Cadence Capital Limited (CDM) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to a webcast version of the recent Investor Roadshow Presentations for 2026. On the first slide here, you can see that Cadence Capital Limited finished the year up 20.1%, outperforming the All Ordinaries Accumulation Index by around 14.5%. Since inception 20 years ago, we're up 10.9% per annum, outperforming the index by 3.4% per annum. Since inception, we're up 761% against the index, which is up 410%. Importantly, we have now announced our final fully franked dividend of $0.03. This equates to a 7.9% fully franked yield or an 11.4% gross yield based on the share price at the date of this announcement, which was $0.75. The ex-date is 29th of September, and payment date 15th of October. After a strong performance for this year, the Board of CDM have resolved to pay a special dividend of $0.01 fully franked in December. This special dividend, of course, will enhance fully franked yield. The ex-date is the 15th of December, and the payment date is the 23rd of December. After this, the company still has $0.25 of profit reserves to pay future dividends. This equates to around 4 years' worth of retained earnings based on the final dividend. The company also has around $0.05 of franking credits to pay future dividends. This equates to 2 years worth of fully franked dividends based on the final dividend. The recent Australian budget has made franking more valuable than ever. DRP will be in operation for the special dividend. If you need to enroll for that, please contact Boardroom. As of the 16th of July, the CDM shares are trading at around a 6% discount to pre-tax NTA. Pleasingly, that has come in significantly since around a year ago. The fund has returned 3.5x the market. And in 2025, it yielded 3x the market's yield. The CDM share price for the past financial year, including dividends and franking was up around 31%. You can still buy CDM share price at a slight discount to NTA, although a lot less discount than previously. Opportunities Fund finished the year up 30.5% roughly, outperforming the index by around 24.5%. Since inception 7.5 years ago, the fund is up 22.8% per annum, outperforming the index by 12.6% per annum. Since inception, the fund is up 367%, outperforming the index by 261%. CDO is one of Australia's top performing investment companies. CDO has now announced a fully franked final dividend of $0.075 per share, and this equates to 6.5% fully franked yield or 9% gross yield based on the share price at the date of the announcement, which was $2.31 per share. The ex-date is the 29th of September and the payment date is the 15th of October. After a strong performance in 2026, the Board has resolved to pay a special December quarter dividend of $0.02 per share fully franked. This, of course, will enhance fully franked yield again. The ex-date is the 15th of December and the payment date is 23rd of December. The company still has $0.73 of profit reserves to pay future dividends. This equates to about 4 years' worth of dividends based on the final dividend. And the company has $0.162 per share of franking credits to pay future dividends. This is around 2.5 years' worth of fully franked dividends based on the final dividend. Once again, to participate in the DRP, if you're not already doing so, please get in contact with the Boardroom. CDO is now trading at a 13% premium to pre-tax NTA and the fund returned around 5x the market in 2025 and yielded around 3x the market. CDO's share price for the past financial year, including dividends and franking was up 41%, which is a combination of performance and of course, the compression of the discount to NTA and now trading at a premium to NTA. On the roadshow, we spent some time again focusing on this chart, which we have been looking at and showing our shareholders for around 5 years. Interest rates now dropped to their lowest levels quite a long time ago now and have been rising ever since. We -- the long-term interest rate on this chart of over 220 years is around 7.5% to 8% -- and you can see that period from the early '80s all the way through to around 5 years ago, we have been calling this period living the dream, or a period of nothing but falling interest rates. And as a consequence, most assets had to wind behind their sails. The opposite was true of the Second World War in 1945 all the way up to the early '80s when interest rates more or less went up, not in a straight line, but they went up significantly over time. And we, of course, have seen interest rates rise significantly in the last 5 years. The Consumer Price Index in Australia is well above the target band that the RBA is trying to achieve. And, of course, we read about this and the inflation effects in the paper every day and the consequences of much higher inflation. The Australian dollar is also significantly stronger against the major currencies over the last year and a bit. This is a chart that we've been showing for -- well, this will be our third year showing this chart now, and it is a very, very important chart. You can see that EPS growth is really low in the All Ordinaries Accumulation Index and in fact, went negative for a while there. And we're interested to see this year whether it can be positive or whether we'll once again have negative EPS growth for the entire index. On the other hand, we watched the PE ratio go from around 13x to 25x at its peak and now at around 17 to 18x PE. We'll know at the end of this reporting period what the actual PE and EPS growth numbers are. Suffice to say, earnings growth is very, very slow and PE multiples are high relative to the earnings growth. One cloud on -- one bright spot on the horizon, I beg your pardon, is the amount of AI, spend that's taking place. Of course, every day, you're reading this AI spend. Where is the revenue associated with the AI spend. At the moment, we interpret this as more of a land grab. And at some stage, we hope that the value of the token becomes more clearly defined, and we work out what revenue is associated with all of the spending. So now just putting some headlines in place comparing the 1970s to today. I think you can see that a lot of the headlines are very similar in that 1970s period compared to the headlines that we're reading about today. And just to reiterate going back on this chart here that this is really the type of headline you'd expect to be seeing when interest rates are going up. So against that backdrop and against the -- all the newspaper articles and everything that you're reading at the moment, of course, our process remains unchanged. We use a combination of fundamental and technical research as we agree that we understand this is a greater probability of producing higher returns and either fundamental technical analysis alone. And we visit companies on a daily basis to research them and to determine whether they are cheap or expensive. We use a PEG ratio, operating cash flow, free cash flow, balance sheet strength to determine value. And then we determine exit and entry positions based on technical research to scale into and out of positions. And this hasn't changed in the 25-odd years that we've been running money. So what does this look like in any given period? Well, in Australia, there's 2,000 stocks, 700 of them make a profit roughly every year. 35 are cheap, 35 are expensive, and the rest are average. Globally, around 14,000 shares make a profit, 700 are cheap, 700 are expensive and the rest are average. So really, it's those outliers that we're trying to spend time finding and that is where we see the opportunity. for investing fundamentally. But then we have to be confident that the stock has either finished falling or is trending up, and we have take on a 1% position for our initial long positions and then add to those positions over time until we get to 5% of cost. On the other hand, when it's time to sell when the stock comes off, we sell 1/3 of it, then another 1/3 and then another 1/3 until we're out of the position. So that process of entering and exiting positions is a secondary risk measure on top of making sure that you're buying cheap stocks and selling expensive stocks. Conversely, on the short side, of course, we're looking for expensive stocks, which we start to short of 1% all the way through to 5% and then cover them by buying them back 1/3, 1/3 and 1/3 as the stocks go up again. our dashboard helps us to monitor all of this information on a daily basis. And the dashboard becomes more and more sophisticated over time. The other part of what we do is what we call trading. So we've just been describing the core part of our investment philosophy. And then trading are those transactions that occur in the marketplace daily IPOs, placements, share purchase plans, rights issues, underwriting, takeover arbitrage, dual listed arbitrage, convertible note arbitrage, et cetera. So when times are good, it's good to trade. And the important thing to realize in trading is that when times are not good, when there's not a lot of opportunity, you should simply step back and not trade. There's no compulsion to trade if you're not making good risk-adjusted returns from it. Turning now to the outlook. I think we've said time and again in our presentations over the last 3 or 4 years, the investment landscape has fundamentally changed. Interest rates are going up and the inflation is in the system. There's geopolitical uncertainty, currency wars and the war for scarce resources continues. The CPI of 4% is above the band what we would like of 2% to 3%. And the interest rate up cycle that commenced in May 2022 is with us. We expect this to continue. I mean everyone would hope that it does not continue, but hope is not a strategy, and it's best really to look at what is actually happening in the environment. And as we speak, inflation is in the system and interest rates are going up. This is odds with the buy the dip mentality adopted by many in the markets, and we don't see this strategy being particularly successful going forward. As I said before, the winds are no longer in the sails from an investment perspective using a buy strategy. Many crowded trades, technology, SaaS discretionary, retail, et cetera, have fallen significantly without meaningful recovery and remain on expensive valuations for a high interest rate environment. Other sectors such as AI and contractors are also crowded and may face a similar phase in the future, depending on how expensive they get relative to their earnings growth. We expect inflation to remain a challenge with persistent budget deficits, lower productivity and government going insulin reversing previous globalization trends. We see a lot of similarities between this period and the 1970s with persistent stagflation. The 1970s had energy shortages, food shortages and the need to raise interest rates to combat inflation. All of these situations are prevalent today. Stock selection and the application of the Cadence process is pivotal in these times. Over the second half of the financial year, the falling gold price and changing trends in the resource stocks has led us to sell down more than 80% of our gold and resource stocks exposure, leading to an elevated cash position as of the 30th of June 2026, with 61% cash in CDM and 45% cash in CDO. And those numbers have remained around the same coming into July. Opportunities have emerged more recently to invest in good businesses that have been heavily sold off by the market. Previously, these market darling businesses were at extreme valuations that did not meet the Cadence fundamental criteria. A few examples of these include CSL, Cochlear, Pro Medicus, Life360 and A2 Milk. I think if you were to look at all of those companies, you would see that their prices have come up. 60%, 70% and are starting to recover, and they are much cheaper than they were. We have initiated positions in each of these companies and have added several of those positions already as the share prices have risen. We continue to monitor for changes in trend and we will act accordingly. Here's a snapshot of CDM in 2026. You can see our 1-year, 5-year and since inception returns as well as our yield. Our yield is 2 to 3x the yield of the -- all Ordinaries Accumulation Index. We're currently trading at around a 6% discount to NTA and the fund has had a return -- share price return of around 31% this year with high cash levels and the fund is very well positioned to capitalize on what the future brings. CDO returns are around 30% this year, 23% since inception, more than 3x the market's return since inception and yields of around 2 to 3x what the All Ordinaries Index can deliver and, of course, fully franked yields. We are now trading at a premium inside CDO of around 13%. And our 1-year share price return, including dividends and franking is 41%. We are holding high cash levels. And again, in this fund, we're very well positioned to capitalize on opportunities that will present this year. Ladies and gentlemen, thank you for listening to the webcast version of the Investor Roadshow. And we will shortly be giving a synopsis of all the questions and answers that people were asking in the second part of this webcast. Thank you.