Cadence Capital Limited (CDM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Cadence Capital Limited March quarterly update. This following slide's obviously familiar to everyone who gets the newsletter. You can see for the year-to-date, we've done about 34% against the market that's done 20%, so outperforming market by 14%. You will also have seen from the weekly updates that you're getting for our NTA that April is also a very, very good month for us. So those numbers are quite a bit higher than at the end of March. The year-to-date returns have been driven across a number of different investments from varying sectors, market capitalizations and geographies so that the returns are becoming much more diversified within the fund. On average, we've been holding 20% to 25% cash, which is fairly traditional for the business. Our biggest contributors for the period, from a positive perspective, were Bed Bath & Beyond, Lynas Corporation, Uniti Group, Cettire and Sonos and Chalice Gold Mines Goldmines. The biggest detractors for the period were Nitro and Redfin. In the following slide, you can see the interim dividend has just been paid of $0.02, bringing our total dividends up to $1.062 and our grossed-up dividends $1.508 since inception. The ex-date for that dividend was the 29th of April 2021. As we've said a number of times now, no dividend reinvestment program is operating because our shares are trading at a discount to NTA. In actual fact, we continue to buy back shares. The following slide, you can see our estimated pretax NTA is $1.08. Our post-tax NTA at the end of March was $1.18 and the CDM share price was $1.13 at the time. So you can see that the share price discount to NTA has significantly contracted. It blew out to around 40% just after the COVID pandemic crisis in March 2020. We have continued to buy back shares on market on behalf of all shareholders. And obviously, the benefit of that is that, that reduces the number of shares for all shareholders and increases the NTA for all shareholders. To date, we bought back 23 million shares for a consideration of around $17 million at an average price of $0.74. So we've made a significant gain per share on the buyback of those shares. Board and management continue to be the largest shareholders in the company and continue to add to their positions. You will see that in our ASX announcements on a -- every week, actually. The company's tax asset per share has significantly reduced as we've had significant profits in the year-to-date. The next slide is one that we've started to include in the presentations, which is the portfolio construction. Importantly, you can see so many of the investments now have a market capitalization greater than $100 million, and a significant part of the portfolio has a market capitalization greater than $0.25 billion, which means that we can easily liquidate our portfolio. For example, 81% of the portfolio can be liquidated in a week and 92% in a month. We have around 50 positions with a size greater than 0.5% in the portfolio, and the largest position is a 5% position. We have invested in companies with greater than $1 billion with 62% of the invested capital, so a lot of liquidity. The next slide shows our top 20 positions, which you'd see in the newsletter as well. And you can see significant diversification on an industry, sector as well as geographic basis. And this continues to be the case and, obviously, has led to significantly better risk-adjusted and diversified returns. So I'm going to introduce Charlie and Jackson now to take us through the investment themes that have been prevalent within the portfolio over the last 9 months.

Thanks, Karl. So I'd now like to talk about a couple of themes that we've noticed in the market over the past quarter. And the first one is, coming out of COVID, we saw all boats rise in a lifting tide kind of environment. So we saw a number of stocks across a number of different industries have significant share price appreciation. But now we believe the market is really turning to a stock picker's market. As you've seen, vaccine rollouts, reopeners, work-from-home trades, they're starting to bifurcate the market into different segments. And we think this is a really good opportunity. And what we're seeing in small caps is there's really good risk-reward scenarios that we've noticed. And I guess for that, I'd like to talk about -- to start, the first one is Uniti Wireless. We've mentioned a few times, we've been a shareholder for a significant time in this company. Over the past quarter, it saw a 55% share price increase, and we still think there's further to go. The reason being is just in the contracted order book, the company is set to double earnings over the next 3 to 4 years. And what we've seen across the industry is Aware Super came and bid for OptiComm, which is now under Uniti's umbrella. They paid -- well, they were offering to pay a price at 17x EBITDA. The media speculated at certain prices that the NBN may fetch upwards of 20x EBITDA. We believe Uniti Wireless, with the management they've got and their high levels of free cash flow generation, we believe it should fetch a higher valuation in both these businesses. With the company at the end of the quarter trading on roughly 15x, 16x EBITDA, we still think there's room to go and we still think that they'll go into adjacent verticals in the commercial property sector and further winning developer contracts. The second stock is Nitro Software. Nitro is a document productivity software business, specifically, PDFs and recently, they've developed an e-signing business. So what people may think is this is purely a work from home and COVID beneficiary business, but this thematic was emerging for a period of time prior to COVID, and we think there's just been an acceleration here. So what we've seen is, with this business, it previously sold into small- and medium-sized businesses. And over the last kind of 5 years, they've made the switch into enterprise sales and selling into much bigger businesses. They've also converted from an upfront licensing model to a SaaS business kind of a software subscription over 3 years, which we believe is much more higher-quality revenue and much more higher-quality earnings. The business has 90% gross profit margins, and we -- the business is just about to kick off their e-signing business, which essentially people can use all over the world to sign off on documents. You may think of lawyers or engineers trying to collaborate on workplace documents at this point in time. So there's been huge volumes, and that product is just about to be a revenue [ live ] product. So we think there's upside. There's $54 million of cash on the balance sheet. So we think there's further scope for M&A in the business. The third company I'd like to talk about is Life360. Life360 is a safety and location sharing app with over 26 million users. We feel the opportunity here is there's only 900,000 of those are paying users per se at this point in time. The company IPO-ed in 2019 to increase the balance sheet, to do further M&A, higher sales staff and accelerate the product rollout. In late 2020, what's really interesting with this business, Mark Zuckerberg's sister joined the Board, and the company outlaid a strategic road map for what's going to happen in the next kind of 6 to 12 months. And we're already kind of actioned on one of those elements, which was M&A, into different product verticals. We think there's another vertical coming, potentially in the insurance industry. And then there's also talks of a dual listing for this business. It's one of the cheaper SaaS businesses on the ASX roughly at 5x to 6.9x revenue with 80% gross margins versus the other businesses trading on 10x, 15x revenue. The last business I'd like to about, and Karl mentioned, was one of our top performers at the last quarter, Cettire. So Cettire is an online luxury retailer, which is implementing a drop-ship model, which -- so they actually take no inventory risk. Over 90% of the sales from the business are international. It's an extremely high-growth and disruptive business with over 319% customer growth and 450% revenue growth year-over-year. So a really fast-paced emerging business in the high-end luxury fashion division. It was a recent IPO, and we feel it was massively underappreciated by the market because it came on in December, listed at $0.50 and right after the COVID vaccination rollouts were happening in November. So there was a sell-off in tech stocks. The stock consequently has tripled, but we still think there's further upside as it [ screens ] attractively to listed comps in the U.S. I'll now pass to Charlie to talk about some further stocks and Karl to do an update on DeepGreen and round out the webcast.

Thanks, Jackson. Today, I'll be speaking about the 2 sides of the great reopening, to borrow a term from Jim Cramer. The first side is the consumer-facing side, which we've spoken about a few times. And this is really driven by consumers who've been stuck at home, coming back out, cashed up, saving rates have tripled in the pandemic with significant capital and now wanting to spend in a number of different categories. It's also been aided by the low interest rates and other stimulatory policies by governments. The first stock relating to this theme, which I'll touch on today, is Google. Now certainly not under the radar, one of the biggest companies in the world, Google at $1.6 trillion continues to beat market expectations. Releasing results last week, we saw consensus estimates up nearly 10% as they continue to outperform. In Google, you get a company that's trading now ex cash at about 24x PE, growing at 30% and just announcing a $50 billion buyback. The core search business is benefiting from the great reopening in that a lot of advertisers are now spending and a lot of the verticals that were impacted are now coming back to be able to spend to attract customers back to their business. So you get that cyclical part of the business aided by the other 2 parts, which is the YouTube and YouTube TV, which management are doing a very good job in executing on the monetization strategy, especially in direct response. And we believe that has further to go. And the cloud business which, in itself, we believe, and as we've seen in AWS, can become a very profitable business if we look further out. That business by itself, if you look out a few years, could underpin much the current valuation of Google. The next up I'll touch on today is a global brand that's growing at over 50%, over 30% of the sales are generated online and with a big Asian opportunity. This might not be obvious to you, but it's Crocs. And this business has gone in and out of fashion over the years but is certainly enjoying a surge in popularity at the moment. You can still pick up this business on 17x earnings despite a strong share price rally recently. And the last company is Atomos. Atomos is a Melbourne-based camera technology business. It has a product that can plug on top of camera to do post-production on the spot, as you go. It serves anywhere from Netflix production to at-home YouTube stars. So this business has its sales run rate already back to pre-COVID levels and with the cost base that's been reduced is enjoying profitability levels actually ahead of where it was pre-COVID, yet the share price is still down 50% from highs. So we think this is still compelling here. There's significant opportunity for the company to grow its sales into other verticals. It's launching new products, and there's also a good sales momentum on the back of a number of OEM camera manufacturers, the likes of Sony and Canon, who are launching their new cameras, which Atomos' products will typically get bundled with. Atomos is one of the few camera production technologies that's integrated with ProRes RAW, which is the new Apple file type, which gives them some IP and a unique product as we go through this reopening phase. They also have over $20 million of cash on the balance sheet, which allows them to build up the working capital required to fund significant sales growth in the future. Now the second part to the great reopening trade is the supply chain. And really, it's the other side of the coin. As this demand has surged through the economy, our supply chains have been strained to keep up and deal with this. And this has led to significant increases in input costs. We've seen this across commodities, both soft and hard commodities, and particularly in steel prices. So the first company of the portfolio is BlueScope Steel. And we've seen the hot rolled coil price double in the last 4 months, which is quite exceptional as demand, usually being just strong in 1 or 2 verticals, has been strong nearly in all segments of their business from automotive to nonresidential construction, residential construction, renewable technologies, whether it's solar or wind and even energy, starting to recover. At the same time, 10% of U.S. capacity had been off-line. So you can see the dynamic that this has set up. The BlueScope mill in Midwest of U.S.A. is one of the most profitable in the country due to its proximity to customers. So we think this is a good way to play on to this surge in steel prices. The next supply chain input that we'll discuss is copper. Copper, obviously, has been very topical recently. We've seen a massive increase in the price of copper. We're back to all-time highs in the copper price. And this, again, is driven by a significant demand, not only from the cyclical recovery that we're seeing in markets but also a significant demand from EV-related usage. Copper's used in EV batteries. And as we're seeing all the OEM manufacturers globally increased the amount of models, electric models, that they're making, the use for copper is increasing. This, combined with over a decade of undersupply in new mine investment, is leading to this rise in price. Now the stock in the portfolio that reflect this theme is Freeport. And this is one of the few stocks globally that actually is displaying significant growth in production, which is quite hard to get, and it's also quite hard to get something which is nearly over 80% in copper revenues. The management's executing well on the ramp-up of their mine in Indonesia. So we think this is a good way to get exposure to copper across a high-quality business with long-term assets. Other stocks in the portfolio that are obviously benefiting -- also benefiting from this theme is called Maas Group, which we spoke about previously, Boral and lifestyle communities, amongst others. Thanks for your time. I'll now hand back to Karl.

Thanks, Charlie and Jackson. Turning now to the slide on DeepGreen Metals and an investment update. You would have seen we put out an announcement in early March because the company has announced that they are going to merge with SOAC in America and be listed on the New York Stock Exchange. This combined company will be renamed The Metals Company, and it is intended to begin trading on the New York Stock Exchange under the stock ticker TMC. So this investment, when it was put into our portfolio, the average cost represents about 2.8% of the portfolio at our last full year results, which was in June last year. And I think it's roughly around that number now, maybe slightly less. And that position has been brought into the portfolio at a valuation of USD 1.38 per share. The transaction that's taking place in America has had money raised at a valuation of USD 2.9 million enterprise value and a market cap of USD 2.4 billion. So as you can see, the entire transaction creates a significant uplift in value for the DeepGreen shareholder, which is the shareholding that we own. So to put that in perspective, the position will become a significantly larger position as a percentage of our overall portfolio. And as we understand, the transaction is taking place, the documents have been submitted with the SEC in America. There's a scheme of arrangement that needs to take place in Canada. And all of these things are progressing very well, possibly slightly ahead of schedule, and we hope for this company to be listed on the stock exchange in America before the 30th of June 2021. Now as we've indicated when we put this announcement out and in all of our subsequent weekly NTAs, this position is being valued in our current NTA calculations at cost, which means that we're valuing that in our portfolio at USD 1.38. The capital that has been raised in the new structure has been raised at USD 10 per share. So you should expect to see a significant uplift in the NTA of our portfolio when this company is listed and then an uplift in the retained earnings of our business when this company is listed. And as a consequence, a significant uplift in both pre and post-tax NTA. Turning now to the outlook for the period ahead and reflecting really on the period that we've had, which has been a very, very interesting period coming out of COVID-19. I would say that we've had a big part of the recovery out of COVID-19 now and that markets are just grinding higher slowly despite some of the negativity that's coming out in the marketplace. So just combining the positives against the negatives are some of those negatives that we've been reading about and hearing about, we're hearing about U.S. tax hikes. We're hearing about a possible change in the long-term trend for U.S. bonds. We've been in an interest rate falling environment for about 30 years. This is the beginning of an interest rate rising environment. We had a little bit of a scare last month but that tends to have reversed itself again now. And we're seeing a meaningful input cost increases, meaning that this could be the first signs of inflation which, once again, would point to potentially higher interest rates. And we're also seeing a number of interesting scenarios where there's been hedge funds that have gone bust because they were so highly leveraged, which affect the market for a period of time and also this resurgence of the COVID pandemic in India and other developing countries. On the flip side, monetary policy from the central banks has been very accommodative, and we're seeing good indications that the -- this policy is leading to a recovery in world markets and also clear sections of growth in parts of the economy, particularly in America and Australia. So now we find ourselves in a situation, what we're calling a "rotation" within the financial markets. Last year, there were stocks that were the big COVID winners. And this year, there's been stocks that have been the big COVID recovery stories, and they've done very well. So coming into COVID, obviously, they were the companies that benefited during that period. And now we're seeing that the COVID recovery is benefiting those companies as they come out of the COVID pandemic. And really in Australia, you'd have to describe us as being in that period coming out of the COVID pandemic recovery. And it's happened remarkably quickly. We went into this period quickly, and we've come out of this period quickly. In a year, a lot has changed. So what are we doing? We continue to focus on visiting companies and looking for companies that are fundamentally strong and undervalued, and we do this on a case-by-case basis. And we are finding opportunities. But of course, there are much more stock-specific opportunities now than just this general feeling of buying the whole market and the whole market is going up. Interestingly, particularly in the last 6 weeks, we're finding that a lot of our short positions are starting to work. And you'll see an increase in the size of our short positions as a percentage of the overall portfolio. And that's an important leading indicator. We may find that all stocks went up in a rising tide, but now that they've all gone up, the very good stocks will continue to climb higher -- climb a wall of hurry and worry, I beg your pardon, and go higher and that those ones that are probably pushed too hard, the trend is rolling over, and we're making gains by shorting those positions. And that seems to be the nature of the marketplace we're currently operating in. So our cash levels as a result of that have increased. As trends have ended, we're moving out of long positions and adding to our cash. And obviously, as we short positions, our cash levels increase. And that's the beauty of our strategy is that we can move from being net long to long and then holding cash and then holding long and short positions and holding high levels of cash, and that's where we find ourselves at the moment. Ladies and gentlemen, the final slide is one that you see all the time, which shows the -- all the articles we've been writing or that we've been interviewed on or any television or podcast that we've been involved in. And I would encourage everyone to join the newsletter and to follow what's on our website. So please, if you haven't joined the newsletter, join it. And thank you once again for your time.