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

Ladies and gentlemen, welcome to the Cadence Opportunities Fund March 2025 Quarterly Webcast. The fund returned 2.5% in April and over the first 4 months of the year is up 5%, outperforming the All Ordinaries Accumulation Index by 4.8%. Top contributors during the period were Evolution Mining, Echo IQ, West African Resources, Turaco Gold, Robex Resources, QBE, Calibre Mining, Guzman Y Gomez and Solvar. The top detractors were Regal Partners, Block, Step One Clothing, Yancoal and Iperionx. The fund's investment in gold companies have performed well for the fund over the last 4 months, and we'll go into that a little bit of detail. The fund has been holding higher-than-normal cash balances, which have served us well during this period and especially since the beginning of this calendar year. Since the last webcast, we paid out a $0.065 fully franked dividend that equates to 8% annualized fully franked yield or if you gross that up for the franking credit, 11.4%. We still have $0.135 per share of profit reserves to pay for future dividends. The next slide shows the exposure, and I mean the overriding impression you should be getting here is that the portfolio is diversified and liquid. We have around 50 positions with the largest position being 5.5% of the fund. Currently, about 93% of this portfolio could be liquidated in 1 week and 99% in 1 month. Here's a list of stocks as of the 30th of April 2025. It's a combination of things going on here. PE expansion has continued to benefit our existing positions, Suncorp, QBE, and also Netflix, which were -- which we made a number of years ago with Suncorp and QBE able to increase premiums during that inflationary period. A key part of this process is to follow the trend. Now QBE, Suncorp and Netflix do not meet our fundamental criteria, but the stocks continue to rise higher and higher. And so we will not sell those positions until the trend changes and the stock prices roll over. That's actually symptomatic of a lot of stocks on the ASX at the moment. We've added to our gold exposure over the last 12 months. We have substantially reduced our coal exposure when the coal prices rolled over. Recent market moves have created a number of opportunities to be added, and we have several new positions, which we'll go through. This is an important slide. You can see us trading in different periods of time at a premium in and around NTA at a discount and most recently, at around a 20% discount to NTA, despite outperforming the All Ordinaries Accumulation Index and despite our NTA going up. In actual fact, when the market had that 15% range in performance that fell 15% and has now recovered 15%, creating what was -- commentators created -- described as volatility and uncertainty, our portfolio is up 5% during that period. And as we -- right now, that creates a 20 -- maybe 20% discount to NTA. Another way to say this is that you are buying $1 in our portfolio at $0.81 at the moment. So we've seen the situation where our NTA has been going up, and our share price has actually fallen a little bit, creating quite a lot of discount, which is unusual. At these discounts, the company is buying back its own shares in a nonmarket buyback program. You will have noticed through the ASX announcement that all CDO directors added to their CDO holdings at this discount to NTA by participating in the recent DRP. This slide we showed in previous webcast, that I think is an important 1 to reiterate again. Here, you see anemic EPS growth, actually slightly negative EPS growth, clawing its way back to no EPS growth and once again, turning slightly negative in this quarter. Conversely, PEs expanded and expanded and expanded during this period came back a little bit and now once again expanded. This means that many stocks are not meeting our fundamental criteria. And then as a consequence, are not attractive for us to invest on a paid ratio basis or a cash flow basis. In addition, we can't actually short these stocks because the share prices continue to go up, and we will not short a rising stock price. So we actually have to wait for these stocks to roll over before they become attractive as short positions from a fundamental perspective. We will continue to invest using this process and it has served us well through different market cycles in the long run. We showed this slide a number of times now in our presentations. What we're trying to reiterate here is there are a number of fundamental measures. The market is currently as expensive as it's ever been in the 1900s and 200os. I mean this is a chart that goes back 120-something years now. Here's a core position in our portfolio, New Gold. We own the -- actually the Canadian listing. The company is growing at 100% EPS growth. It's trading on a PE of 8, very, very strong operating cash flow yield and free cash flow yield. Former management had run into problems and production had suffered. More recently, production has improved dramatically, and this has been evidenced by 10% beat to consensus production numbers. In addition, as you know, the gold price has been going up. This has led to a very leveraged effect on the free cash flow for the company with free cash flow having gone from 4% to 16% for this year and 40%, respectively, for the next 2 years. This has given New Gold a very strong balance sheet in a short space of time, and their net debt of $0.25 billion is very conservative relative to their market capitalization now and, of course, the production -- gold production numbers. Here, you can see how well the gold prices -- sorry, the gold price, and as a consequence, New Gold's share prices down during this period. Here's an interesting little company. We've just said it's very difficult to find new core positions, but here is one. The Motorcycle Holdings company is a leading motorcycle retailer in Australia and has a new management team and is executing a new strategy to grow and expand over the medium term. Recent results have indicated that sales volumes are improving across both new and especially used motorcycles. There is an emphasis on cost management and operating efficiencies. The net result is that the company will experience an EPS growth of around 30% this year on a PE of 10%, with good operating and free cash flow yields, quite conservative debt levels now and a market capitalization of $185 million. Should this continue, of course, the balance sheet situation will improve and stock turnover will reduce inventory and the cash flow numbers as a consequence can be used to pay down debt. You can see from this chart that around August 2024, the share price trend changed, and we started adding to a new position in Motorcycle Holdings. I'll just go through a quick list of other new positions in the portfolio. Boss Energy is a uranium producer. In this quarter, we've seen quite some uncertainty around the Sprott Uranium Trust. It was mooted that they would have to sell uranium in the marketplace to pave the costs of running their fund. An actual fact, they raised money through issuing new shares in the fund, and this eliminated the need to sell uranium, which was perceived as an overhang in the whole uranium industry. This led to the Boss Energy price dropping dramatically. This position was further enhanced because there's a 25% short on Boss Energy. It's 1 of the most shorted companies on Australian Stock Exchange. So of course, when the stock price did run, people had to quickly cover the short positions and the stock went up a lot in a short space of time. You've heard us talk about Echo IQ. We recently participated in their placement. The company's technology has received FDA approval in October and they recently announced integration agreements with a hospital in Boston, USA. We reduced our position trading it several months ago and have again added to that position in this recent placement. Myer's share price over this period of what has been called volatility, share price fell from $1.20 to $0.58. And this has created an opportunity for us to buy into a company at around a PE of 10x with EPS growth rooted be around 90% for the year ahead. We believe that the new management team that have been installed at Myer will have a very high probability of being able to turn the business around. And we also believe that Solomon Lew, 1 of the best retailers in Australia, who has joined the Board of Myer, will be instrumental and turn the Myer business around. Betr Entertainment recently did a placements, which we participated in. We believe this position combined with the merger with PointsBet Holding, stock code PBH, will be a core position. And when the acquisition is successful, the 2 companies will have meaningful synergies and significant scale of the market in Australia. We expect it to trade on a multiple for the combined entity of around 13 times and a free cash flow yield of at least 10%. Turning now to the outlook for the market in general. Of course, you've heard us say before that the RBA lifted interest rates 13x since May 2024. And during this quarter, reduced interest rates by another 25 basis points, with inflation now back in the 2% to 3% target range for the Reserve Bank of Australia. Meanwhile, the U.S. continues to run deficits and this year would exceed $40 trillion of debt. This grew with great uncertainty on the outlook that is growing reluctance for global peers to buy these issuances of U.S. bonds. And so there is a risk that interest rates go higher. As things stand at the moment, interest rates in Australia remained below U.S. interest rates, and this is a very unusual situation historically. There are expectations of further domestic interest rate cuts in Australia. And if executed, we see potential for interest rate differentials to widen even further between the U.S. and Australia. And with this place more pressure on the Australian dollar and upside pressure on inflation. Of course, the market will watch these interest rates move closely as will we, as they affect the valuation of all asset classes. As we've already outlined here, we see evidence of valuation model expansion, outpacing earnings growth across the broader ex-resources landscape, and this has resulted even more expensive equities than when we lost the webcast. Within our own portfolio, we have seen head ratios expand and price earnings multiples expand in companies such as QBE, Suncorp, Origin and Netflix, which previously met our core criteria, but are now becoming stretched fundamentally. And as a consequence, our trades in our portfolio until those share prices roll over. The net result of this is that the company is holding a higher-than-normal cash levels. The U.S. political situation has heightened tariffs -- were heightened tariffs has created additional market uncertainty, leading to a reduction in lower growth expectation and disrupted trade flows. We will have to watch as this situation unfolds. With the political uncertainty and inflationary monetary and fiscal policies, we maintain a positive outlook for gold and gold equities with broader market volatility likely. We continue to focus on implementing our process, and it has served us well through many cycles. Ladies and gentlemen, thanks once again for watching our webcast. And as always, if you are not receiving our monthly news that are webcast and periodic results, please register on our website, and we look forward to being in contact again soon. Thank you.