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

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

Well, good afternoon, everyone. Yes, I'm Mark Freeman, the CEO and Managing Director of Djerriwarrh Investments, and welcome to this half 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 pay my respects to their elders past, present and emerging. So joining me today on this webinar, we have Brett McNeill, the Portfolio Manager, Olga Kosciuczyk; Assistant Portfolio Manager; Andrew Porter, our CFO; Matthew Rowe, our company's Secretary; Jeff Driver, our General Manager, Business Development; and Suzanne Harding, our Business Development Manager. This briefing is based on the material available on 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. I'll now turn to Chart 2, which is our usual disclaimer, just to say we're here to talk about the company and we're not giving any advice as such. So at that point, I'll pass over to Brent and Olga to run through the presentation.

Thank you, Mark. Good afternoon, everyone. It's great to be presenting Djerriwarrh' first half financial results today. Slide 3 shows the agenda for today's presentation. I'll begin by giving an overview and a recap of Djerriwarrh [indiscernible] our CFO, Andrew Porter, will go through the half year results in summary. I'll then expand on that by looking at the results in a bit more detail, and then Olga and I will go through a portfolio of [indiscernible] Covering both stocks and options, including recent changes and then we'll conclude with some outlook comments before taking questions. So some of the key points of Djerriwarrh are listed on Slide 5. Djerriwarrh's one of the largest income-focused listed investment companies. So this is on the ASX. We've got a long-term track record, having been established in 1989 and listed on the ASX over 30 years ago in 1995. And this listing means that shareholders get the benefit of [indiscernible] associated with being a listed investment company, which brings with it high governance standards, including having an independent Board of Directors. We've got an investor-friendly clean structure, meaning that Djerriwarrh shareholders own the management rights to the company, there's no fee leakage to third parties, and there's no additional fees such as any performance fees. And Djerriwarrh is part of our broader group of listed investment companies. This also includes Australian Foundation Investment Company, AFIC, along with AMCIL and Mirrabooka and this means we're able to support a broader research approach and how the scale of operations helps keep costs low. So looking at our investment objectives on Slide 6. Djerriwarrh's primary objective is to deliver an enhanced level of fully franked income, and that's produced in the form of a dividend yield that should be higher than what has been produced by the broader share [indiscernible] . So we show the results of this on the left-hand side and to the 31st of December 2025, based on Djerriwarrh's dividends over the last 12 months, which have totaled $0.155 per share, this equates to a dividend yield of 6.6% for dark blue bar there, and that 6.6% is including franking credits, and that's measured and the yields measured on our net asset backing. The equivalent yield on the broader share market, the ASX 200, also including franking credits is 4%. That's the orange bar there. So Djerriwarrh's enhanced yield, which is our primary objective is the difference between the two. And so that was 2.6% as of the 31st of December 2025, which we think is a very attractive level and importantly, a sustainable enhanced deal, given it continues to be fully covered by our net operating profit. We also show on the left-hand chart the equivalent dividend yield, but based on Djerriwarrh's share price at the 31st of December 2025, and that dividend yield was even higher at 7.1%. And then for comparative purposes, we listed 12-month deposit rate, which sits at around 4.1%. So overall, a very strong and attractive enhanced yield. The right-hand side of Slide 6 covers our secondary objective, which is to also produce attractive total returns over time, which should be some capital growth alongside the strong income and the results of this are shown in the chart on the right-hand side. If we look at 1-year performance. Our 1-year total return of 5.5%, the light blue bar is behind the share market total return of 11.5%, the green bar, and we'll give some more detail on the reasons for this gap later in the presentation. But as we can see over multiple time periods, that 1-year underperformance has fed through into our longer-term numbers. And if we pick the 5-year number, whilst Djerriwarrh's total return, 8.6% per annum, including franking credit is good in an absolute sense, it is also behind the broader share market total return of 11.3%, also including Franking. Moving on to Slide 7. This looks at things from a share price perspective. So we show the relationship between Djerriwarrh's share price versus the net tangible asset backing of our portfolio. At the 31st of December 2025, Djerriwarrh's net tangible asset backing was $3.35 per share. Whereas the share price was about 7% lower at $3.12. We continue to see net tangible asset backing as representing around fair value for the shares, particularly given some of the features of Djerriwarrh, such as a shareholder-friendly structure, low cost and very good scale. Both management and the Board continue to focus on ways to close the share price discount, including measures such as we're now moving to quarterly dividend payments rather than half yearly, which we announced at our Annual General Meeting last September. We've been doing a lot more marketing and promotion to both financial advisers and retail shareholders. And we've also, again, during this period, being buying back shares on market to effectively neutralize the shares that we issued under the dividend reinvestment plan. But despite all that for now, based on the end of year metrics, investors are able to buy Djerriwarrh shares at about a 7% discount to the net tangible asset backing order, think of it another way, are able to buy $100 worth of assets for about $93. So with that introduction, I'll now pass to Andrew Porter, our CFO, and he's going to give a rundown of the key features of our half year results.

Thank you, Brett, and good afternoon, ladies and gentlemen. So the 4 boxes that you'll see on the screen there are what many shareholders will be used to the net operating result. Now that is the profit excluding the impact of the open options position and is what we would consider the key measure of our profit in that that is what the Board based the dividend upon, and that was $19.7 million, down from $21 million. And Brett and I will go through some of the components of that later, but suffice to say, it is largely due to a decline in the dividends that we received over the 6-month period compared with this time last year, and Brett and Olga will go over the figures later on. The dividend was maintained at $0.75. The net operating result per share was just under [ $.075 ]. So the Board elected to keep the dividend constant at $0.0725 per share. As Brett has said, I would remind shareholders, this is the last 6 monthly dividend that Djerriwarrh is declaring. From now on, we will be moving to a quarterly dividend, which does mean that shareholders will receive an extra quarter's worth of dividend in this financial year. So be aware of that when it comes to doing your tax returns. [indiscernible] management expense ratio, 0.38%. That's the cost of running the company over the total portfolio value. last year of 0.46% was unusually high. The contribution from Djerriwarrh's associated entity AICS, was a lot lower this time 12 months ago. And the 0.38%, $0.38 for every $100 invested is more in line with what we've had in prior years. So for instance, in 2023, it was 0.40%, and in 2022 is 0.36%. The dividend yield, Brett has been through 6.6% based on the portfolio and 7.1%, as Brett said, based on the share price. And with that, Brett, I'll hand back to you to look at those profit figures in more detail.

Okay. Thanks, Andrew. So if we turn to Slide 11, this is where we present a summarized version of our profit and loss statement. And we do this to show really how we produce the 19.7% profit for this half year period that Andrew just talked about, but also then how it flows through to the $0.075 dividend per share that we've declared today. So the 2 key drivers of our net operating profit are the dividend and distribution income, and that was down 8% to $16.6 million, along with our option income, which was flat to this period at $7.5 million, and we'll go into some more detail on both of those in the next 2 slides. But for now, continuing to move down the rest of the table, Finance costs were up at $0.9 million and Administration costs down to $1.8 million. That took the operating result before tax to $22.2 million and then with income tax expense of $2.5 million, the net operating results that we produced of $19.7 million, you can see, down 6% versus the prior period from the year before. On a per share basis, the $19.7 million becomes $0.0749 per share. And as we can see, that more than covers the dividend that we've declared for this period of $0.0725. So looking at those 2 key drivers of our operating profit in some more detail now. We cover the dividend and distribution income on Slide 12. As a reminder, this is the income that we received from the companies that we own in the investment portfolio. We show the 5-year trend in this metric on the left-hand side. And then on the right-hand side, we show the same metric that calculated as a yield on our portfolio value, that's the green bars. And we compare it to the equivalent yield on the broader share market, the blue bars, both of these are before franking credits. So a couple of takeaways from these 2 charts, we can see that our dividend and distribution income has declined over the last 2 half year periods. But as a yield on portfolio value, it's still been above the market over both of these periods. Some of the key drivers we see behind these movements. Firstly, overall dividend from the broader share market have declined over the last 6 months, especially from large companies, resource stocks like BHP and [ Rio Tinto ]. Then the other factor specific to us is really around our portfolio repositioning, particularly from the option exercises that we've had in the banks, but also combined with we've had a defensively positioned portfolio over this time period, which has included holding more cash than usual and that was definitely another factor. So from here, our expectation remains that our portfolio is dividend yield. So the dividend income we received from companies we invest in will be around the level of the market being the ASX 200 Index. Looking at the second key driver and our [ auction income ], which is a big factor behind our ability to produce the enhanced yield. Slide 13 shows similar analysis. The option income was flat for this period of $7.5 million and on a yield basis, so divided by our ending period portfolio value, that was an option income yield of about 1.7%, same as the year before. Our view remains from here that an option income yield around this level, 1.7% is a reasonable expectation for future periods. But as always, it depends a lot on market conditions, particularly when it comes to the writing of predominantly call options. So that covers the financial results. Looking now to the portfolio update. I'll start by giving some more detail on our recent performance, like I touched on at the start, and then Olga will discuss our option activity, the major portfolio changes we've made and summarize the key portfolio metrics. So what Slide 15 shows is the key drivers of our portfolio underperformance over the last 12 months. So this is where the portfolio total return has been positive, but it's been 6% behind the benchmark's total return. And we've grouped the reasons for this portfolio underperformance into 3, but first is some of the large companies that we've owned and their performance. So you can see CSL down 37% on a total return basis for calendar year 2025, a big holding for us. It's the former market darling, has suffered a huge derate following a very poor 2025 profit result. It's been a very frustrating investment for us recently, and there's still short-term pressures on the business, but our view at the moment is we think the long-term growth potential from their core products is still there. And hence, we intend to maintain a good investment in the stock at this stage. ASX was down 18% for 2025. They've continued to suffer from higher expenses since the [ both tech upgrade ] to the clearing and settlement system a number of years ago. There's a lot of regulatory pressure on the business, and that's holding back profit and dividend growth at ASX in the near term. But longer term, we still want to own the dominant exchange operator that earns good returns and should be able to get back to producing good dividend and profit growth at a point in time. And so for now, the dividend yield that we're earning on the stock is attractive enough to justify our holding. So there are 2 key large companies that have dragged on performance. The 3 small cap company that we own that have fallen over the last year, that have also dragged on performance being equity trustees, IDP Education and ARB. So just running through each of these quickly. Equity Trustees was down 23% on a total return basis for the year. [ EQT ] is a solid business. It operates in an attractive industry, but they've got the issue now of needing to resolve the [indiscernible] Action related to the failure of the First Guardian super products. And that needs to be resolved before we can get more confidence about their balance sheet position and dividend growth potential, which we've always owned the stock for. And until that happens, we are reducing the portfolio position size in this company. For IDP Education, historically been a really strong performer, but it's recently suffered from cuts to international student numbers in its key markets and this has significantly reduced their profit. So we bought stock too early in hindsight, but for now, we intend to hold our position as long as we retain confidence in management and the balance sheet, so that will obviously be a focus in the upcoming reporting season. And in the case of [indiscernible] Drive accessory company, ARB, we think the business outlook and the balance sheet is as strong as ever. Nonetheless, it's been derated by the market. And as a result of this, we've been back buying stock in recent times and adding to the position. The third bucket is really around gold companies that we have [indiscernible] . So Gold has been one of the biggest stories in markets over the last year. The gold price has almost doubled. Pleasingly, for Djerriwarrh, we bought a gold stock 2 years ago, and we've owned Newmont during this time, and that is up was up 156% over the past year alone. But there's also a lot of other gold stocks in the ASX 200 Index that we did know that have been very strong performers also, and that's included Evolution Mining up 170% and Northern Star up 78%. And so by not owning all the other stocks as well, that has dragged on our performance. So hopefully, that gives some insights into why our 12-month total return has been below the benchmarks total return. And for some more detail on the portfolio, particularly on options and the stocks that we own. I'll now pass to Olga.

Thank you, Brett, and good afternoon, everyone. Our main investment objective is to pay our shareholders an enhanced dividend yield. And 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, overlayed with a top-down view of our portfolio's call option coverage. We started the financial year 2026 with call option coverage of 32%, at the bottom end of our normal range of [ 34% ] our option coverage then briefly decreased to 28% in mid-July following option exercises in Region Group, Telstra, Goodman Group, NAP and Macquarie Group. And then we continue to increase our portfolio's called option coverage in response to the rising market until it peaked at 48% in late October. We maintain high call option coverage until mid-December, which saw us generate a good level of option income, but it reduced our exposure to the strongly rising share market. We finished the calendar year with call option coverage of 37%, following significant option exercises we had in December. On Slide 17, we show our key recent transaction in the last 6 months. We had significant option exercise across banks, ANZ, NAB and Westpac as well as [indiscernible] , Telstra and Region Group. We also exited the position in PEXA Group and Domino's Pizza, both of which have been disappointing investments for us. During the period, we invested almost $240 million in the market as we saw opportunities to buy high-quality companies at attractive valuations. This included increasing our holdings in high-income companies, including Telstra, Woolworths, Region Group and Transurban. We also saw opportunities to buy high-quality growth companies, REA Group and ResMed during the period. [indiscernible] Is the world's leading manufacturer of devices and masks, used in the treatment of obstructive sleep apnea. This common sleep disorder affects over 1 billion people globally. The markets are concerned that the uptake of weight loss drug will negatively impact the addressable market for ResMed. However, early data analysis shows that patients on weight loss drugs are more likely to initiate and continuous sleep apnea [indiscernible] . The company has an excellent track record of earnings growth and we believe its leading position in large underpenetrated markets means their long-term opportunity remains significant. We see ResMed as one of our portfolio's highest quality growth companies. The company also pays modest, albeit strongly growing dividends. Finally, we added one new holding during the period, Sigma Healthcare. Sigma following the merger with Kanis Warehouse is one of the highest quality retailers in Australia. The company has a strong track record of execution with double-digit revenue growth over the past 2 decades. Sigma has significant growth opportunities in Australia and offshore as they continue to roll out stores and win market share in attractive health care and beauty sectors. We see it as a great addition to our diversified portfolio that primarily offers an attractive level of capital growth. On this slide, we show a snapshot of our portfolio, starting with some key metrics on the left-hand side at the end of December. We can see that the portfolio's value is $928 million, invested across 43 stocks. Our call option is at 37% and we currently have no [ put option exposure ]. This all adds up to $3.35 of net tangible assets. On the right-hand side, we show the top 20 holdings in Djerriwarrh. We have a diversified portfolio of high-quality companies across different sectors with the appropriate balance of income and growth. We continue to be defensively positioned with significant capacity to invest should we see opportunities in the market. And with that, I will pass to Brett.

Thanks, Olga. So we make some outlook comments on Page 20. In terms of markets, it was another strong year in 2025, and we've now got the situation where the market, the S&P/ASX 200 currently trades near its all-time highs. And in this context, it looks moderately expensive to us, especially when we look at long-term valuation metrics, such as price to earnings ratio and dividend yield. So overall, from a top-down perspective, we remain defensively positioned. Notwithstanding this, though, we have recently been taking advantage of buying opportunities in selected companies that are judged to be high quality and have attractive long-term growth prospects, including, as Olga mentioned, Telstra, Woolworths, particularly for income, but also REA and ResMed more for long-term growth. In terms of our dividend and option income, so the portfolio adjustments that we've made not in the last 6 months, but even in periods before that mean that at this point, our dividend income is more reliant on companies such as the major miners, as well as industrial companies in sectors such as supermarkets and telcos, for our dividend income. And as a result, we're significantly less reliant on the major banks for our dividend income. In terms of the options portfolio, we've already got a good amount of option income written for second half financial year 2026. And we've still got flexibility and timing to write more option premium income later in this financial year. So overall, that's well placed. And finally, just a reminder, as we've mentioned, Djerriwarrh will be moving from now into the payment of quarterly dividends rather than half yearly dividend and the first of these dividend payments is expected to be made in May 2026. So overall, we believe we've got the right settings to enable Djerriwarrh to keep delivering on its long-term objectives, primarily enhanced yield but also attractive total returns. And I'll now pass to Jeff who will conduct the question-and-answer session.