Cadence Capital Limited (CDM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Cadence Capital Limited Half Yearly Audio Cast. On the first slide, you can see the performance update indicating that the fund is up 8.8% year-to-date as of the 31st of January 2023. And over the past 3 years, we have performed at 11.3% per annum. The top performers for the first half of the year were Whitehaven Coal, New Hope Coal, Terracom also, BHP, AMP, Tietto Minerals and Stanmore Resources, also our coal position. The largest attractors for the period were Citi Chic Collective, Life360, Australia Pacific Coal, Renascor Resources and Fortescue Metals. As you would have noted, read by now on the following slide, we have declared a half year dividend of $0.04 fully franked for the first half, bringing our total dividends since inception of the listed vehicle to $1.212. And when you include franking, $1.721 against the share price currently of around $0.93 per share. The half yearly dividend, as I've indicated, is a fully franked interim dividend. This implies an annualized yield of 8.6% fully franked or 12.2% gross when you include the franking based on the share price on the date of the announcement of around $0.94. As we have previously indicated in our webcast, we are currently trading at a slight discount to NTA. After paying this dividend, the company will still have around $0.22 per share of profit reserves to pay future dividends. Importantly, the ex date for this dividend is the 14th of April 2023, and we'll be paying the dividend on the 28th of April 2023. The dividend reinvestment program will not be in operation in first half year as we are currently trading at a discount to our underlying NTA. The portfolio composition slide should show that our positions are in -- by and large, are very, very liquid, and we have a very diversified portfolio at this stage. Currently, more than 93% of our portfolio could be liquidated within 1 week and over 90% of the portfolio within a 1-month time frame with us representing about 1/4 to 1/3 of daily volume in each year. The company holds around 60 positions with the largest position being 7% of the fund. Approximately 82% of the fund's gross exposures in companies with greater than $1 million market capitalization. And you can see that table above to illustrate that point. Importantly, on the next slide, you can see our top 20 holdings, and you will see there a very diversified and liquid portfolio, which we update for the market on a regular basis. We have indicated in our roadshow and over each of our newsletters over the last few years that we have had big coal investments in the portfolio. The thermal coal prices change trend. The spot price of thermal coal has fallen to USD 190 from a high of over USD 450 a few months ago. Indonesian supply has increased, while the European winter has also been mild. While coal equities have fallen, it has not been as pronounced as the underlying commodity moves given valuation and, of course, dividend support. In line with our process, we have sold more than 3/4 of our thermal coal related investments. Coking coal, on the other hand, has at its hires -- is at its hires on the back of China's reopening and this has benefited SMR Stanmore coal. Resource companies are a leverage play on the underlying commodities, as you've heard me say before, and the commodity price trend is the most important factor in driving the share prices and ultimately determining the amount of profit you'll make on a given commodity. So it's important to realize that whilst we did have big coal positions as I grew in size, we are holding much, much smaller coal positions at the moment. I'd like to now hand over to Jackson to take you through a few specific stock positions. Thank you.

Thanks, Karl. My name is Jackson Aldridge, Portfolio Manager at Cadence Capital. The first stock I'd like to talk about is Tourism Holdings. This company is a recent merger of Tourism Holdings listed in New Zealand and Apollo Tourism, which was previously listed here in Australia. And we think it's really interesting because from our perspective, it's the first true merger on the ASX in a long period of time. Between the 2 businesses, they accounted for upwards of 60%, 70% of kind of domestic RV rentals in Australia and New Zealand and roughly 40% to 50% in America. So when you sandwich these 2 businesses together, there's obviously a lot of cost-out synergies. There's 2 cost centers at every airport, there's to financial centers at each -- within each business. So there are a lot of cost-out synergies, which the company has alluded to, significant opportunity. But we also believe that there's effectively revenue synergies from a pricing perspective that they're not as competitive as they used to be against each other. So the interesting thing about this business is over COVID, they sold combined 50% of their fleet into the inflated RV market. So they sold their fleet into the secondhand market. And what that's done is that's left the RV rental market now and fast forward a couple of years, structurally short supply of RVs. So as what we're seeing is inbound tourism happens. People want to travel and rent these RVs. That number is above 65% of pre-COVID levels, yet the supply of these vans is low. So what it's led to is a yield on the fleet at 50% to 70% above pre-COVID levels. Now we don't think that will stay forever, but we do think the market structurally shifted as these guys kind of control the supply level. They can drip feed supply back into the market and aim to get back to previous levels of fleet size. However, with a yield on the fleet at 20% higher potentially than pre-COVID. So there's a lot of opportunity from a growth perspective, from a pricing perspective and then a synergy perspective. So we feel this stock could go into a number of indexes. We feel that the company could do over $100 million of NPAT. The business has typically traded between 12 and 15x. So that's upwards of $1 billion market cap with the company currently listed at about $800 million. The next stock is more of a turnaround situation, City Chic. It was once a well-loved stock when it's over $6. Recently, Brett Blundy and associates have bought in at roughly 45%, so stocks trading at $0.45 now. There's approximately 45 -- 47 to 50 depending how you provision the recent write-down of net working capital. So effectively, the market caps backed by inventory. And what we think is interesting about this business is pre-COVID and still to this day, this -- the off-line business does anywhere between $8 million and $15 million of NPAT. The market cap is at 100%. So that business is on about 10 to 12x P/E, and we're getting the rest of the business for free. Now the rest of the business has had a tough time because of what he had the CEO took on a lot of inventory like all retailers, and then demand fell away. So was forced to discount heavily. So current income statement and the profit loss for this business looks horrendous because his gross trading margin has effectively gone from 60% to 40%, which is a loss-making situation for him. But if he can return to somewhere between 55% and 60% from a gross trading margin perspective and gets the operating costs under control, we could see this business doing a lot more than $14 million of NPAT, it could do somewhere between $25 million and $30 million in kind of the next kind of 18 months. So we think from a risk-reward perspective and Brett Blundy as a retail specialist in there owning 7%, and we feel it could be buying more. We think the risk reward is very favorable in this situation. The last talk I'd like to talk about is Capstone Copper. The stock is a recent merger of -- between Capstone Mining and Mantos Copper is completed about 18 months ago. And effectively, this company put together has the best growth profile in our view of any copper stock globally and has an extremely good cost profile. So locally, we see copper miners with a cost profile of $3.50 to $4. This company, its all-in sustaining costs are currently $2.40 a pound. And with the synergies of merging the 2 businesses together and some of the cost-out profile that they're getting, it will fall potentially to $1.85. And so with the current price of $4.15, that's a lot of margin, and this company's growth profile is going upwards to 500 million pounds of copper. So that's effectively a 60% uplift on current production in the next 12 months. And then by FY '25, production will double. So if we're looking into our FY '24 projections, this company is on about 7x P/E with significant earnings growth and generating a lot of earnings at a $4.15 copper price. The market itself at the moment, copper, shorter term is heavily driven by Chinese infrastructure demand. China reopening and support for infrastructure projects has signaled that there's some strength there. And then on the supply side, nearly between 14% and 20% of copper supply comes out of South America, specifically Peru and that there's significant political tensions in these countries. And that's heavily disrupted supply and more recently, First Quantum has shut down in Panama, which is about 4% of global copper supply. So there's pressures on both sides of the demand and supply. And medium-term copper is an extremely important input into the electrification of all things. So medium term, we see huge deficits in this commodity, and there's very few projects that have been approved over the kind of the next 5 to 10 years. So we feel there's upward pressure on the commodity price. So I'll turn back to Karl to talk to Genworth and then provide an outlook.

Thanks, Jackson. And now turning to one of our international positions in the portfolio and an interesting position, which is Genworth U.S. This is a long position and can basically be split into 2 forms of valuation. The first is a holding in 81.4% of Enact, which has been spun off and listed on the United States Stock Exchange under the Code ACT US. This is a publicly listed company with a market cap of around $4 billion. Genworth's share price can almost be justified by the 81.4% holding in Enact. The company then has a life insurance division with $71 billion of assets and $65 billion of liabilities. This Life Insurance division contains many long-term key insurance policies that will end up costing Genworth much more than expected when the policies were originally sold and written. This has created a very complicated historical history for the company and a very complicated reporting environment for the company. Genworth's expects though that it can meet the increased cost by increasing customer premiums, but the market is valuing the Life Insurance division at almost 0. Genworth has stated that it will not transfer more capital to the Life Insurance division from its mortgage insurance business. So the worst-case scenario for investors is that the life business is worthless and the Enact position is worth its current price, which is approximately Genworth's current value. The best case scenario, of course, is that there is significant upside considering the Life Insurance division already has a book value of $6 billion. So this is a very unusual and interesting position and so far as you can easily determine the component value for the mortgage business, which is around the current share price. And in a way, in Terracom is a free core option over the improvement in the Life Insurance division. And so the market is just slowly starting to realize this. And if you look at the share chart on the following page, you can see that the stock has tracked sideways since 2016 and all of a sudden in 2023 has started to pop its head up as the market begins to realize that there is that recall optionality. And in actual fact, the Enact business is performing quite well itself. Turning now to the outlook for the year ahead. The Australian stock market obviously has climbed a wall of worry to once again reach near all-time highs. And international markets have lagged with the S&P 500 and NASDAQ 13% and 24% below the highs, respectively. So clearly, Australia and stock market has recovered more quickly or has risen higher than the S&P and NASDAQ. The Resources sector, of course, explains a lot of this and continues to lead the ASX hire with China's reopening being the latest catalyst for the ASX market to perform well. The Australian dollar has bounced recently after trending lower in 2022 as well. The Australian consumer has remained resilient to date, but we are seeing through some of the half year results that there are early signs of softness in the 2023 calendar year. We are probably expecting further weakness given the lagged impact from interest rate increases and reduced saving buffers, which you've heard us talk about in previous webcast, and we spoke about extensively during our roadshow and also in our monthly newsletters. These higher interest rates and elevated cost environment will, of course, favor active stock picking, which combines fundamental and technical research. It is also a time to be holding above-average cash levels. And as you know, we traditionally hold around 25% cash. We were holding a lot in less than 25% cash, and we're once again holding around 25% cash. So it is an environment to proceed with caution, which is how we're describing it to our investors. Ladies and gentlemen, thanks once again for your time during this webcast. And of course, to keep up to date, we always say, please join our newsletter. And also, we've started to do a number of interviews on streaming services and on television, and we'd encourage you to listen to those and watch those streaming services at your convenience. Thank you.