Mirrabooka Investments Limited (MIR) Earnings Call Transcript & Summary

Good day. Good afternoon, and welcome to Mirrabooka Full Year Financial Results Briefing. [Operator Instructions] I would now like to hand the presentation over to Alison Gibson, Managing Director of Mirrabooka. Thank you. Please go ahead.

Thank you, and good afternoon. Welcome to this full year result briefing. I'm Alison Gibson, the CEO and Managing Director of Mirrabooka Investments. I've just recently rejoined the team, having spent the past 5 years at HESTA as a portfolio manager there, helping to establish the Australian equities team. I say rejoined as I was a portfolio manager with the company from 2011 to 2021. I'm very excited to be back with the team. It's an honor and a privilege to serve our shareholders in this role, and I look forward to meeting and speaking with shareholders over the coming months. Firstly, I'd like to begin by acknowledging the traditional owners and custodians from all the lands they gathered on today and pay my respects to their elders, both past and present. I have joining me today on the webinar, Kieran Kennedy, Portfolio Manager for Mirrabooka; Stuart Low, Assistant Portfolio Manager for Mirrabooka; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; Geoffrey Driver, General Manager, Business Development; Claire Aitchison, Head of Business Development and Investor Relations; Suzanne Harding, Business Development Manager. This briefing is based on the material available on the company's website. The presentation slides will change automatically via the webcast. I'll now turn to the first slide, which is our disclaimer, which says that we're here to talk about the company and not to provide individuals with any investment advice. Slide 3 outlines who'll be speaking this afternoon. Kieran will cover the key features of Mirrabooka and then pass to Andrew to talk about the results. Kieran and Stuart will then cover markets, the portfolio and then the outlook. We'll circle back to question and answers after the formal presentation. And as mentioned, you can ask a question via the webcast using the tab at the bottom of the screen. I'll hand over to Kieran Kennedy on the next slide.

Thank you, Alison, and welcome back. So just I'll start my part of the presentation on Slide 5, starting with our investment approach. And for those that have followed the company for a while, this is the same slide that we've been including for a number of years, and it reflects our consistent investment approach that we've been employing now for Mirrabooka's 27 years of investing. So, I guess at its core, where we start is that we are a long-term investor as we are in the four companies listed investment companies we manage from this group. And what we're really trying to do is buy companies that we think we can own through cycles for the long term and the businesses that we buy can then generate attractive returns as a starting point for the portfolio. When we're looking to do that, the first thing we look for is business quality because that's the most important trait that you need to have consistent returns in the long term and can help weather the volatility that comes along in a greater degree at this end of the market. We're generally very focused on the people. They're particularly important on smaller companies in management. They have a bigger influence on these companies. And where you have failure and things going wrong, people is often one of the things you look back on and say we were backing the wrong people in that case. So that judgment of the people, their incentives, their motivation is a very important point at the outset. Financial strength is also very important. Again, looking at the companies that do fail through this end of the market. The common theme is it will be a combination of people and balance sheet. So, we really want to have businesses with strength in their balance sheet, good cash flows, a good resilience on the balance sheet so that they can see through cycles and deliver on their returns for the long term. In terms of the way we manage the portfolio, by its nature, this end of the market tends to be more active. There is more volatility in the general operation of the businesses. They have more volatility in their results. And adding to that, there tends to be more volatility in the valuation that's applied to these businesses. So, to manage the risk and make sure we're generating the right returns for investors in a risk-managed sense, it's important that we're aware of valuation and where extremes apply in both directions. Moving on to how we've gone with this strategy and how it's delivered over the long term. I guess one of the appeals of investing in smaller companies is that we do think there's greater returns on offer. And we think there's a couple of reasons for that. Firstly, when you're finding good companies in the early stages of their development, they tend to be a bit more undiscovered. So, the ability to find companies where there's returns available where others in the market haven't yet seen them. And what we particularly like is when you identify them well, you then get a longer period of ownership where they're doing their higher growth, and you can compound that for a longer period of time, and that can generate really good returns in the long term. As with everything in financial markets, nothing comes for free. So, where there's higher returns on offer, there can be, and in this case, there is more short-term volatility, and we've recently experienced some of this in the Mirrabooka portfolio, which will be a real feature of what we talk about later. But importantly, at the outset, just going back to the strategy and what Mirrabooka is about, if we look at the since inception numbers, Mirrabooka has demonstrated that this theory of being able to generate higher returns has played out in the portfolio in reality versus both its benchmark, the mid- and small cap indices and the broader ASX 200. Before moving from this slide, we do get some questions about share price growth. If you're looking just at the share price and thinking about the returns being generated there, I think increasingly in Mirrabooka, you're missing the overall returns because of the increased role that dividends are now playing in the Mirrabooka returns profile. Andrew will cover this in more detail. But since we first paid a special dividend in 2013, we've now paid $0.57 of fully franked special dividends. And that's really as a result of realized gains being an increasing proportion of the returns, which just goes back to that point I made earlier about valuation extremes and making sure we're locking in some of those returns when they occur. So again, with an extra $0.03 special dividend this year, it's just important they're being reflected in returns. And investors obviously have the ability to reinvest those and get compound long-term returns by going in the DRP and increasing their share count over time. So, with that, I'll hand over to Andrew to cover the latest financial results.

Thank you, Kieran, and good afternoon, ladies and gentlemen. So, there are a couple of new boxes on this slide from the ones that you're familiar with, but I'll briefly run through all of them before we get back to the portfolio. So, profit was up for the year, up to $0.058 per share, but that's actually consistent with levels that we had in 2023 and in '24, which were themselves at a higher than usual level. This was caused not only by an increase in dividends received, particularly from companies like ALS, which changed the timing of their dividends. So, we got three dividends this year rather than last year, a special dividend from ARB, but also an increased contribution from writing call options over stocks that we owned with a particularly large contribution from options written over Lynas Rare Earths as it shot up in value. And from the trading portfolio, particularly from our holdings in TUI and Flight Centre, which were sold appropriately during the year to take advantage of the gains that they had achieved by that time. The interest that we received from our cash holdings was considerably higher as we were patient with the cash that we got from the rights issue. So, we had a fair proportion of that in deposit accounts. As Kieran noted, we announced a special dividend of $0.03 this year, bringing the total dividends for the year to $0.14, which represents a yield of 7% on the portfolio at the end of the year, including franking. We actually think this is one of the attractions of Mirrabooka, getting a fully franked dividend of this size from a portfolio of small to mid-caps is rare. After paying these dividends, we still have sufficient franking credits to cover $0.27 worth of dividend, and I'll come back to that shortly. So, looking at the bottom row, portfolio was down to $635 million at the end of the year, and Kieran and Stuart will go through the main drivers of that. The Management Expense Ratio, or MER, is a proxy for the cost of running the company and is calculated as the cost for the year over the average portfolio for the year. So even though the costs are flat and the portfolio down at the end of the year, due to the rights issue, the average portfolio this year was higher than last year. So, the MER dropped to 0.52% or $0.52 for every $100 invested. But don't worry, there won't be a quiz on that, but happy to take any questions. We think that for this sector of the market and the work involved, the costs are actually very competitive, but are always monitored by the Board and management. Realized gains per share were down on last year, but combined with the increased earnings, the Board were comfortable to declare a special dividend. The next slide shows the history of special dividends, which Mirrabooka has been paying out, as Kieran said, since 2013, but not, I should note, every year or even of a consistent amount. Mirrabooka will pay a special dividend depending on the level of earnings, the level of realized gains and what is considered a prudent reserve of franking credits to continue to pay the ordinary dividend in times when we are not receiving or generating as many franking credits as usual. As noted, this year, after paying out the dividends in August, we'll have roughly $0.27 worth of coverage, which is the dotted line on the chart that you can see. Now it's important to note that Mirrabooka's ordinary earnings and in earnings per share, what it gets from dividends received, options, et cetera, that I mentioned earlier, only approximate 50% of the ordinary dividend even in a good year. The rest of that dividend needs to be funded from realized gains. So Mirrabooka does need to be more cautious with regard to the reserves of franking credits, that we have in order to maintain that ordinary dividend for times when gains are hard to come by than perhaps you will see in other LICs. The last slide that I will cover shows the premium to discount chart. As you can see, for the first time in recent years, Mirrabooka has been trading at a continuous, albeit until very recently small discount, which means that the share price is less than the value of the portfolio per share. The Board were conscious that this might have meant that we might be issuing shares in the DRP or DSSP as a discount. So, we have put a share buyback plan in place should the Board decide to use it. However, as we noted in the estimated NTA for close of business last Friday, and that's in the box there on the screen, that discount has now closed considerably. So, we will continue to monitor the situation. So, as I said, very happy to take questions about this or anything else at the end of the presentation. But in the meantime, I'll hand back to Kieran.

Thank you, Andrew. And for those following, I'm now going to Slide 12. So as mentioned in my earlier remarks, the prospect for longer-term outperformance in returns in Mirrabooka do come with extra volatility. It's important to acknowledge in this period that we've been both challenged and disappointed by the 1-year returns, and they're very clear on this slide. And we understand that a number of negative 10.8% for the year versus the benchmark doing positive 7.8% is likely to raise questions from investors, which we welcome later, and the significance of this underperformance has dragged our long-term numbers under, which on a 10-year view, we previously had an unblemished track record of outperformance on. So, our main aim in this session is to provide you with reassurance that the settings for the portfolio and the strategy is consistent in place and that we have full confidence in delivering strong returns in the long-term future for Mirrabooka. I think it's important in the next few slides to outline some of the key factors behind this underperformance, both through the lens of what we haven't owned that's been performing particularly well and those that we have owned that haven't. I'll then pass to Stuart, and he'll give a snapshot of the portfolio as it stands today and some of the recent buying and selling activity. So, moving on to Slide 13 and focusing in on what we haven't owned that has been performing particularly well. It's been quite an unusual year in the market in terms of the concentration of returns. So as mentioned, our benchmark return has been positive 7.8% for the one year. But within that return, the mid-cap resources indices did positive 68% for the year and the small-cap resources index was positive 31%. If you look at all the other companies in the benchmark, which are known as the industrials and non-resources, they actually did modest negative returns. So that 8% return to the benchmark has really been driven by the strength in the resources area of the market. So, I guess the clear question with that is what is Mirrabooka's approach to investing in mid- and small-cap miners. And what we've consistently said here is that we apply the same investment approach to these companies as we do to other companies. But as we acknowledge with commodity, with resource companies, they tend to be price takers in that they don't influence or control the price of the products they sell, and they tend to have more limited competitive advantage. So what we're really saying there is when we take a decision to buy a company that we intend to hold through cycles for the long term, we find it more challenging with the majority of mid- and small-cap miners to make that decision and really to back them in when that commodity price is going against them and own them through those tougher times. These businesses also come with more volatility in both their earnings and the share prices that attach to that as those cyclical conditions play out. But it's important to note that where they do meet our criteria, we have owned them. We're not a non-mining investor. In this period alone, we've owned Lynas, as mentioned earlier. It's been a really good investment for the portfolio. It's one we've sold, which Stuart will cover, as it graduated to the 50 Leaders index. But what we're really looking at there is the competitive advantage we feel that company has. And that's because as the only material producer of rare earths outside of China, we felt they had a strategic nature to their asset base. So, where that applies or where a company has really strong market positions, a cost position that's really attractive in its industry, where we can back in returns through the cycle, we will invest in them. But as you look through the index and particularly at the moment where around 25% of the benchmark is in mining companies, with the way we invest on a long-term view and I guess, the returns we've been able to generate from that, it is challenging for us to really meet that benchmark. So, we're likely to be and remain underweight in this space. It's important to note, this is not the first time we've seen underperformance coming from the mining sector of the market. So, if you look at the chart on Slide 13, what we're reflecting here is how resource companies have tracked versus industrials within the benchmark on a one-year rolling period since 2002. So, in the chart, where the orange bar is above the line, that is periods where industrial companies are outperforming resources. And when it's below the line, that's when the resource companies are outperforming. So, you'll see from the chart, this most recent episode has been the strongest period of outperformance that resource companies had against industrials in Mirrabooka's time investing in markets. Moving then to what we have owned, which has been weighing on our numbers. So, if you look at the key drivers of relative portfolio performance, and I'll start in the right-hand box and the negative contributors. Through the year, we've had a number of stocks that we have backed in as good long-term investments in the portfolio that have suffered from earnings disruption and downgrades. We'll cover this later, but we're finding the way the market structure works these days is the penalty for downgrading profits has never been greater and the volatility in downside terms has never been greater. In companies like Gentrack, Temple & Webster and ARB, we've experienced that through the period. Just to quickly touch on each and how we're looking at them from a long-term point of view. Now, Gentrack, just to remind those in the audience, is a software utilities billing company with an airports business as well. We think that's an interesting space. There's a lot changing in the energy market that's changing the way customers are being billed. We think Gentrack is one of few companies globally with good intellectual property to benefit from this, but they're going through a phase where they have project earnings as well as high-value recurring software earnings. And through this period, they are long sales cycles that had a gap in terms of signing new customers, which has seen them move very quickly from being a market darling to one that's now under pressure and has had a lot of people exit the register. Temple & Webster and ARB, the similarity with those is companies that we think have got really good long-term track records of growing market share in their industries, but we're seeing increased consumer pressure recently. And Temple & Webster has seen that in a slowdown in their sales as has ARB, which again has seen deratings in those stocks. Stuart will touch on this a bit more later, but it's important to look at the long-term track record on these companies. These are companies we've owned for a long period of time, bought well, had sold at much higher prices. And then in a one-year view, they have hurt the numbers, but in the longer-term sense, they've been good for the portfolio. Equity Trustees is another one that has impacted numbers. Those who have followed markets would understand it has an exposure to Shield and First Guardian that's been prosecuted at the moment by ASIC. There are some court cases there. Their role in that is that they, the trustee that had some of these products on menus, and they're being asked whether they should have excluded that from the investment menu of those participants down the line. That will play out. It's impacted the share price understandably. There is potential exposure that they will have to put the bill for some of those losses that have been suffered, but a lot of that has now been reflected in the share price. So, we'll continue to hold that position but watch it very closely from here. The one most particularly we want to talk about is Corporate Travel Management. As mentioned earlier, we talk about our investment style as being quality first. And that's the first thing we look at. We're really trying to avoid blowups to be candid. And this is particularly disappointing to have a business like this in the portfolio. It was a small position, but it's still one that's caused a lot of reflection on how we got our quality assessment wrong here, to be candid. There were red flags that, I guess, in terms of some of the margin profile in particularly in the European business that we were watching. But they have, I guess, eventuated that has been some accounting irregularities, and it looks like this business is not going to survive through that. So that's something we reflect deeply on and will ensure that we're reflecting those red flags in the way we manage these positions going forward. Just to complete those on the right-hand side, companies we don't own, Pilbara and Mineral Resources are in the lithium mining space. That's been particularly strong with commodity prices, and that goes to what I was touching on earlier. Important to balance this, there's been some good positive contributors. Stuart will again mention some of these in the top 20 investments shortly. A lot of these are businesses that we've been buying more recently as we've seen better value in them, and there have been good strong performers in the portfolio. But I'll leave Stuart to cover those in subsequent slides. And with that, I'll hand to Stuart.

Thanks very much, Kieran, and good afternoon all. Now moving to a discussion on the Mirrabooka portfolio. Turning to Page 16 in the slide deck. This is the top 20 holdings as of the 30th of June with the associated ownership period for each of the holdings. This is a slide we always like to include in the deck as I think it shows that we genuinely are a long-term investor. I guess the reason why we view that as being increasingly important is it allows our companies the time to grow and compound their cash flows and then our returns in those companies. It also means it reduces unnecessary transaction costs and gives us time to build confidence in the management of these companies. As Kieran pointed out, a few years ago, we reflected there was some pretty high growth and top 20. So, we did move down a couple of defensive businesses like Cuscal, Region, Channel Infrastructure. There are some of the more recent entries into the top 20. We purchased those businesses in smaller size, but they have performed very well over the last couple of years and have earned their way into the top 20. The one of note that you'll notice with a shorter holding period is ASX. That's a recent addition in the last couple of months, and we'll talk to that in a little bit more detail on the next slide. As always, we're happy to talk about any of the businesses in our top 20 and any of the stocks in the portfolio more broadly in Q&A. Moving to Page 17, the major transactions across the financial year, starting with the acquisitions. ASX, as mentioned, into the portfolio after a really tough period with a number of cost-related downgrades, predominantly relating to the ongoing CHESS replacement issue that's been quite public. The ASX subsequently fell out of the top 50 companies, which has been there for a number of years and back into our investable universe. We see the ASX has been a critical piece of unique market infrastructure. It still has a good balance sheet, strong revenue growth. And due to the underperformance of the shares, it's now on what we see as an undemanding earnings multiple and has a solid dividend yield. They've announced a new CEO who comes highly regarded, and we look forward to meeting them when they commence in September. CAR Group, as shown on the previous slide, we've owned car for many years. And following the heavy derating of technology stocks in the second half of the year, we added to that position. We're attracted to its dominant industry position in automotive classifieds across a number of international markets. It's very strong balance sheet and highly capable management. Vista Group, probably less well known to the audience. This is a business that produces software that powers nearly 50% of the cinema industry. They spent the last three years transitioning from what was an older on-premise software business to a fully cloud-based, largely subscription business. And once again, that was a business we added to in the technology sell-off in the second half of the year as we think it's a very hard to replicate piece of infrastructure software. Web Travel. This is another business that we've owned previously, one of the major global bed bank hotel wholesaling businesses and understandably, was sold down quite heavily when the Middle East war broke out earlier this year. Despite having an exposure to that region, Web announced earlier this week that their operating performance continues to be really strong. And due to the subsequent share price weakness following the war and the combination of a very strong balance sheet, they've announced a $9 million on-market buyback. So pleasingly, even though it's a short period since we've owned it, the stock has responded really well in the last week. In terms of disposals, as Kieran mentioned, Lynas, the rare earths miner, it was a very successful investment for us over the year, but was promoted to the ASX 50 and out of our index. This tends to be a natural catalyst for us to reassess our ownership, and we've subsequently sold out of that position. Cobram, the major olive oil producer and Peet, a residential land developer, we still own both of these businesses. And in both cases, the companies performed very well during the year. Both were businesses we've been buying in the last couple of years, but following material share price moves, their position sizes in the portfolio became quite large in the context of what we would deem to be quite full valuations for both. We used the subsequent strong share prices to reduce both positions, but we do continue to hold them in the portfolio. Infomedia was a successful takeover in the first half of the year. The next box includes three companies that we still own in the portfolio. These are examples of stocks that we sold material amounts earlier in the year when the valuations became stretched, and positions had grown quite large in the portfolio. All three businesses subsequently had large share price falls. And given our positive disposition to each, we repurchased the shares at what we thought were much fairer prices. Unfortunately, in each case, the shares have fallen further than we anticipated and remain below the most recent buying levels. Kieran will touch on this a little bit later, and we've alluded to it already in the presentation, but this is something we're reflecting on with our buying. As many listeners will have noticed, we're seeing much higher volatility in share prices than we have in many years. For example, over the last 18 months, Temple & Webster traded in the range from $13 up to $28 and back to $5. Life360 traded from $22 to $55 and back to $18. Thankfully, we were able to use this volatility to our advantage, selling into the strength and creating significant capital gains that have helped fund our dividend, but it has made us reflect upon our approach to buying companies where momentum has turned negatively and their share prices are falling. I will now hand back to Kieran to expand on this topic a little bit more, discuss the recent market observations and the outlook for Mirrabooka.

Thank you, Stu. So, I'm now on Slide 19. So, we've talked about this a lot through the presentation, but it's clearly a more volatile market that we're now operating in. And so, we thought it would be interesting just to stop and reflect on why that is. We think it is fair to say that the structure of equity markets has changed, and it's hard to see how they return to where they were previously. Why we think that is, there's been an increased flow to passive funds, which I think has been well documented and most will understand. What that means is there's now more of the buying and selling activity in the market that is determined by index weighting and the operating momentum often of those businesses rather than fundamental bottom-up stock picking. With that force in place, it's meant that active managers now are very aware of these technical drivers of share prices and their positions versus the benchmark on their stocks because the penalty for managers now underperforming has never been greater as more of that money moves passive. If you then think about the super fund industry and the performance tests that apply to them, it also means that there's a lot of money now that is very closely following the index and much more than there ever was. This actually heightened share price volatility because it means when a company stumbles, there is more selling pressure than there ever was before, and that opens up the possibility in terms of how far share prices can fall. So, moving on to Slide 20. How are we responding to these changes and how do we reflect it in our investment process. I think the most important point to make is the first one, which it doesn't change the sorts of companies that we want to buy that we think fit our strategy. Our belief in quality being the most persistent factor and compounding earnings growth for the long term and that earnings growth is the best determinant of long-term share price direction remains unchanged. Where we do think there's room to reflect is more in the tactical piece rather than the strategy. And that's thinking about investment timing and our awareness of the volatility and the way share prices move with the direction, operating momentum, the earnings momentum of businesses and the index weighting consideration, which we think can improve, I guess, the prices we achieved, particularly on the buying side versus what we've experienced in the last little while. The other element of this is in terms of sector weightings. The moves between sectors have never been greater, and it's interesting to reflect on how that's played out over the last few years. As we've alluded to through this presentation, we've gone through a period of higher-than-usual turnover in selling in Mirrabooka over the last three or four years as we've been aware that our quality companies that we prefer have often been more highly rated and more highly valued than they were before. That's led to more selling and more capital gain generation. As we reflect on this today, we think about the sort of high-returning businesses that are offered in sectors like technology and healthcare and where they sit now, and it's actually flipped. We feel like if you're now looking at the sectors that are most out of favor, it is actually in those areas which are well represented in the portfolio, which has been one of the underlying performance headwinds in the portfolio. The final slide on Slide 22, just moving to outlook. As mentioned, we aren't changing the way we're investing. We think the LIC structure provides us a unique ability to look through cycles and be a true long-term investor. And we think that the long-term track record of Mirrabooka gives us confidence to continue to do that. As we look at the portfolio, we're confident with the businesses we own. We think there's extra competitive advantage in our sort of portfolio of stocks versus the universe. We think there's good attractive long-term returns. And there's now a less demanding valuation backdrop for these businesses. Since inception returns gives us really good confidence in the long term. But as always, near-term direction of markets, economies, they're always difficult to predict. And at the moment, there's any number of things, both coming from White House policy, Middle Eastern conflict, I guess, the tax changes we've seen in Australia and the consumer pressure we're seeing in Australia that do cause some caution in the short term, but we do have strong belief in the portfolio and our strategy for the long term. So, with that, I'll hand to Claire, and she'll queue some questions.

Thanks for that, Kieran, and thanks for all your questions. [Operator Instructions] This could be for Kieran or Stu. Could you just provide some insight on the average return on equity and earnings growth of the Mirrabooka portfolio?

Yes. Look, so it's obviously across the portfolio of 60 stocks and each at different stages of their maturity. There's a lot going on in terms of quoting a return on equity figure, and I think it's misleading to big a figure. But when we're looking at what we look to invest in and how we identify quality, obviously, companies with a spread over their cost of capital, the mature companies in the portfolio, that's absolutely a factor we look at, and we see that well represented across the portfolio. So, we're confident our portfolio of stocks has a higher return than the average in the indices, but there is a lot of noise in terms of short-term earnings that influences those return on equity figures in our benchmark.

This listener has pointed out that AFIC has invested in international shares. Would Mirrabooka consider doing the same?

Look, we never say never. And it is something we have thought about in the past. We do travel to see some of the businesses in the portfolio. We often remarked in the past about, I guess, some of the quality companies in Australia, the valuations can be quite demanding versus what you see in other markets around the world. But we really feel at the moment that we've seen some volatility in the portfolio recently. Our strong desire now is to get out hunting for the next ASX-listed companies that really can drive our returns and get us back to delivering those good long-term returns in the portfolio. So, I think that's our near-term focus. But in the medium to long term, we wouldn't rule it out.

Okay. In the presentation, you talked about the investment in the Corporate Travel Group. Have you written down this investment?

We've gone further than that. We've actually sold that investment. So obviously, it was a modest amount that we sold it for. But in this situation, we had a lot of capital gains in the year. So, the most value that stock could produce for the portfolio from here was to realize that loss and offset some of those gains. And it's important to note, we still had net capital gains after that activity, which has funded the dividend, but we no longer own corporate travel.

And this question refers to what you were talking about earlier about realized gains being part of the dividend. When was the last time Mirrabooka's earnings per share was greater than its dividend per share?

I can't think of a time, certainly not in the last 15 to 20 years. It's always been a key picture ever since we increased the dividend up to $0.10 and above. That's always been funded by realized gains.

Yes. Look, and I can understand the logic behind the question. I'm guessing it's going to sort of sustainability of it. And is that dividend policy sustainable. But I guess it's important to reflect on this area of the market. So, the average dividend yield in mid- and small cap companies is sort of in the low 2%. So that's the sort of running yield you get if you buy the average market stock. I guess when you're a listed investment company, the sort of volatility we're dealing with, the extreme valuation, prudent that we do, and I guess the way businesses change, you get businesses taken over. There's just a natural level of turnover you're going to have in a portfolio. When we have that turnover and we've had a successful investment, we pay tax as a company. And that takes away some of the value out of the portfolio because you paid the tax. We get a franking credit from that. We've got to communicate that value back to shareholders because it's important that a franking credit on our balance sheet is worth nothing. But when it goes back to shareholders, that's where the value is transmitted. So, it is important that we pay out those realized gains. But I think going to the question, it's most important that we do it in a sustainable way. And what we've been most pleased about in our dividend policy in Mirrabooka is we've lived through both GFC, COVID pandemic, where dividends were cut significantly in the market. And even in a portfolio like this that's operating at the small and mid-cap end of the market, we didn't cut the ordinary dividend through that period. So, we think that's important to note.

And I'd note that it's the reason why our level of reserves of franking credit are higher than you'd see elsewhere for exactly that reason.

Thank you very much. So, this one is about changes in sectors. So, you talked about the turnover in the portfolio. Have we had any sort of major changes in sectors in the portfolio?

Not really. No. I mean we are bottom-up investors. So that remains the case. So, we're looking at each stock individual on its merits. I guess where we're alluding to some of the volatility within sectors before, part of what we're thinking there is when we were grappling with some of the extreme valuations in the portfolio going back over the last three or four years, as I said, that led to higher turnover, which is helping with the dividends today. There's probably, going through those conditions, again, our learning from that period is to be looking a bit more at sectors then and saying where are those unloved sectors and what are the best quality businesses you could own for the long term in those sectors when the sort of the higher growth sectors that we're invested in are flying high. So that's our learning that we'll deploy over the next cycle. But I think we're in a position now where it has flipped. And I guess the sectors that we're well represented in the portfolio, those that are out of favor now, which gives us some confidence on the valuation sense going forward.

Okay. Andrew, will the DRP be in operation for the final dividend?

Yes. As will the DSP, which is the bonus share plan. So, the Board have decided to keep those turned on for this dividend.

We've got a question here about Objective Corp, which has been some share price movements of late. How is management reflecting on the news that the Department of Defense did not renew their agreement? Maybe you could reflect on that announcement and then also your thoughts on that.

Yes. I'll take that one, Claire. Yes, very well picked up. And obviously, this one came as a bit of a shock to us, too. And just a little bit of background for people on the call, Objective produces software for local government, federal government and a lot of government agencies. And the contract, in particular, was the Department of Defense contract, which was not renewed and it related to, essentially as they've been with the Department of Defense for a number of years, and this related to the support and maintenance revenues associated with that contract. It was reasonably material to the business, probably 7% of revenues and came as quite a shock to us and to the company. We've obviously spoken to the company since then, they were surprised by. As part of our work, which is a continuing piece of work is trying to understand the drivers of that, whether there's something related to the objective software in particular or whether price was an issue. We feel relatively comfortable that it was unique to Department of Defense. They're on an older on-premises piece of software. It's quite different to Objective's current subscription software stack. But when a company on the software companies because they have very low churn and really high returns. When they do lose a contract, it is time for us to pause on the investment case and really get to the bottom of that, and that's a continuing piece of work. But at this stage, we do feel like it's isolated, but we do, obviously, we'll catch up with the company and a result period, be able to talk to them more fully, have a look at the full financials and make an assessment from there.

Just adding to that, it's quite unusual, isn't it, that's a situation like this where the support hasn't been renewed, but they're still using the product, which that means there's a lot of work to be done, to work out what exactly is going on.