Cadence Capital Limited (CDM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Cadence Capital Limited March 2025 Quarterly Webcast. The fund returned 1.4% in April and for the first 4 months, has returned 3.5%, outperforming the all Ordinaries Accumulation Index by 3.3%. Top contributors for the period were Evolution Mining, West African Resources, Netflix, Robex Resources, QBE Insurance, Turaco Gold, Calibre Mining, Suncorp and New Gold. The largest attractors for the period were [ Block ], Regal Partners, Yancoal, Alcoa and Whitehaven. The fund's investments in gold companies have performed well for these first 4 months. The fund has been holding higher-than-normal cash balances, which has served us well during this volatile period. Since our last webcast, we paid a $0.03 partially franked dividend on the 30th of April 2025. This equates to a 9.9% annualized fully franked yield or 12% gross yield. Based on the share price at the time, the dividend was declared of [ $0.065 ]. The company still has $0.095 per share of profit reserves to pay future dividends. You can see from the exposure tables here that this fund is very liquid and diversified. We hold around 45 positions, and the largest position is around 5.5%. 85% of the fund's gross exposure is in companies with a greater than $0.5 billion market capitalization, and we could liquidate 88% of the portfolio in 1 week or 94% of the portfolio in a month. Here is a list of our top positions, both long and short as of the 30th of April 2025. We outlined this at our last webcast and I pointed to it again, P/E expansion continues to be a factor in the Australian marketplace. And in bigger stocks like Suncorp and QBE, investments which for us were made many years ago with these companies being able to increase premiums during periods of inflation, these stocks have continued to trade on higher valuations. A key part of the cadence process is to follow the trend. And while Suncorp, QBE and Netflix may not meet our fundamental criteria and are currently trades, we will not exit the positions or sell them until the share prices have rolled over and the trend has changed. We have added to gold exposure over the last 12 months as gold stocks have continued to prove that they are going higher and as gold is trading higher. CDM substantially reduced coal exposure when gold prices rolled over -- with coal prices, I think, rolled over. Recent market moves have created opportunities to add several new positions in the portfolio. This is an important slide for CDM at the moment. You can see that the company has traded between a premium and a discount over really a significant amount of time here. You can see 18 years' worth of data -- nearly 18 years' worth of data here. We've traded at a big discount when there was a global financial crisis, a big discount when there was the COVID uncertainty and COVID crisis. And here we are again trading at a discount to NTA, given the latest volatility in the marketplace. The start of the second half for us, even though the market has been volatile, has been a period of outperformance for the fund. After adjusting for dividends, our NTA has increased 4% during this period and our share price has fallen 8%. That's a big disparity in performance between share price and NTA. As we [ write ] this webcast, CDM is trading at an NTA discount of 24% whilst holding cash -- some cash. Excluding cash, the share portfolio can be bought for a 27% discount in underlying value. We are currently trading at our third largest discount with the largest discounts being the GFC and COVID-19. Put another way, this presents an opportunity to buy the portfolio at $0.76 in the dollar. At these discounts, the company is buying back its own shares. All CDM directors added to their CDM shareholdings at a discount to NTA by participating in the recent DRP. We outlined this slide in our previous webcast. Really what this is saying is that EPS growth remains anemic, slightly negative, maybe 0%, but then going slightly negative again, whilst P/Es have come back a bit and they are once again rallying. We are seeing this P/E ratio expansion on limited to no earnings growth is unfavorable and most often leads to unfavorable cash flow multiples as well. We can't short these stocks because their share prices are going higher. And so all we do then is continue to invest using our investment process. We presented this slide in our last webcast as well. And really, all this is showing is that the market on many ratios, valuation metrics is as expensive as it's ever been. Turning now to a few stock examples. Here is a gold core position with 100% plus earnings growth on a P/E of 8, very strong operating and free cash flow yield. A company that did have debt problems that under previous management had failed to reach its production numbers, but now under new management has had a beat to consensus and is having significantly improved free cash flow through increased gold production as well as through the increased gold price. This is leading to a cash flow yield that's gone from 4% to 16% and will lead to a 40% plus free cash flow yield in '27 and '26 years. The company now has a strong balance sheet and is very, very quickly paying down any debt that they had. Here's a diagram of the share price and how well it has been performing. This recent volatility has created an opportunity for us to get a new core position in Myer. The Myer share price was $1.20. During this period, it fell below $0.60 and became quite compelling for us as we were buying into this turnaround story at around a 10x P/E with earnings per share growth of around 90% for next year and good operating cash flow yield. We believe that the new management team will turn Myer around and that the new Chairman, Solomon Lew, one of the best retailers in Australia; will be very determined in turning Myer around and that this should lead to a good long-term core investment. You can see from the share price here that it's the collapsing of the share price and consequently, the valuation for Myer Holdings, which has created the opportunity. Just going quickly through a number of new positions. Boss Energy, we took on a trading position in Boss Energy when it appeared that the uranium market was getting unstable on rumors that Sprott Uranium Trust may have to sell uranium to pay for its expenses of running its trust. In actual fact, it issued new shares and didn't need to do that. In the meantime, BOE is 25% shorted, and this created an opportunity to buy shares, and the share price jumped significantly on this news. We have added a new core position in Aurelia Metals, which focuses on gold, copper and zinc production. It will transition out of a long period of capital investment into substantial positive free cash flow whilst maintaining a net cash position. At spot prices, AMI is on a CAGR of 0.1 and free cash flow yield of around 30%. We are looking forward to their Investor Day in June, where we expect them to deliver guidance showing increased production and lower costs. Robex is a position that we've held in Canada and is a gold developer in Côte d'Ivoire. It is led by a highly experienced team that we are confident will successfully transition the asset into production based on previous experiences with similar assets and jurisdictions. In actual fact, we met this management team through our [ Tieto ] investment around 2 years ago. This company is going to be dual listed and I think lists tomorrow in Australia. And so there will be an opportunity for ASX investors to participate in a new gold story that they haven't seen before. We've taken a trading position in Champion Iron. We did very well in Champion Iron when it first listed on the Australian Stock Exchange. And we think that at current commodity prices, if the iron ore price stays around $90 to $100, the company has potential to be a good trading position in the short to medium term. Turning now to the outlook. I think we've outlined before that Australia lifted interest rates 13x since May 2022 and recently reduced interest rates by another 25 basis points, and inflation is now back in the 2% to 3% range. Meanwhile, the U.S. continues to run deficits and this calendar year, should exceed $40 trillion of debt. And with greater uncertainty on the outlook and a growing reluctance from global peers to buy these issuances, this is leading to potentially higher interest rates and general global uncertainty on U.S. bonds. Consequently, Australian interest rates remain below U.S. interest rates, and this is a phenomenon that's unusual in recent history. There are expectations of further domestic interest rate cuts. If executed, we see potential for interest rate differentials to widen even further and with it, place downward pressure on the Australian dollar and potential upside on inflation. The market will watch these interest rates closely as will we, as in the end, these interest rates affect the valuation of all asset classes. We continue to see evidence of valuation multiple expansion outpacing earnings growth across the broader ex-resources landscape, and this is resulting in more expensive equities. Within our portfolio, we have outlined companies such as QBE, Suncorp, Origin and Netflix, which previously met our core criteria and are now only in the portfolio as trades. Their valuations have become stretched. This has led to the fund holding higher levels of cash than normal. The U.S. political situation has heightened tariffs, has created additional market uncertainty, leading to a potential reduction in global growth expectations, and it has disrupted trade flows. With this political uncertainty and inflationary monetary and fiscal policies, we maintain a positive outlook for gold and gold equities and expect broader market volatility. We continue to focus on implementing the cadence process that has served us well through the market cycles. Ladies and gentlemen, thanks once again for your time and listening to this webcast. And please make sure that if you don't already receive our newsletters and webcasts to register at our website so that you are receiving them. And we look forward to talking to you again.