Cadence Opportunities Fund Limited (CDO.AX) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Cadence Opportunities Fund Limited Year-end Webcast for June 2025. The company produced a profit after tax of $1.5 million and the fund ended up around 8% for the year. We performed strongly in the second half of the financial year being up 9.1%, reversing some of the underperformance in the first half of the year. The top contributors for the period were Evolution Mining, Netflix, Echo IQ, Robex Resources, QBE Insurance, Boss Energy, New Gold, Turaco Gold and Guzman Y Gomez. The largest detractors for the period were Step One Clothing, Whitehaven Coal, Alcoa and Capstone Copper. The All Ordinaries Accumulation Index performance for 2025 was driven by a small number of large cap stocks that did not meet the Cadence investment criteria, having low earnings growth and high price earnings multiples. Commonwealth Bank, Wesfarmers, Westpac, Telstra and Brambles are 5 such examples, which were responsible for about half of the rise in The All Ordinaries Accumulation Index over the 2025 financial year. In our 2024 webcast, we highlighted that the Australian dollar gold price has been rising and that some gold mining companies are leveraged to the gold price. Their share prices should have outperformed gold price movements but have not. At that point, we had underperformed, and this continued for most of 2024. We have recently seen many gold companies share prices catch up to the gold price. Our Evolution Mining investment has performed well for the fund with the share price up 123% over the past 12 months, while the Australian dollar gold price was up 44%. Robex Resources, New Gold and Turaco Gold have also performed well for the fund, particularly over the last 6 months of the financial year. Market moves over the last 6 months of the financial year created opportunities to add several new trading positions in the portfolio. This dividend slide shows the final dividend, bringing our accumulated dividends to $1.10 gross since inception. This final dividend is $0.07 fully franked, an increase of $0.5 on the interim dividend, bringing the full year dividend to $0.135 per share fully franked. This equates to a 7.8% fully franked yield or an 11.1% gross yield based on the share price at the date of this announcement of $1.73. Importantly, this equates to 6.7% or 9.5% gross yield based on the NTA of $2.03 on the date of this announcement. After paying this final dividend, the company still has $0.145 per share of profit reserves to pay future dividends and before any future profits. The Ex-Date is 15th of October 2025, and the payment date is 31st of October 2025. The DRP is in operation for this final dividend and will be priced at the weighted average share price over the relevant DRP pricing period. At the time of writing this presentation, the CDO share price is trading at a pre-tax NTA discount of around 16%. Participating In the DRP is an efficient mechanism to add to existing holdings in the fund without paying brokerage. If you have not registered for the DRP and would like to, please contact Boardroom. The company will buy back shares it issues under the DRP, and the buyback will operate when the CDO share price is trading at a discount to pre-tax NTA. Turning now to the portfolio at the 31st of July 2025. This includes both our long and short positions. You can see in this list of stocks here that we have been adding to our gold exposure over the past 12 months. The 2 positions, Alkane and Mandalay Resources were an arbitrage that the fund participated in, and that trade is now complete. Recent market moves have created opportunities to add several new trading positions to the portfolio. Some of our older positions, for example, QBE and Sun, no longer meet the Cadence core fundamental criteria, but are still in the portfolio as trades. We've been adding to 2 core positions that have done well for the fund over this period, Motorcycle Holdings has a long position and Guzman y Gomez has a short position. Over the past 6 months, there has been an increase in trading activity in the fund due to an increased number of capital raisings and secondary opportunities. This slide shows the premium and discount to NTA for the fund. You can see that we've moved from being at a around a 15% premium to NTA to NTA to at its worst, a discount of greater than 20% discount to NTA, but the fund has gradually started to close that discount to NTA. And of course, we always encourage potential shareholders or existing shareholders to add to their positions when the company is trading at a discount to NTA rather than at a premium to NTA. As mentioned, we're currently at around a 16% discount to pre-tax NTA and this represents an opportunity to buy the current portfolio for around $0.85 (sic) [ $0.84 ] in the dollar. At these discounts, the company will be buying back its own stock in the CDO on-market buy-back program. Directors have also been adding to their CDO shareholdings at a discount to NTA by participating in the recent DRP. This is a very important slide and a slide that we showed at the last half year results as well. Looking at the slide very carefully, we can see that this is the second reporting season in which the Australian stocks have recorded negative earnings growth. Against that backdrop, we've seen PEs expand from around January 2024 at about 17.5 to 18 to in excess of 20 PE at this stage. And that means, of course, that a lot of stocks are trading on high PEs with single-digit growth rates or less for the average of the whole market to be negative earnings and for PEs to be at 22, of course, we have a situation where there is no growth, slight negative earnings growth and expanding PEs. Gold stocks on the other hand, as we outlined briefly, have started to catch up with the gold price. And that is important because what should be happening is that as the gold price goes up, gold companies with good operating leverage and good retained costs for producing gold should, in fact, be making incrementally much larger profit. So in actual fact, you would expect to see the gold price index line going significantly higher than the lighter blue gold price in Australian dollars. Now put another way, we often like to use this quote, it's a quote that famously said, commodities are the purest form of trading in the world and resources companies are a leveraged version of that same trade so that if gold is going up, at these prices, with these profit margins, gold stocks should be going up by more than the gold price. And we're starting to see signs of that. Endeavour Mining is a stock in our portfolio, a Canadian stock, a gold miner and a diversified gold miner with production in excess of 1 million ounces per annum, spread across 5 producing mines in different jurisdictions. It has a refreshed management team led by a new CEO and is now building a track record of consistent delivery. EDV recently transitioned to being cash flow positive and is now in the midst of cash flow harvesting with unhedged production, CapEx subsidizing -- subsiding [indiscernible] and free cash flow yields for the foreseeable future improved to an excess of 15%. These characteristics have led to a strong balance sheet with leverage below targeted 0.2x and we predict transition to net cash. We expect an acceleration in buybacks and dividends, both of which are already in place. So you can see we've got a balance sheet here whose debt is rapidly going down and whose cash will start to accumulate and very good pay ratio. The company's share price has been progressing very well and has almost doubled. Amplitude Energy is a domestic East Coast gas producer with a well-established gas field and associated infrastructure in Victoria. It's led by a highly regarded team that have delivered an exceptional operational turnaround at Orbost, taking historical average processing rates to 40 to 50 TJs per day towards a nameplate 68 TJs per day. With significant regulatory impediments on new domestic gas production, the value of this asset with exposure to rising gas prices is highly valuable. It trades on 12x PE and a PEG of 0.1. Free cash flow yield is 8%. Operating cash flow is 29% for the year ahead. And this will help to strengthen the balance sheet ahead of its upcoming growth campaign at the ECSP Project, expecting to increase production by around 65%. Again, the share price has performed very well over the previous few years. We've spoken briefly about Motorcycle Holdings in the webcast before, and this company is a leading motorcycle retailer in Australia. The company has a new management team in place and is executing its strategy to grow and expand over the medium term. Recent results have indicated that sales volume are improving across both new and used motorcycles, much as we're seeing improvement with motor vehicles as well and the price of new and secondhand motor that are being sold being up nominally as well. MTO recently announced the acquisition of Peter Steven and Harley-Haven from administrators for between $7 million and $9 million. I think although the acquisition price for this is fairly small, there are a lot of synergies between these businesses. And I mean, it's fair to say that Motorcycle Holdings have bought very well here because they bought of an administrator and very much it would appear on Motorcycle Holdings terms. The acquisition will give MTO a presence in both Perth and Adelaide and complement the existing operations on the East Coast of Australia and New Zealand. We expect this acquisition to improve fundamental numbers, being EPS accretive straightaway and look forward to hearing details of the available synergies during the full year results presentation this month. If you have a look at the numbers on the left-hand side, we're experiencing 26% EPS growth roughly on a 12x PE with operating cash flow yields of 10% (sic) [ 9.9% ] , free cash flow yield of 8%, very low debt relative to market cap and probably the debt will go lower. The stock has performed very well since it bottomed out at around $1 and now is trading around $3.60. Guzman Y Gomez, we've spoken about briefly before. This is a short position for us. Guzman Y Gomez listed on the ASX in the middle of 2024 with ambitions to grow its Australian network from over -- from 198 stores to over 1,000 stores over the next 20 years, whilst expanding into the U.S. GYG has an Australian store rollout target of 30 stores per annum in the near term and 40 per annum thereafter, well above the store rollout rates of Australian peers and Guzman Y Gomez' own past performance. The management team has set high expectations for the U.S. expansion, quoting a large addressable market with a long growth runway. As things stand at the moment, they're conducting a pilot study in Chicago and have between 5 and 7 stores in operation. GYG is trading at a very high valuation. On these numbers, we see a PE of 126x, but the share price has already halved and so the stock was trading on around 340 PE. We took a short position when the share price started to roll over from its highs and have been adding to that position as the trend continues. Recent results have shown some softness in trading in the Australian market, not particularly bad, but not easily to justify 126x PE at this stage and very little growth, if any, in the U.S. market with low sales growth and losses increasing. So on the left-hand side, you can see here a predicted EPS growth of 43% on 126 PE with very little operating cash flow and free cash flow and a very large valuation. Here's a chart of what I just outlined. The stock moved from around $20 -- just above $20 to around $45 and is once again around the mid-$25. And so although it has fallen a lot and has been written about in the press a lot, it is still trading on a very, very high PE multiple. Turning now to the outlook. Global markets remain caught between the slowing growth we've just been describing in particularly the negative earnings growth for the period we've just outlined in reporting season, political uncertainty and central bank policy easing. U.S. President Trump's tariffs have added further pressure to the global economy, prompting central banks worldwide to respond with interest rate cuts. The RBA reduced rates by 25 basis points in August, while the U.S. Federal is widely expected to follow suit in September. Despite short-term rates falling, we do see upside risk to longer-term interest rates and inflation. Loosening monetary policy and growing fiscal deficits are laying the groundwork for inflationary pressure to reemerge. These forces may lead to a devaluation of currencies and elevate the safe haven characteristics of gold with gold equities remaining a core exposure within the fund on relatively inexperienced valuations and certainly very inexpensive valuations when compared to many industrial company valuations. We're starting to see the word in the financial press again, stagflation. This is really negative earnings growth combined with inflation. In economic terms, this is discovered -- this is considered the worst of all worlds and no doubt policymakers should be turning their minds on how to prevent this. Across the broader ex resources market, we continue to see evidence of PE expansion outpacing earnings growth. In fact, I've just been describing earnings contraction, resulting in increasingly more expensive equities. Recent interest rate reductions may see this trend continue in the near term with increased market volatility providing more trading opportunities. We continue to focus on implementing the cadence process that has served us well through many market cycles. Once again, in these webcasts, I would please encourage everyone to join our monthly newsletter. And if you have not done so, please register to receive that newsletter and our webcast and periodic results at the web address below. Ladies and gentlemen, thank you once again for listening to our webcast, and we look forward to talking to you again in the near future. Thank you.