Djerriwarrh Investments Limited (DJW.XA) Earnings Call Transcript & Summary

Hello, and welcome to the Djerriwarrh Full Year Financial Results briefing. [Operator Instructions] I would now like to hand the presentation over to Mr. Mark Freeman, CEO and Managing Director of Djerriwarrh Investments. Thank you. Please go ahead.

Well, good afternoon, everyone. I'm Mark Freeman, the CEO and Managing Director of Djerriwarrh Investments, and welcome to this full year result briefing. I'd like to begin by acknowledging the traditional owners and custodians from all the lands we are gathered on today and to pay my respects to their elders past, present and emerging. I have joining me today on the webinar Brett McNeill, the Portfolio Manager for Djerriwarrh; Olga Kosciuczyk, Assistant Portfolio Manager; Andrew Porter, our CFO; Matthew Rowe, Company Secretary; Geoff Driver, our General Manager of Business Development; and Suzanne Harding, Business Development Manager. This briefing is based on the material available in the company's website. Presentation slides will change automatically via the webcast. Finally, please note following the presentation, there will be time for questions and answers. You can ask a question via the webcast using the tab at the bottom of the screen. I'll now turn to Slide 2, which is the disclaimer, just to say we're here to talk about the company. We're not here to give any advice. So on to the agenda, I'll just give a brief overview of the company. Brett will talk through some of the recent results, and then I'll touch on the premium discount to NTA slide. Andrew Porter will then give a summary of the full year result. And back to Brett and Olga to talk through the results in more detail, including a portfolio update and outlook, and then we'll go to questions. So just starting with Slide 5, which is the overview. So just to remind everyone that Djerriwarrh is one of the largest income-focused listed investment companies on the market. It was established in 1989 and listed in 1995. So shareholders get the benefits and transparency associated with being a listed investment company, or an LIC, as we call them as long as -- as well as the governance standards delivered by our independent Board of Directors. Importantly, Djerriwarrh shareholders own the management rights to the company, so there's no fee leakage to third parties, and there's no additional fees or performance fees attached to that. Djerriwarrh is also part of the broader group of listed investment companies, which includes the Australian Foundation Investment Company or AFIC, AMCIL and Mirrabooka. This supports a broader research approach and scale of operations. So just in summary, Djerriwarrh is focused on producing higher income and higher yields than that you achieve on the market. Our target is to produce a yield of at least 1.2% greater than the market. We use call options primarily to achieve this. We do some limited put writing activities. Just to remind everyone, selling call options does bring in additional income, but it can sell the blue sky on the stock particularly when you've got a sustained period of strong markets, which we've had over the last few years. So we give away some of the upside to produce much stronger, fully franked dividends today. And so we think this product has a unique positioning in the market, particularly in superannuation funds and pension funds, which have 0 tax paying status and can get all their cash back on franking credits received. So with that, I'll just pass over to Brett for a couple of slides on yield and performance, and then I'll talk about the share price.

Thanks, Mark, and good afternoon, everyone. Thanks for joining our presentation today. So on Slide 6, we address Djerriwarrh's primary objective, which is to deliver an enhanced yield. So what we mean by this is essentially providing an enhanced level of fully franked income that is higher than what is available from the broader share market being the S&P/ASX 200 index, and we look to deliver this at a low cost to shareholders. So what do we mean by enhanced yield? So we're taking the last 12 months' worth of dividends, grossing them up for franking credits, and calculating that as a percentage yield on the 30th of June 2025, valuations for both the Djerriwarrh portfolio and the broader share market. And this is what we show in the chart on the left-hand side of Slide 6. As we can see in the dark blue bar, Djerriwarrh's dividend yield was 6.5% as at 30th of June 2025. And this compared to the broader share market dividend yield, of 4.2% as we can see in the orange bar there. So the enhanced yield that we aim to deliver was 2.3% being the difference between our 6.5% and the markets of 4.2%. So we think an enhanced yield of 2.3% being a very attractive level. And if we measure the yield on the Djerriwarrh share price, given that it's trading at a discount to the NTA, the yield is even higher at 7.3% for Djerriwarrh still versus the market at 4.2%. On the right-hand side of Slide 6, we show how our enhanced yield has tracked over the last 5 financial years. And it shows that we've produced what we think is a very healthy, attractive and sustainable level of enhanced yield for each of these last 5 financial years. Turning to Slide 7, which covers the secondary objective of Djerriwarrh, which is on top of delivering an enhanced yield to also deliver some capital growth through an attractive total return. And we showed this measure over various time frames on the left-hand side. The last 12 months was certainly disappointing for Djerriwarrh in terms of the capital growth given our total return of 7.8% lagged the market's return of 15.1%. Both of those metrics being grossed up for the value of franking credits. And the 5-year numbers on the same basis, being Djerriwarrh a total return of 11.1% and the market at 13.3%. The right-hand side here shows how Djerriwarrh's total return has tracked the market over the 5-year period. And we think it's useful because it illustrates how the underperformance over the 5-year period has really occurred over the last 12 and a bit months, and that's mostly been due to our defensive positioning in what turned out to be a very strong market. And we'll go into some further detail on some of the stock positions behind this later in the presentation.

Okay. Thanks, Brett. So if you just move on to the next slide, I would just make an additional comment on the previous one. So we are seeing markets at very high valuations. And as I said, the call options do cap our upside, particularly when markets are very strong, and we do have that cautious view on valuations, particularly when you look at the fee price to sales, price to book of the Australian market as well as the U.S. market at this point in time. So on to that slide, it just shows you where the share price is in relation to the NTA. So at the 30th of June, the NTA was $3.40. That point, the share price was $3.03. As we sit here today, the discount is around 7%. So the share price is around 7% below the NTA. And we have been experiencing those sort of discounts now for a couple of years. This is an issue that seems to cover most of the LIC market. In fact, there are a number of LICs trading discounts much greater than that. It's a bit of a trend we're going through. There's a number of reasons why this may occur. Obviously, there's continued growth in ETFs in the marketplace. We think higher interest rates has put some retirees in a position where they're happy to put more money into fixed interest in term deposits. We think there are a number of LICs that have entered the market, in our view, that has sort of clouded the picture, where newer LICs, with external managers charging high fees and there seems to be a disappointment with those models. But just to remind everyone, we see ourselves as a traditional LIC, where there is no external manager. There's no performance fees. That's simply cost recovery and the shareholders own the company. That is a very different model to some of the new LICs. And it's been a hot market. And we've seen in the past that markets are really red hot, we do tend to lag a bit. We did see the discount closed quite substantially when there was a sell off a few months ago. So in a way, it's almost like people looking at their traditional LICs, like ours, not quite believing where the current market sits at this point in time. But you're basically paying $0.93 for a dollar's worth of assets. There's a dividend coming up, which is quite significant. And so against where the NTA there is at the moment, there appears to be some value. So with that, I'll pass over to Andrew Porter, our CFO, to talk through the results.

Thank you, Mark, and good afternoon, ladies and gentlemen. So the summary of full year results is there on the screen for those of you who are watching. And the net operating result, $40.8 million this year, up from $40.3 million. Just to remind shareholders, the net operating result excludes the results of the open options position. So we don't know what the final position of those is going to be in. So it's a normal measure that the Board used when determining the dividend. That's a pleasing result, particularly the -- as there was a decline in dividends from key dividend players such as resources, stocks during the year. And as we'll come on to later, there was also a reduction as part of the defensive posture on a lot of bank stocks, which also led to an overall decline in dividends. But interesting enough, the amount of money that we got from deposits was up to $1.5 million. So that was $1 million more than normal because Djerriwarrh was relatively ungeared during this period compared to what it has been in the past. So $40.8 million, that's led to the Board declaring a dividend of $0.0825 this year. So total dividends for the year $0.155, up from $0.1525, and Brett has been through some of the key objectives there in terms of that enhanced yield. It's a question that we're often asked. When you paid that out, what is the franking credit balance left in the company for future downturns? And after payment of that dividend, it's roughly equivalent to $0.23, so about 1.5 years' worth of dividends we've got in store, which we think is an adequate reserve. The total portfolio return. Brett touched on that, and we'll go into that in more detail later on. Management expense ratio, Mark has also touched from 0.47%, up from 0.42% last year. There was a small increase in the costs themselves. But the MER was perhaps higher than it would otherwise have been because as we said, we are relatively ungeared. If we'd be more fully geared, that would have come down. So with that, I'll hand back to Mark.

So I think, actually, we might be passing to Brett, actually.

Thank you. So to pick up on some of the financial highlights that Andrew just gave, we give a bit more detail on the next few slides. So beginning on Slide 12, we give a summarized version of our profit and loss statement. And this is to really illustrate in a bit more detail, the key drivers of how the net operating result hasn't been made up and how it flows through to the dividend. And again, just to be clear, we're focusing here on the net operating result, given, as Andrew mentioned, it's a better measure, we believe, of Djerriwarrh's profit, and hence is the basis for the dividend that we declared. So the overall picture from Slide 12 for this financial year was that our defensive positioning for the majority of the year resulted in a smaller investment portfolio given the net cash position, as we mentioned, and as a result, we had slightly lower dividend income. It was down 4% to $34.7 million, but this was offset by a small increase in the option income, up 1% to $16.7 million. Other income, that bank deposit revenue being up and also lower finance costs, which were down to $2 million. So the bottom line in dollar terms, the net operating result up 1% to $40.8 million, which equates to $0.155 on a per share basis. And then the dividends declared for the full year, up 2% to $0.155. So a couple of points to make here. Firstly, we think a very pleasing result that we're able to increase the profit and the dividend per share in a year when dividends are actually down on the ASX 200, and we maintained a defensive portfolio. But also pointing out that we think the dividend per share is set at a very sustainable level, being fully covered by net operating profit per share. So on Slide 13, we just give a bit more detail on the key driver of Djerriwarrh's profit being the dividend income that we received from the companies that we own in the investment portfolio, and we show the 5-year trend for this metric. So the FY '25 result was down, as we've mentioned, but in yield terms, which are shown on the right-hand side, the portfolio dividend yield was well above the market yield. And this was mostly because of a couple of reasons. Firstly, we received some special dividends during the last 12 months, in particular for Woolworths, which boosted our portfolio's dividend income and yield. But secondly, some of the timing of a lot of our significant purchases, which I will touch on, was largely done before those stocks went ex-dividend. So we're able to catch up the full periods worth of dividends for only a part year's worth of investment. So both of those factors really increased the portfolio's dividend yield versus the market in a year when market dividends were down. From here, I think the -- we expect the portfolio's dividend yield to be at or slightly above the market level. But obviously, there's a lot of factors that can influence that. On Slide 14, similar analysis, but to the option income, which is the other key driver of Djerriwarrh's profit. As a reminder, we received -- this is the income that we received from our option running activities, and that involves us writing options, predominantly call options, sometimes puts purely to generate extra income. We don't use options at all for any hedging or speculative purposes. It's purely to generate extra income. And because of that, that's why it's a key source of the enhanced deals that we produce. So here, the 5-year trend in option income has been very positive, and it was very pleasing that this year was an increase on the previous year, which was also a strong year. And then in yield terms, quite high with the portfolio's option income yield getting to 2%. There's a lot of factors that will influence the portfolio's option income yield from here, such as the amount of call option coverage we have across the portfolio, whether we write any put selectively, but also market conditions like volatility levels, but the mix would suggest that we'd expect the portfolio's option income yield to be around the range of probably 1.6% to 2% from here in a normal type of year. So hopefully, that gives a bit more detail on how we generated the increase in profit and dividend this year and the 5-year trends in dividend and option income. And so with that, I'll pass to Olga, who's going to give an update on the portfolio.

Thank you, Brett, and good afternoon, everyone. Our main investment objective is to pay our shareholders an enhanced dividend yield. To achieve that goal, we generate income by writing call options against select portfolio holdings. On this slide, we show the performance of the market as defined by our benchmark, the ASX 200 index, overlaid with a top down view of our portfolio's call option coverage. We started the financial year 2025 with call option coverage of 29%, just below the bottom end of our normal range of 30% to 40%. And this works well as the market grows over the next 2 months. In response, we significantly increased call coverage in September, and then maintained it about 40% over the next few months. In hindsight, we position our portfolio defensively too early as the ASX 200 index continues to rise until the significant correction we saw in March and April. Following the sell-off of the market quickly rebounded and we increased our call option coverage to 45%. We finished the year with call option coverage at 32% following significant option exercises we had in May and June. On Slide 17, we show our key recent transactions in the financial year 2025. We had significant option exercises across banks, CBA, NAB, Westpac and Macquarie Bank as well as Telstra and Transurban. We were also active sellers of our small remaining holdings in Ramsay Healthcare and FINEOS, both of which have been disappointing investments for us. Finally, during the period, we sold out of mineral resources. We were extremely disappointed in the company's corporate governance practices, which saw us lose confidence in this investment. And as a result, we decided to exit the position. We did not immediately reinvest the capital realized from the sales, carrying a net cash balance sheet until we saw a significant sell-off in the ASX 200 index, which occurred in March and April. During this period, we invested over $123 million into the market as we saw opportunities to buy quality companies at attractive valuations, with prices 15% to 30% cheaper than the recent highs. Our biggest purchases were across the bank, NAB, Westpac and Macquarie Bank, which pleasingly we bought before their ex-dividend date. We also added to our ARB holdings as it underperformed the index significantly, mostly on concerns about the impact of the U.S. tariffs on their business and cyclically weak new vehicle market in Australia. We rate ARB's management highly and back them to navigate through these what we consider short-term challenges. We see no impact on the company's long-term growth outlook. As such, we saw the price weakness as an opportunity to increase our holdings at a very attractive price. We also added to our CSL holding and two large diversified miners, Rio Tinto and BHP. And finally, we added one new holding during the period, Ampol, which was formerly known as Caltex. Ampol is Australia's leading vertically integrated energy company. It operates businesses across convenience retail in Australia and New Zealand as well as the refining, supply and marketing of fuel. We believe that Ampol is a better business today compared to 5 years ago. The earnings mix is better as the quality of the network has improved dramatically. The management have demonstrated good capital allocation and discipline. Ampol primarily offers our portfolio at an attractive level of dividend income, especially if trading conditions in the refining business improved from the current cyclically low levels. Djerriwarrh's portfolio underperformed the ASX 200 Index last financial year, which was a disappointing result. On the next 2 slides, we look at what worked and what did not work in the portfolio. Starting with the 2 key drivers of our underperformance on Slide 18. We were underweight CBA while share price was up 47% and overweight in CSL, with share price was down 18%. In the long term, we anticipate share price to follow earnings growth. However, for both companies, this was not the case last financial year, as the key driver for both companies was the multiple the market was willing to pay for their earnings as we show on the 2 charts on this slide. As you can see on the chart on the left side, CBA's price to earnings ratio has expanded to extreme levels, 29x price to earnings. It is the highest multiple it has ever traded on despite delivering very little earnings growth over the past decade. And the expected earnings growth for the next 3 years is also minimal. CBA's dividend yield of 2.7% is now below the indexes, making it an unattractive investment. As such, following significant amount of call option exercises, we decided to actively sell our small remaining holdings, exiting the stock completely at a share price of $187. On the other hand, CSL continues to trade at the lowest price to earnings multiple in over a decade. The significant derating reflects the market's loss of confidence in management's ability to continue to grow earnings at historical levels. We think that the correction in the price multiple is too extreme, especially in the context of CSL's future earnings potential and their leadership position in growing markets. We believe that CSL is well positioned to deliver double-digit earnings growth over the medium term. This, in conjunction with very limited risk of further derating, makes it a very attractive investment for our portfolio. And as such, CSL remains one of our biggest absolute and relative portfolio position. We remain positive that these 2 headwinds will reverse at some point in the future as their share prices align with their earnings growth potential. Our portfolio is well positioned for that. On Slide 19, we show our 2 key positive contributors to our performance in FY '25, Telstra and Newmont. We took the view 2 years ago that Telstra was a very different investment proposition to what it had been previously. The company has faced a huge disruption to their business from the creation of the NBN and had to restructure the business. This included major cuts to the dividend. But by 2023, we felt confident that the work was behind Telstra and made it our top active position in the portfolio. We saw a market-leading mobile business in a world where people seemed to be consuming more and more data, a strong management team, a solid balance sheet and the likelihood that earnings and the dividend could start to grow again. And pleasingly, the company has delivered well. It is now reflected in its share price, which was up 35% last financial year, as you can see on the chart on the left side of the slide. Our portfolio also benefited from our Newmont holdings. Newmont is a diversified gold and copper mining company that owns high-quality assets in attractive jurisdictions. We think Newmont offers a good mix of income and growth, along with some extra diversification for our portfolio, given its gold exposure, especially at the time of heightened geopolitical risks. Both companies performed very well during the year, as you can see on the chart, and we continue to hold them both in our portfolio.

Thanks, Olga. So we'll turn to Slide 20, which gives a summary of the portfolio as of the end of June. Some of the key metrics of the portfolio shown on the left-hand side and the stocks shown on the right-hand side are our top 20 holdings in order of value. So an $835 million portfolio across 44 stocks, the 4 largest being BHP, CSL Woolworths and Rio Tinto. We still own Telstra. As you can see, it's in the top 20, the sixth largest holding, but we own a lot of less of it than we did 6 and 12 months ago given the option exercises that have occurred. And not only CBA, not in the top 20, but as Olga mentioned, we exited the stock completely after significant option exercises in the last few months. But in terms of the banks, we still own NAB and Westpac in the top 20 and you can see ANZ reappear in our top 20 after we stepped back in and started buying the stock in recent months. Wesfarmers is a core -- another core Djerriwarrh stock that's dropped out of the top 20 after significant option exercises. And similar to CBA with Wesfarmers, we'd love to own more given we believe it's such a high-quality company but only at lower prices, and hence, we're positioned for that. We've got overall defensively positioned with significant capacity to invest when we see more compelling buying opportunities as occurred in March and April earlier this year, like Olga described. Moving to some outlook comments on Slide 21. In terms of markets, we think the share market is back at a very high level. It's had a huge rebound since that sell-off in March and April. And to us, it looks expensive on some top-down fundamental valuation metrics, particularly forward-looking price-to-earnings ratios and dividend yields. And so for us, when we're looking through the market in a bottom-up perspective, trying to add good quality stocks to give us the right mix of income and growth, we think it's hard to do that to find good value, but we've still been able to do it selectively in small amounts recently. So overall, that view on the market feeds into our portfolio's defensive positioning. But just to reiterate, we do have significant capacity to invest when we see the right opportunities. And then in terms of our 2 key profit drivers for our dividend income, we've got bigger holdings in the major miners, Rio and BHP, and we expect this will generate a solid level of fully franked dividend income over the next 12 months. But beyond that, our ability to maintain and grow our dividend income will be driven really by our ability to find the right buying opportunities, quality companies at the right prices. In terms of our option income, we think overall well positioned. We've got a good amount of option income already written for the next financial year with the ability to write more as well as maintaining the exposure to potential capital growth. So to sum up, I think it was a good year for Djerriwarrh. We had a good increase in the profit level and the dividend, produced a very attractive enhanced yield level, but with less capital growth in the market. And we think we've got a portfolio well positioned to start the next financial year. So with that, I'll hand over to Geoff, who will run the question-and-answer session.

Okay. Thank you, Brett. [Operator Instructions] So we've got some questions here, and I please encourage you to ask them as we're going through these ones I'm asking now. Given that the post NTA -- post-tax NTA, I should say, is $3.40 and the share price is to $3.20, why can't a buyback be undertaken to buy the shares back at below the post-tax NTA, which would be a benefit for all shareholders by reducing the discount to NTA and increasing the resultant NTA?

Yes. So we have been doing buybacks over the last couple of years when we felt that the price was attractive, and we take into consideration not just the discount but where the absolute level of the market is, but also taking to consideration the DRP, and we've had -- certainly had a view around if we're issuing new stock at discounts, it's a good idea to at least neutralize that. That has been the approach. And I guess we'll consider that going forward as well. We tend to leave the DRP on because we certainly had periods where the stock is traded at a premium. At the moment, we're going through a period where it trades at a discount, and we tend to find a lot of the same shareholders stay in it through those different periods. So therefore, our preference is to keep it on. However, we will consider neutralizing that, the dilution impact from offering stock at a discount, but we will also consider if we saw a market selloff, and we're trading at a large discount that might be another opportunity we consider. So it's still on the table, doing buybacks.

Yes. I guess [indiscernible] Mark, too. So the buybacks may close discounts slightly, doesn't it. Hasn't had a major impact on...

No, it has not. But still, if you're buying back at a really cheap price, you are adding value, you are improving the NTA and the total returns for those shareholders that stay in the stock for you.

And we are doing a lot more work on marketing the fund as well in terms of trying to get that close at discount, too.

Yes, that's right. And I mean, we're sort of aware it's not something we like having and increased our resources. We've taken on Suzanne Harding, who is helping us understand better, I guess, where our true market is for Djerriwarrh because the landscape has changed a lot over the last 10 years. I guess some of our traditional supporters may be going to, I guess, programmed portfolio structures, which may not suit us, but there's a whole lot of what we call independent financial advisers that are actually looking to do something a little bit different and want to find value in the market, particularly in the expensive market. So we're finding lots of new avenues now to market Djerriwarrh and finding new potential investors who are finding this discount a very appealing opportunity to come into the stock. So I think this to be a bit of a transition period. And I guess we're hoping at some point that we trade closer to the NTA. Just to remind everyone that when we -- when the market did have a sell off a few months ago around the Trump tariffs, that gap closed quite substantially high, substantially, i.e., the markets fell a lot, we only tell a little bit. So again, it goes back to that point that you almost feel like people who are watching our LICs are almost unwilling to buy into where the market is at the moment.

Mark, it's probably an interesting question in terms of that discussion. I mean have we considered paying monthly dividends given Djerriwarrh's primary income stock? There's some other LIC -- other LIC income offers in the market, they pay monthly dividends, and they're actually trading above pretax...

Yes. Look, it's something -- we're discussing that. We're aware of or fully aware of the structures that some other companies are taking. For us to be more considering what our shareholders want, so it's probably fair to say we're trying to get better sounding in the market in terms of the significant -- will it be that significant? But we're certainly happy to look at some of those things, and we're doing the work at the moment.