fully franked, and the payment date for that is the 13th of May. This reflects an annualized dividend yield of 11.4% fully franked or 16.3% grossed up based on the closing share price of $0.35 per share yesterday. And as I've already stated, we hold $0.37 of cash per share as well as a portfolio of stocks. There is no DRP on the interim dividend as our shares are trading at a significant discount to underlying NTA. As at the close on the 19th of March, CDM shares are trading at roughly a 43% discount to pretax NTA. The on-market share buyback is ongoing, and you would have read about that in our newsletters, in the weekly updates and also on the ASX announcements, where we indicate the buybacks. We have bought back 12 million shares to date. Board and Management are continual buyers of the CDM shares as well, and those announcements come out on the ASX on a weekly basis. This graphical representation of CDM discounts and premiums, you would have seen before at our AGM, in our newsletters and in a number of presentations that we give. You can see the discount that our fund went to during the global financial crisis. You can see the premium that we traded at for about 5 or 6 years post the global financial crisis. And you can see the discount that the fund is currently trading at. And in particular, over the last week or 2, the largest discount per share that the fund has ever traded at despite holding more cash in the bank than our current share price. I think this illustrates quite clearly that during periods of panic or underperformance, funds trade at a discount. And then in periods of outperformance and I guess, good periods, the fund trades at a premium. And so that is how these investment companies trade over time and no doubt that will be how these investment companies trade in the future once again. Turning now to the outlook for the period ahead. Obviously, the world has entered a period of uncertainty as a result of the coronavirus and also as a result of the global economic response to the coronavirus. In actual fact, it is the global response to the coronavirus that has had a much larger effect than the coronavirus itself. Unemployment will rise domestically and abroad and impact the world economy and GDP. It is unclear the duration of this effect and also how much GDP will fall . Of course, many commentators and experts in the area are trying to make predictions on how much the GDP will fall globally and also how long the coronavirus effects will last. These are all very difficult things to calculate. It's also difficult to estimate what the ultimate impact will be on different businesses, and we have seen many companies withdraw earnings guidance. Of course, companies that hold high levels of debt have irregular or uncertain incomes and revenue streams, are very vulnerable as our households with high levels of debt and irregular income streams. Companies with excess cash on the balance sheet and regular and sustainable earnings, obviously, are much better positioned in these times. And this will all become -- as the time goes by, to sort of that will all become a little bit clearer. Interest rates have been cut to 0.25% by the RBA in Australia and to 0 in many other major countries and by other major central banks. These are extraordinarily low interest rates. Central banks and governments have also announced significant stimulus packages in various forms, and are likely to announce further measures to support the economy. The ultimate question is, are those stimulus packages big enough? Do they cover the falloff in gross domestic production that's expected globally? Or will they simply not be enough? Our commentators have different views on these things, and it is too early and unclear to make clear predictions on any of those points. The next point is very important. Obviously, there are going to be elements of panic globally. And panic is not something you can analyze, but is an emotion. It will cause people to move from their medium- to long-term investment objectives, their medium- to long-term overall objectives, their medium- to long-term business objectives and start to focus on the very short-term and make decisions in the very short term. And of course, in the end, that is the definition of a panic, and we are clearly seeing signs of that. We are, to some extent, seeing signs of that in our own share price, trading at a discount to cash in the bank and putting no value on the portfolio of stocks that the company owns. Of course, after significant price falls in many stocks, there are now a large number of companies meeting our fundamental criteria, and we have not seen that for some time. The difficultly will be trying to ascertain how secure those earnings are and over medium- to longer-term periods, what the earnings profiles of those businesses look like. That will become clearer in the medium term. It's hard to imagine at the moment, but eventually, the coronavirus and the global reaction to the virus will dissipate. Markets will stop falling and opportunity will present. Just like all pandemics in history previously were temporary and the world recovered from them. So this virus will be temporary and we will recover from it. It's just that right now, whilst we're in the middle of a coronavirus pandemic, it feels permanent and it feels like nothing is ever going to improve. History tells us that, that won't be the case. And in that situation, with us holding high levels of cash and being in a position to invest back into the recovery using the Cadence process, that is actually how we produce above market returns. These environments will ultimately provide very good investment opportunities. Ladies and gentlemen, obviously, at these times, it's important to look after your health and safety and to follow all of the Australian government guidelines in relation to your health and safety. We, within our team, have taken a number of initiatives, which involve ultimately working from work and also working remotely and being in a position to fully run our business at full operation, either within the offices or outside of our offices, and that is going to be a very important part of the equation for many businesses in short term. And of course, we want everyone to remain as safe and healthy as they can. Thank you very much for your time. And as always, if you need to reach out to us or e-mail us or telephone us or be in contact with us in any way. We're always available and happy to talk. Thank you for your time.