L1 Long Short Fund Limited (LSF) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you very much for joining us for the L1 Long Short Fund Limited Investor Conference Call. My name is Mark Landau. I'm the Joint Managing Director and Chief Investment Officer of L1 Capital. And I'm really pleased to have the opportunity to present you today and give you an update on the fund and the strategy. In today's presentation, we're going to go into a lot of detail about the positioning of the fund, the stock that we think are really exciting at the moment, how we see COVID-19 playing out and some broader observations on equity markets. Please feel free to send through questions. We've lodged the presentation on ASX. And hopefully, everyone has a copy of that. I'll do my best to remember to tell everyone page numbers as I go along. And I'd also encourage everyone to try and have a read of our quarterly report, which came out about a week ago and was also lodged on the ASX. We try and put a huge amount of effort into these presentations and quarterly and monthly newsletters, and hopefully, people get some beneficial insight into the way that we're positioning the portfolio and the reason we're so excited about the outlook for the company over the coming years. And with that, I'll begin the presentation. I'm starting on Page 3. The fund has performed strongly since the market fell off back in March. We returned 34% during the June quarter. While we expect market volatility is likely to stay elevated at least for the next quarter or 2, we believe there's a lot of upside across the portfolio over the next 1 to 2 years. Value and cyclical stocks are now trading at incredibly depressed prices. And generally, we think there's a much better risk-reward proposition in those stocks than in the expensive and crowded growth stocks. There are a number of drivers that we think will trigger a rotation towards cyclical stocks. Some of those drivers include the massive monetary and fiscal stimulus that we're now seeing, extremely defensive investor positioning, positive COVID-19 progress, and we'll discuss that in detail later on, and also improving leading economic indicators. We've identified 4 parts of the markets that we think offer an exceptional risk-reward in the current environment. And we think that each of those has an asymmetric payoff where expectations are very low and the shares within these parts of the market are very mispriced. And lastly, the Board has commenced a share buyback program and has been very assertively buying shares on the market. And hopefully, people have noticed the way that the Board has gone about that buyback program. So turning to Page 5. Just for a bit of a recap in terms of how the portfolio has been positioned over the last 6 months. We've essentially broken it down into a few time periods. As we came into this year, the portfolio had a clear skew toward cyclical stocks that we thought would perform well, assuming a stable or improving global growth backdrop. The trade war and Brexit had finally de-escalated, and we started to see a significant improvement in business confidence. Between September and December 2019, we saw the early stages of a rotation towards value and cyclical stocks, and that was reinforced with all leading economic indicators starting to trend up. So we saw rising bond yields, rising commodity prices, improving PMI and ISM data and new orders data. And all of that was suggesting to us that the world was stabilizing, getting better. We also saw the performance of the fund deliver very nice, consistent returns through that September to December period. We had positive returns in every month, and that rounded out a really good year for the fund. We're up roughly 26% for the year with positive returns in every quarter. Unfortunately, the COVID-19 shock totally derailed global GDP, and it disproportionately hit economically sensitive sectors such as the energy sector. And because of that, the fund had a very poor first quarter as a result. Turning to Page 6. Given the market sell-off and the extreme fall we saw in markets, the ASX 200 fell 37% in the space of 5 weeks, which was the most aggressive sell-off we've ever seen in the ASX over the last 100 years. It came as a surprise to a lot of our investors, that we were becoming more positive on the market. I think that was a time when you had extreme pessimism across the board. And there's a number of reasons why we increased our net long to 100% at that time, which is actually the highest or basically the highest net long we've had in the 6 years of the Long Short strategy. We believe the outlook for equities was really attractive for a number of reasons. Firstly, because of the share price falls, there were a lot of stocks that were trading at the most attractive valuations that we had seen since the depths of the GFC. Secondly, investor positioning was extremely defensive and negative. There were record cash levels, there were record inflows into bond funds, there was high short interest. I told you that everyone was negative, everyone was bearish. Central banks and governments conducted massive stimulus and fixed credit markets. In the case of the Fed, they did more stimulus than during the GFC and they did it all within a very tight time frame, which was very different to GFC, where it was spread out over roughly a year. COVID-19 case growth, which was rising exponentially back in March, we thought would start to slow given the shutdowns in many countries, and we started to see that happen through April. So obviously, this was back in March, and we thought that, that would be a positive, at least, in the short term for markets. And then lastly, nonfundamental selling of stocks was extreme. And what we mean by that is that people were selling shares not because of the outlook for a business or for its cash flows, they were selling us for mechanical or emotional reasons. So there were margin calls, a huge amount of redemptions, ETF outflows, quant and volatility targeting strategies were selling aggressively in the market, and retail investors were panicking. And I think the combination of all of those factors led us to believe that there was a lot of upside in stocks. And it was a very similar feeling to what we had back in the GFC, back at the end of 2008, when we became very positive on markets. And we were one of the few investors that really took the market on at that time. And I think the anecdotal with that is we're one of the few investors according to our clients that actually turned very positive back in March. And I think, hopefully, that that's proven to be the right decision, at least in the short term, that's been the case. So we think even under the assumption that we have that the economy is going to stay relatively weak, at least in the short term, we think there's a lot of upside remaining in the portfolio. We don't need the world to be firing on all cylinders. All we need is for the situation to get slightly better over the next years, 1 to 2 years. Turning to Page 7. In the last presentation that we did back in March, we flagged 8 stocks that we thought were very oversold and we've been aggressively buying. Since that time, the average return of the stocks that we listed at that time has been around 57%, and that's come through in the space of only 4 months. So when you think about how tough the world has been over the last 4 months, how negative the press and the investment community has been over that period, to have a recovery of more than 50% across a number of stocks in such a short period of time, I think, should give you some confidence as to how much under valuation here is across the portfolio. Here, we list the stocks that we mentioned. All of them remain key positions to the portfolio. Within some of these in the small cap space like Karoon or Perenti, some of them are bigger stocks like an SES, which is listed in France. NIB is the only stock that we've exited. We exited that shortly after the call given the changing circumstances for private health insurance. But in all cases, we remain very positive on the outlook for these businesses. The one that I'd note is Karoon, which is at the top of that list, they had another positive announcement today. And we think there's a lot more upside in that stock, which has come through as a result of a restructured acquisition they've made, which we think is a fantastic deal. Turning to Page 9. When we step back and look at equity markets globally, we believe that global growth stocks now look incredibly stretched from a valuation point of view. The chart you can see there, which is a chart that's been prepared by Goldman Sachs, shows the extent and the magnitude of the outperformance of growth stocks versus value stocks going back almost 50 years to the mid-1970s. And what you can see there is that the outperformance of growth stocks has never been so extreme and it's never persisted for so long. So this current phase where growth stocks have been outperforming is now up to 12 years. To give you some context about how dramatic that is, if you look back to the period up to the dotcom boom back in 2000, that looks like a relatively modest period of outperformance for growth stocks by comparison to what we're going through today. We believe that what's happened is COVID-19 has acted as another trigger for people to hiding growth stocks. When the pandemic hit, what people wanted was companies that had safe balance sheets, that had an organic growth story that wasn't going to get derailed by COVID, and they had less economic sensitivity. And I think companies like tech stocks and health care stocks are really the place that people are hiding. The dispersion between growth stocks and value stocks is best illustrated in the U.S. by the Morgan Stanley growth basket and the Morgan Stanley U.S. value basket. And these are very broad baskets of stocks across 2 different, I guess, factors as they call them. Growth stocks are up 37% for the calendar year-to-date, and value stocks are down 53%. So that's a 90 percentage point difference in just over 6 months. So this data was calculated on July 9. So looking at just over 6 months of data, a 90 percentage point difference in a huge basket of stocks shows you how dramatic this differential has been. We think that the portfolio is incredibly well positioned to benefit from any reversion that we see in this unprecedented factor dispersion. We're not predicting that growth stocks are going to derail all the way back to their sort of 50-year average. We think the growth stock have deserved a structural rerating. But what we're saying is any modest unwinding of this would be hugely beneficial for the portfolio. And I'd also note that the performance that we've delivered over time, which is roughly a 16% return per annum for the strategy going back to 2014, has been delivered with a value base despite a continual pretty strong headwind. So turning to Page 10. The Australian context for growth stocks is very similar to the global trend. And what you can see in the chart at the top of Page 10 is the average P/E for growth stocks in Australia. And if you go back all the way to the early 1990s, the typical P/E multiple for growth stocks in Australia was around 24x. And very rarely, only 1 period, very briefly did it bridge 30x, and that was around the time of the dotcom boom. If you look at the multiples today, you're looking at close to 50x earnings. We're currently sitting at 47x for the average growth stocks. That's double the 20-year average. We think that COVID-19, as I mentioned before, has been a huge trigger for growth stocks to completely detach from fundamentals. We don't see any logical reason why these shares should have rerated by 15 P/E points in a sustainable way. In most cases, the outlook for these businesses are still strong, but they've modestly deteriorated. And at the same time, the multiples have gone from roughly 30 to 35x to 45 to 50x. We believe that as COVID-19 resolves, we expect the growth stocks will be used as a funding source to buy value stocks. One other factor that doesn't get talked about too much is the growth stocks also tend to be U.S. dollar earners. A lot of these companies are growing offshore. The primary source of their earnings is U.S. dollars, and the U.S. dollar has been in a 7-year bull market. We've gone from roughly $1.05 for the Aussie dollar to $0.55 at the lows of the market back in March. That means that these companies have enjoyed an unspoken EPS tailwind from that bull market in the U.S. dollar. We think that we've now reached potentially an inflection point in the U.S. dollar, and we've started to see the Aussie dollar reverse from $0.55 briefly to around $0.71 today. The reason we are relatively bearish on the U.S. dollar is we think that the size of the fiscal deficits and the size of the Fed balance sheet expansion means that it's difficult for the dollar to retain its value. Turning to Page 11. Leading economic indicators suggest to us that cyclicals will soon start to outperform. And I know that's probably a pretty controversial thing to say when you read the newspapers and you see how bad the recent economic data has been. But if you bear with me for a second, I'll explain what we mean by this. If you look at 2 of the best leading economic indicators that have been consistently good predictors of economic activity going forward, they have ISM new orders index and the M1 money supply. Both of those factors or the ISM new orders just had its most recent rating, came out at 56.4%, which is the red star you can see on the left-hand chart. That has typically been a great predictor of the profit revisions or the EPS revisions for industrial stocks, which tend to be cyclical stocks. Secondly, you can see the M1 money supply, which has been advanced by 1 year. So essentially, money suppliers that enters the system has a multiplier effect, and you start to see a benefit for the new orders index and a benefit for economic activity. Both of those indicators are now trending strongly positively and suggest that earnings for cyclicals are likely to improve over the next 12 months. Turning to Page 12. So the way we've positioned the portfolio today is far more positive than I think a lot of investors would currently be positioned. We believe that equities look very attractive versus other asset classes, particularly versus cash and bonds. We're currently sitting at roughly 100% net long, and that means that we're fully invested. So if someone invests $100,000 in LSF or $100,000 in the Long Short strategy, they effectively have $100,000 of market exposure. And we think that's appropriate, given how attractive valuations are and given how negative investor expectations are for the overall market. The comparison is obviously bonds where in the U.S., you're getting roughly 0.5% return for a 10-year bond. And in Australia, you're getting roughly 0.9%. We think earnings yield and dividend yields are very compelling in that context. In the case of Australia, we think valuations are very attractive. The market is trading about 20% below with February highs. We think that if you strip out growth stocks, many stocks and sectors are still trading 30% to 40% below where they were back in January. In the case of the U.S., again, we're probably different to most people in the market. We're quite cautious on the U.S. We have been positive on the U.S. for quite a long period of time. But now that the U.S. market is trading close to record highs, it's been hard hit by COVID-19 probably a lot worse than most other countries in the world. You've got stretch valuation metrics. You've got election risk. The Biden government or potential government, I should say, is talking about higher taxes and higher regulation. And lastly, the U.S. dollar is beginning to weaken. In the case of Europe and Hong Kong, we're relatively cautious on those economies, but we do think that those markets are cheap. And particularly for high-quality global businesses that are not reliant on the European or the Hong Kong economy, we think those companies look exceptionally attractive at the moment. The overarching focus for us is on finding high-quality businesses with really strong industry positions and safe balance sheets. We think those are the factors that will bode well, regardless of how COVID plays out. So turning to Slide 14. In terms of COVID-19, it's hard to put into words how much work we've done trying to understand the outlook for COVID-19, doing work on the vaccines and the various treatments. We're very fortunate in L1 to have Andrew Lin, who's our Head of Healthcare here. Andrew is a medical doctor by background. He's fluent in Mandarin. And a lot of the research that we've done has required on both of those skills and both of those aspects of Andy's background, which have been really helpful. I guess, what's, I guess, encouraging, not just from an investment point of view but also from a, I guess, personal point of view is that we think the outlook for COVID-19 is a lot better than people expect. And that over the next year, you'll see less panic from investors and less panic from consumers in terms of the outlook for coronavirus. Obviously, we are fully aware of the impact of COVID-19 where we're based in Melbourne. In Melbourne, we're in a lockdown situation at the moment for 6 weeks. Case numbers continue to rise. But we think when you look forward 6 to 12 months, we think that the prospects for COVID-19, particularly in terms of the vaccine, but also in terms of other potential treatments and community measures will bode well in terms of investor sentiment. One of the things that we've done is conducted an absolutely massive amount of research including one-on-one meetings with almost every leading vaccine company in the world. So we've spoken with the companies directly. So I might be with their Chief Scientific Officer, their CEO, the person who's leading their production ramping up, vaccine experts, virologists, epidemiologists, production managers, basically anyone and everyone we can possibly speak to, to try and get as much information to form as much confidence as we can about the prospect for the vaccine. We think that expectations of vaccine remain very low. And yet, in only 3 to 6 months' time, we think we'll have Phase III data from 8 different companies, and we've listed them there. There's Pfizer and BioNTech, which just did a deal with the U.S. government. They'll be supplying -- assuming their Phase III trial works, they'll be supplying 100 million doses by year-end. AstraZeneca, Moderna, Inovio, Novavax, Sinovac, Sinopharm and CanSino. And all of those companies have done early stage trials, which have shown not only that their vaccine appears to be safe in a small-scale study, but also that they're getting the right level of neutralizing antibodies, which suggests that a person who's been vaccinated with one of their vaccines will have a good chance of fighting off the virus. Obviously, Phase III data will be the true test, and we'll only get that information between October and December for most of these companies, but we do have 8 different shots on goal. And I think one of the things that we've got a lot of confidence in is that the best chance of success is having lots and lots of shots on goal as they call it. And effectively, the more different types of vaccines that are being trialed, the more likely that we'll have at least one that will prove successful. For what it's worth, there are 24 different types of vaccines that are currently in trials, 8 of them will complete their Phase III by year-end. And we think that incremental news flow, particularly towards the end of the year, will be very encouraging. The second point here is that new antibody treatments are also on the way. So this is effectively a stop gap in between the time from today until towards the end of the year when the vaccine progress come through. We think you may see some positive news flow from companies like Regeneron, Celltrion, BioCryst that have come out with monoclonal antibody treatments that we think will reduce the severity and morbidity of COVID-19. And hopefully, while not a full solution, that will at least reduce the death rate and reduce the impact on people and hopefully reduce the panic that exist in the community today. Herd immunity, which we think will become a feature in certain parts of the world where they've had really bad outbreaks, in places like New York, places like Florida, we think once you get to close to 20% of the population that's had COVID, we think that you do reach herd immunity levels. We don't believe that you need to get to the 50% and 60% like some people talk about. And lastly, this is probably more of an Australian context, but now that people are wearing masks, particularly in Melbourne, but that's also becoming more popular in Sydney, we think that will also reduce the R0, which is the infection rate, and effectively how quickly the virus is spreading. Many stocks globally are trading at incredibly discounted levels because of the fear and uncertainty that the normal pre-COVID-19 way of living will never return. While a vaccine or some other solution is definitely not a certainty, we think that the probability is much better than what's priced into COVID-19 hit stocks. And we think it's created one of the best investment opportunities that we've seen in our career. We're incredibly positive on the upside in many of these stocks because they're factoring in a permanent major impact to the earnings and cash flows of these businesses. And we think that given how encouraging the early-stage data has been for vaccines, we think you could be looking at companies that have close to 100% upside on a 2-year view, assuming success with the vaccine. So turning to Page 16. Even though we're bottom-up stock pickers and we pride ourselves on doing very detailed company research where we think that we can provide an edge in understanding our companies and industries better than average investor, when you sort of step back and you look at the major themes and the major areas of the market that we find attractive, there's essentially 4 key themes that run through the portfolio. The first one is monopoly real assets. What we mean by that is monopoly assets like an infrastructure company or it could be a toll road, could be a broadband Internet business, could be a rail line. Anything that has a very dominant position in its industry, very hard to replace assets, and they should be generating dividend yields on a normalized basis of around 6% to 7% per annum with a bit of growth on top of that. We think that in a world where bond yields are typically 0% to 1%, these types of stocks will be an increasingly compelling investment for investors looking for safe yield. In a number of cases, these companies also have under-geared balance sheets, so you could get further upside from buybacks or special dividends. So companies like Aurizon are a good example of that. They've got roughly $1.2 billion that they've sort of earmarked for buybacks over the next 4 years, and that's in addition to a dividend yield that's pretty close to 6% already. Point number 2 is on COVID hit stocks. So I'll talk about this in a bit more detail on the next slide. But essentially, these are stocks that are trading 30% to 50% below their levels of January, largely because of the impact of COVID-19. The shares are still pricing in a very bearish long-term outlook that we think is unrealistic over the next 2 to 3 years. Companies like Star Entertainment, Safran, Scentre Group, Downer would be good examples of companies that are trading way lower than where they were trading back in January because of a perception and there's a permanent major long-term impact on their earnings. In most cases, we think there's a negative impact, but it all proved to be much more modest to what the market is currently pricing. The third one is our resource stocks that are a cyclical low point. So we are contrarian investors, and we like to buy high-quality cyclical stocks at a low point in their commodity cycle. Commodities like oil and coking coal are now pricing in extremely bearish scenarios where much of the world supply is loss-making at current prices. Companies like Oil Search, Teck Resources, which is largely exposed to coking coal and copper, and Warrior Met Coal, which is a U.S. coking coal business, is an exceptional opportunity that we think is totally mispriced at the moment. And lastly, conglomerates with high-quality assets and a valuation catalyst. These stocks have been a really disappointing part of our portfolio over the last year or 2. These stocks have lagged the market, and they've generally been incredibly frustrating because their operating performance has actually been quite good. They've had resilient earnings. They've got really good balance sheets, but the share prices have lagged because the catalyst have not arrived yet. And COVID, if anything, has delayed some of these catalysts temporarily. Companies like News Corporation, Iluka, CK Hutchison and Vivendi are examples of companies that we think are incredibly undervalued conglomerates. They've got a clear catalyst that's been identified by the company, and we think that catalyst will come through over the next 12 to 18 months. So turning to Page 17. On this slide, you can see what we've done is we've created a table that shows about a half a dozen stocks and how much upside there is in each of these companies, assuming the share price was to return to its pre-COVID level. What we've done is we've used market cap rather than share price because some of these companies have done capital raisings in the meantime. If you take the average value of these companies and where they would -- how much their shares would have to go up by for it to return to its pre-COVID levels, you're looking at almost 80% upside on average for these stocks. In most cases, we believe that the lasting impact of COVID-19 on these companies will prove to be manageable. And even if there's only a partial recovery, that would deliver still incredibly strong returns to investors. So if the average upside is around 80%, even if we were to take half of that and say it never gets back to where it was trading back in January, but it gets halfway back, that's 40% upside. And then you can choose your time frame as to whether you think that's proposition that's likely over the next 6 to 12 months or maybe it'll take a couple of years. But we would argue that it's not a situation where it never recovers or it takes 5 years to get there. As you can see in the table, the stocks that we've listed are across a number of different sectors. There's everything from oil and gas producers, engineering consulting businesses, infrastructure maintenance in the case of Downer, casinos and shopping centers. And while each of these are affected by COVID in different ways, I think they do have one thing in common. And that is that they are perceived to be a high-quality business prior to COVID. And then obviously, with the impact of COVID, they've been derated in a dramatic way where people are implicitly pricing that these companies will never recover anywhere near where they were trading before. But we think that if you were to get some progress on COVID, it wouldn't take long for the market to want to rerate the stocks and you can see how much upside there is. In a handful of cases, we expect there will be a capital raising for some of these companies. We fully expect that. We factor it into our valuations, and investors should not be concerned by that prospect. And examples like Oil Search, and to a lesser extent, Qantas and Downer are examples of companies that have already done their capital raising and the shares have traded relatively well in the circumstances post then. Turning to Page 19. On this page, we list a number of key long positions across the LSF portfolio. And what we've done here is just taken 2 examples from each of our themes that we think are really exciting over the next few years. Atlas Arteria and Chorus are 2 examples of the monopoly real assets we were talking about previously; Star Entertainment and Imdex, COVID-hit stocks; Teck Resources and Worley are high-quality cyclicals; and CK Hutchison and News Corp has undervalued conglomerates with a catalyst. We think each of these stocks represents outstanding quality and value, and we're very optimistic about their outlook over the coming years. So turning to Page 20. Atlas Arteria is an Australian-listed company, and the main asset is a 31% stake in APRR, which is the best toll road network in France. It's an incredibly high-quality business. It's a monopoly of toll rate asset with long-term concessions. It's delivering roughly a 5.5% dividend yield at the moment, and we think that will grow nicely to around 7% by FY '23. At the moment, you're seeing a very rapid recovery in passenger traffic volume. You're seeing consumers beginning to avoid public transport and start to use toll roads more. And truck volumes, which are around 35% of revenue for APRR have been very resilient and barely have noticed the impact of the shutdowns. Traffic on neighboring roads was down 80% back in April, and we've seen a very rapid recovery back to around negative 7% if you look at neighboring roads such as those owned by Atlantia. We expect Atlas Arteria will benefit from rising cash flows and dividends because of falling APRR CapEx, you get lower French corporate tax rates, and you'll also see Dulles become cash flow positive to the group. In the case of Chorus, that's been one of the key positions in the Long Short strategy going back all the way to 2014 when we started the fund. Chorus is the monopoly owner of the ultrafast broadband network in New Zealand. It's an incredibly high-quality asset. So if people think about the NBN in Australia, Chorus is currently delivering speeds roughly 20x faster than the NBN. And the price per month is lower as well. So it's an incredibly compelling offer for people in New Zealand. We think that dividends for Chorus are likely to accelerate given CapEx is going to be falling sharply from around $800 million to less than half of that level over the next few years. The Chorus Board is pleasingly committed to pay out almost all of its free cash flow as dividends going forward, and we think that you're going to get improved regulatory certainty over the next 12 months. So some positive catalysts coming through there. We've been the largest shareholder in Chorus for a number of years. We've made 6 detailed submissions to the regulatory review process. And as part of that, we also presented in New Zealand polymer. So it's a stock that we know well and it's been delivering attractive returns for investors for a number of years, and we think that will continue going forward. On Page 21, Star Entertainment. Star is the owner of the monopoly casinos in Sydney, Brisbane and the Gold Coast. It has a market cap of only $2.6 billion, which we think hugely undervalues the asset base, the licenses and the future cash flow generation. Star was trading at close to $5 back in January, but is now trading around $2.70 as a result of COVID-19. We think that on a normalized basis, Star will be generating between 12% and a 15% free cash flow yield once earnings normalize going forward. The company has a lot of corporate appeal. It's got a very attractive long-term structural growth outlook because of the rise of Asian tourists and Asian gamblers. And 2 strategic investors, Far East and Chow Tai Fook have bought a 10% stake in Star and are actively seeking regulatory approval to increase their stake further. Imdex is one of the most exciting small cap companies we see on the ASX. It's the global leader in exploration drilling technology for the mining sector. It is essentially a technology stock that is masquerading as a mining services company. It has invested about 1/3 of its profits in R&D over the past 5 years, close to $20 million a year, and it fully expenses that R&D. And it's now about to launch the best suite of products by far. The company, we think, can deliver 20% EPS growth per annum for many years to come. For context, Imdex has been doing about 27% EBITDA growth over the past 3 years despite a difficult backdrop for exploration drilling. We've spoken with dozens of different mining companies, drilling companies and competitors of Imdex to assess Imdex products and prospects, and we think the market is dramatically underestimating the lead that Imdex has over its peers. We think you've got an incredibly high-quality management team, conservative financial accounts, really strong EPS growth and a net cash balance sheet, and you're paying a P/E of 15x for that business. Turning to Page 22. Teck Resources owns some of the world's best copper coking coal and zinc mines. All of its major assets are in stable and attractive countries. It's a very low-cost producer with a large cost out program underway that will further lower the group's cost base by 2021. The following year, in 2022, we think that QB2, which will end up being a top 5 copper mine globally, will come online. And that will add around 20% to the group's EBITDA. Despite very weak commodity prices at the moment, particularly for coking coal, which is the largest commodity exposure for Teck, the shares are trading on a P/E of only 8x FY '21 consensus earnings. And we think that the company has an incredibly attractive outlook considering the cost-out program and the ramp-up of QB2 that's underway are not factored into that P/E of 8x. In the case of Worley, Worley is one of the leading engineering consulting firms in the world primarily focused on the energy and chemical sector. It's a really high-quality business. They don't do large fixed-price contracts. They're very diversified by country and clients. And post the Jacobs ECR acquisition, only 20% of their revenue now comes from upstream hydrocarbons, which has been one of the more challenged parts of their business. While they're suffering from a weak near-term outlook, we think that the medium-term outlook for Worley is very positive. They're likely to win a lot of work from the growing demand for new energy solutions. They're likely to win more market share in their existing markets because most of their competitors are struggling or facing bankruptcy. And their shares are trading at roughly half the levels they were trading at back in January of about $15 to $16 versus roughly the mid-8s today. The stock trades on a P/E of only 13x on a 6.5% free cash flow yield at an incredibly weak point in the energy CapEx cycle. One other thing that we think is hidden upside for the company is that the company has announced a $275 million cost-out program, which is roughly half of the earnings of Worley. And little of that $275 million has been incorporated into consensus forecast. So it gives us a bit of a buffer if conditions stay weak. On Page 23, we show 2 of the conglomerates that we like. News Corp, which has their main asset being at 61% stake in REA and $2 billion of net cash. The combination of those 2 assets gets you basically the entire market cap of News Corp. But on top of that, there are about a dozen assets that are incredibly valuable that are being valued at nothing in the sum of parts for News Corp. These extra assets include the Wall Street Journal, Dow Jones, Realtor.com, which is the #2 property portal in the U.S., Harper Collins, Foxtel and the largest and best Australian newspaper assets. The Wall Street Journal alone, we think, is worth at least USD 4 billion, which equates to about half the market cap of News Corp today. The Board and CEO have recently stated that they're evaluating a restructure of the business and are looking to unlock the upside to the sum of parts valuation. We think in a scenario where either the digital real estate assets were to be spun out or the Wall Street Journal, you would get somewhere between 50% and 100% upside to the share price. CK Hutchison is a Hong Kong-listed stock. It's a very high-quality infrastructure conglomerate with dominant industry positions and enormous cash flow generation. The business trades on a P/E of only 5x, more than a 20% free cash flow yield, 6.5% dividend yield with an ungeared balance sheet. The business owns about USD 40 billion of power infrastructure assets, more than 50 ports around the world, the biggest and fastest-growing pharmacy chain in China, and an incredibly valuable European telco and towers business, which I'll discuss later. The CEO has also been buying shares on market quite aggressively in the last few months, which we view as a positive sign about the outlook for the business. One of the major positive catalysts that we see coming for CK Hutchison is an imminent sell-down of their European towers assets, and recent media speculation has suggested close to 30x EBITDA as a likely sale price for that business. And when you think of the multiple that the CK Hutchison Group is trading at 30x EBITDA is many, many, many times what the company is being valued at, at the moment. We think that earnings are set to start to improve going forward after a difficult first half because of obviously impact on trade volumes. Rising dividend payout ratio is likely, and we also think that you'll see bolt-on acquisitions given the under-geared balance sheet and incredibly low cost of debt. Turning to Page 25 and capital management. In March, the Board announced an on-market buyback for up to 10% of the issued capital of LSF. The buyback program commenced on March 19 and has already bought back more than 21 million shares. The buyback is around 32% complete, and has helped reduce the discount from around 40% at the time of the buyback announcement to around 24% as of the close of business on Friday. The Board has been very clear in its commitment to utilize the current buyback program while the share price trades at a discount to NTA, that's larger than 10%. The Board continues to be very committed to narrowing the discount in the interest of all shareholders. The L1 senior investment team, including myself and Rafi, intend to significantly increase our shareholding in LSF. And we intend to purchase more shares once the permitted trading window opens in August. And we are not able to buy shares at the moment, but once the full year results are lodged with ASX, we'll be in a position to begin buying. So turning to Page 26. Hopefully, from this presentation, you can sense the excitement that we have across the portfolio. The fund has begun to recover very strongly after the initial impact of COVID-19. We think that equities are now offering exceptional opportunities that we haven't seen the likes of since the depth of the GFC. The investment team has a strong track record of outperforming after macro shocks. We saw that during GFC. We saw it during euro crisis, and we saw at the end of 2018 as well. We think the portfolio is very well positioned to capitalize on these opportunities and deliver very significant upside over the coming years. With that, I'll turn to questions, and please bear with me for a moment while I grab the questions that have been submitted over the last week or so.

The first question is you have a very optimistic time frame for COVID in terms of the vaccine, much more positive than our other managers. How come you're so confident? So hopefully, a lot of that question has been addressed during the presentation. But I guess if you turn to Page 14, I think there's probably a few points of difference versus other fund managers. And the first one would be, I think that we've invested a massive amount of time to try and understand this in detail. And we're very fortunate that Andrew Lin, who's head of healthcare for us is really well equipped to give us some genuine insight into the space. Andrew, as I mentioned during the call, is a medical doctor. He's also fluent in Mandarin. A lot of the calls that needed to be done to understand what was happening with COVID and with the vaccines basically mainly have to have conversations in Mandarin. We're, I guess, in a fortunate position to have Andy in our team. The other point I'd say is we don't think that it's a formality that you're going to get a vaccine. But what we think is you've got so many different shots on goal that having 8 different companies with 8 different strategies or 6 or 7 different strategies, I should say, mean that you have a chance of getting a good outcome is relatively high. And I think that people using historical examples of that it takes 3 to 5 years for a vaccine and not appreciating that regulators, the companies, the governments are throwing everything at this and incentivizing the fastest possible time frames because they realize the implications of having delays over multiple years. And the fact that you're going to have 8 different companies that will have completed their Phase III trials, which is the final trial before commercialization, that should give people confidence that we're at least going to be in a point where, hopefully, there'll be some light at the end of the tunnel by the time we get to October, November this year. What we're expecting is that large-scale production will start in 2021. And that over the sort of 6 or 12 months from the start of 2021, you'll start to see widespread distribution, at least in the Western world, of vaccines. And I think the data that you would have seen recently out of Pfizer and BioNTech and also the data from AstraZeneca, both of whom have very large-scale manufacturing potential, we think, is really encouraging. So Pfizer is talking about 1.2 billion to 1.3 billion doses available in 2021. AstraZeneca was talking numbers closer to 2 billion. So just from those 2 companies, if we have success from either of those, I think you'd see a huge change in sentiment from investors. The second question, commodity markets have been really volatile. Can you explain why there's such a divergence in commodity prices compared to the broader equity market? Any thoughts on iron ore and how you're positioned in oil? So I'll try and cover as much as I can across those topics. In terms of commodity prices, I guess, what you've seen is, in general, commodity prices have been relatively weak. Oil has been obviously the most notable one in terms of the glut and the unexpected increase in supply from the Saudis and Russians at the same time as you had a collapse in demand. I think it's -- well, it's undoubtedly the weakest oil market we've ever seen. We've never had a period before where traffic volumes and aviation volumes all just collapsed simultaneously, globally. What we think is that the outlook for oil is incredibly attractive at the moment. The sentiment is incredibly negative. Share prices for most of the high-quality oil stocks that we look at are down 50% to 70% on where they were trading only sort of 6 months ago. We think that you're starting to see a supplier response, where a lot of the higher cost producers, particularly the U.S. shale producers, are coming offline. And you're starting to see improving traffic volumes in places like China, the U.S. and Europe, which are really the key drivers of oil demand. So we think that you've got a nice setup on a 1- to 2-year view where the oil market and oil stocks will recover. On the other hand, in the case of iron ore, we think iron ore looks very toppy. So iron ore, at over $100 a tonne, we don't think is sustainable. In the short term, you've had supply issues from Vale, which is one of the world's largest producers. Their mines in Brazil have been running at lower than their typical production levels. But we think that the next 6 to 12 months, you'll start to see a supply response from them. None of the issues that they have, we think, are permanent issues. But we think there is a temporary shortage in iron ore, which is likely to resolve. And when you think a company like Fortescue, which has historically traded between sort of $4 and $6 over the last decade or so, their shares are currently trading at $16. We think that people are implying a very high iron ore price for a very long time to rationalize that sort of share price. So we think that stocks in the oil sector, stocks in the coking coal sector look far more attractive from a contrarian point of view. The next question is why is the strategy's return being so volatile this year? Can you please explain why the volatility has gone up compared to history? I think there's been 2 factors. One is the long-term strategy and the long-term positioning of the fund has not become more aggressive or different to what it's been historically. I think we've just been through the biggest and most aggressive market selloff in 100 years. The market fell almost 40% in 5 weeks. So investors should expect us to increase our net long as valuations become more attractive. If you look back through the history of the fund, we're typically between 30% and 100% net long. And given how extreme the sell-off was, we think it's appropriate that we've moved to roughly 100% net long. We're not aggressively geared. We're not changing our mandate. We think it's appropriate that when the market has a dramatic selloff, we should be increasing our net long as valuations are better. But as markets normalize and as valuations get back to normal, you should expect us to return to that sort of 60% or 70% in a normal world. So please don't interpret the change in net as a change of strategy or a change in our mindset. It's very consistent with what it's always been. Can you talk through the stocks you mentioned on Page 7? Did you actually buy these stocks or did you only buy some of them? So bear with me for one sec. So if I turn to Page 7, you can see the stocks listed in the table. In all cases, we were very aggressively buying all of these stocks around the market lows back in sort of mid- to late March. We think all of them were incredibly attractive. A lot of the reason for our strong performance in the June quarter was a result of the buying that we did at that time. Anecdotally, we've had feedback from a number of the brokers that we deal with saying that we were one of the very few fund managers that was aggressively buying at the market lows. It was obviously a very stressful and unnerving time for everyone. We obviously were very conscious of the decision we were taking to increase exposure at a time when there was a huge amount of panic. But hopefully, from the points that we raised earlier in the presentation where were talking about the impact of Central Bank stimulus, investor positioning, valuations becoming more attractive, we felt that it was the right thing to do for investors. And yes, we did buy all those stocks that we list on Page 7. We've noted that NIB was the one that we did exit around 3 weeks after the presentation. So hopefully, people feel a bit more comfortable that the actions we took at that time has given people some confidence that the consistency and I guess the objectiveness that we come in our research with, we think that over time, valuations do matter. I know in the short term, it can be sentiment and it can be panic that drive share prices lower. But over time, it's all about cash flows. And if we buy companies that are generating massive amounts of cash flow when those companies are using it sensibly, we should deliver really good returns to investors. The next question is, I've seen these value growth slides many times, but nothing ever changes. Why do you think the catalyst of value is coming into favor this time? So I have a bit of sympathy with that question because I feel like we've been talking about it for a while. But if you turn to Page 9, you can see that the chart at the top of Page 9 is an example of just how extreme the current situation is. Now we don't know exactly what the timing is going to be. But I think some of the factors that give us confidence that this is likely to turn is, firstly, if you cast your mind back to September 2019 when Brexit and the trade war got resolved, you did start to see an inflection point in value and cyclical stocks. So the fund performed very well in September, October, November, December last year because you were at the early stages of that rotation. COVID, obviously, was a totally left field event. I don't think anyone in the world forecasted. That totally derailed the rotation into value and cyclical stocks and it caused an exaggeration of the hiring and growth in momentum stocks. So we think that as COVID gets dealt with and as you start to see progress on vaccines, as you start to see some better treatments, you will see people, I guess, come out of that sheltering growth and momentum stocks and I'll be looking for bargains and I'll be looking for the value in the cyclicals. The second thing is the leading economic indicators. So the things that we touched on before, like the ISM data is incredibly encouraging. We've seen a really dramatic inflection point just over the last month or 2. And then lastly, also a lot of the data on COVID, we think as that comes through, that will provide another reason for people to get a bit more positive about the world and feel safe to move back into stocks that have economic sensitivity. Next question, given that you've basically said the next few months will be rough, why don't we and you reduce our equity exposure for now? I think it is, I guess, your instinct to say, well, okay, if volatility is going to stay high and if markets are going to be fragile for the next 1 or 2 quarters, why would I keep my toe in the water now, why wouldn't I just wait? I think the most compelling reason I can give you is that we think, while things may be volatile and they might be a little bit of erratic in the short term, we think that you'll look back in 2 years' time and say I wish I would have bought Scentre Group at $2, or I wish I would have bought Star at $2.60 because you may never see these prices again. I think genuinely, I think that the valuations from the share prices that you're seeing today are really, really unusual. And it's going to take a pretty horrendous world for those share prices to prove to be accurate that effectively companies that are generating massive amounts of cash flow that have really defensive businesses that are going to come through this COVID period intact. They've got perfectly good balance sheets, they got perfectly good management. We think that, that will be the place to be over the next 2 years. And I think you just need to accept that over the next 3 to 6 months, it will be volatile. And it's very reminiscent of when we bought [ SEEK ] back during the GFC. We're paying $2.53 for [ SEEK ] And everyone is telling us we're crazy. The economy is going down the toilet, and [ SEEK ] is obviously exposed to employment trends, but we just said to people, this is an incredibly high-quality business. You've got a fantastic management team. [ SEEK ] is going to be around for the next 10, 20 years. It's not a company that's suddenly going to go bust. And we think it's exactly the same with the companies that we've listed in this presentation that have been hard hit by COVID. It feels very reminiscent of that GFC period that proved to be one of the best opportunities for us. There is one more question. I'll just try and grab it, working my computer. Why do you think the buyback will close the discount? Can you give us any more color? So on Page 25 of the presentation, we've covered the buyback, and I guess, the strategy from the Board. As you can see, the buyback has roughly closed the discount in half. So it was around a 40% discount at the time the buyback got announced. We're now into the sort of low 20s. I think it's around 23% as of today. And we're now roughly 1/3 of the way through the buyback. So hopefully, that gives some confidence that the buyback is having the desired impact. We are seeing the discount close. The Board has been very much on the front foot in terms of the percentage of volume that it's been doing. And hopefully, people have noticed to pick up in that over the last month or 2. We've also seen a period where you do get a bit of extra selling come through around tax loss time. So there's tax loss selling that tends to sort of pick up in June, and we've come through that period where the discount were up temporarily, and now we start to see it close again. So hopefully, that gives people some comfort that the Board is absolutely determined to close the discount. And I think that it's been incredibly clear in terms of how specific it's been with the buyback. And I guess one of the other things is also just the fact that we've openly flagged -- Rafi and I are telling people in advance that we're intending to buy a significant amount of stock as soon as our trading window opens. I don't know of too many companies where the management or the fund managers are flagging in advance that they're going to be doing sizable share purchases. So hopefully, that gives people some confidence that the board believes that the shares look incredibly attractive at this discount. And secondly, under the investment team, including myself and Rafi, believe that the share price is incredibly undervalued, and that's why we're buying stock personally. That covers most of the questions. There are a few sort of specific questions that probably don't have as much broad appeal. We'll ask our investment specialists to follow up with those particular investors. Thank you, everyone, so much for your time today. Hopefully, you can get the impression of how much optimism and hunger we have across the investment team. Please send through any questions or feel free to contact us if you have any other questions. And thank you so much for your time.