Mirrabooka Investments Limited (MIR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Mirrabooka Investments conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I'll now hand the conference over to your first speaker today, Mr. Terry Campbell. Thank you. Please go ahead, Terry.

Thank you, Miles. Well, welcome, ladies and gentlemen. And as I think you all know, I'm the Chairman of Mirrabooka Investments. Thank you for joining us this afternoon, and I apologize for the delay in the call. But with these conferences at the moment, there's congestion that -- so we wanted to get as many people on the line as possible. Well, the environment for the meeting is, well, many would say it's unprecedented. I joined JBWere and Son back in 1959 straight from school. So that means I've seen crashes in -- seen market crashes in the '60s, the '70s, the '80s, the '90s, perhaps the 2000s with the tech rec and 2007 with the GFC and now the coronavirus crash. In some ways, it's not unprecedented. Obviously, we seem to get them every 10 years. But the size of the crash this time -- or the decline is not so much unprecedented. The things that are different about this one are the cause, which I've never seen anything like that and also the speed that -- so the -- it will be interesting to have our chat. What we'll do is I'll introduce the team that we've got here today and they'll go through our presentation, then I'll have a few concluding remarks. I have with me on the phone today, Mark Freeman, our CEO and Managing Director; Kieran Kennedy, our Portfolio Manager; Stuart Low from the investment team, Andrew Porter, our CFO; and Geoff Driver, the General Manager of Business Development. Hopefully, you've all got in front of you the material that's on the company's website, which sits because we are talking to that presentation. And please note that, as Miles was saying, there will be time for questions and answers at the end of the presentation. So with that, what I'd like to do is hand over to Mark.

Okay. Thanks, Terry. Just starting on Slide 2 of the presentation. There is a disclaimer just to say that we're here to talk about the company, what we're doing. We don't have a license and we're not giving any financial advice. So moving on to Slide 4, just to remind everyone what Mirrabooka is about. Our aim is to deliver attractive returns from the mid- and small-sized part of equity markets, both here in Australia and also in New Zealand as well. We're looking to outperform the combined mid and small cap benchmark over the medium to long term through a combination of strong capital growth and the generation of fully franked dividends. We do this by identifying high-quality mid- and small-cap companies that are expected to deliver above-market returns, having a diversified portfolio, which ensures that there's sufficient exposure to growing companies and make sure the portfolio is not too narrowly focused as this sector of the market is typically more volatile than the larger companies. So moving on to Slide 5, just a little bit more details on what we're looking for in companies. We're looking for businesses that have a strong industry position. Our balance sheet is critical. And as we're seeing in this environment, is always the case in all market downturns, the companies with weak balance sheet, so companies with too much debt are the ones that get into the most trouble. And so a key objective for us is to avoid those types of businesses, invest in companies with the strong balance sheets. It's essential to be in companies that have good management and generate good cash flow. So what we're looking for is to invest in high-quality companies that are growing and avoid speculative plays and overvaluation. On to Page 6. In terms of the management of the portfolio, we make sure the top 20 holdings don't dominate the portfolio. We usually build positions with increased confidence or in market weakness. We will sell when there is an adverse change from our original investment case into a company. We will reduce when valuations become stretched, which can often be the case when you're dealing in small companies, share prices can be very volatile. And we can make -- better manage capital gains or losses by having a diversified portfolio. Moving on to Slide 8, which is the portfolio performance. If you see, this is up to the end of February and a fair bit has changed since then, though it is pleasing to see, at least, to that point, we had some good performance. We like to look at our performance in terms of the NTA plus dividends plus franking because we do pay out a lot of franked dividends along the way, and we understand that we know franking is a very important part of the total return. On to Page 9, we did put out an estimate of our NTA through yesterday at $1.75. It is a fall of 26%, which is in line with the way the mid- and small-cap ordinaries have fallen. Now today, we're having a slightly better day than the index, which is pleasing. But clearly, it's been a, as Terry pointed out, significant fall in markets. And I repeat, to Terry's comment, the speed of it is it's been something I haven't seen before as well. Kieran will touch on some slides on market valuation, but I'll just add a couple of points in here before I pass over to him. Certainly, from a personal view, we've seen the market rally over the last few days of some extreme lows. And certainly, from a long-term perspective, I'm seeing value in the market, seeing some prices on stocks and very attractive prices, I think, on some very good businesses, although I'm expecting it really volatile for some time. There are significant dislocations occurring in the economy. I guess, the difference with this fall in the market is the way that the virus is impacting all parts of the economy and the impact on unemployment in this country in the short term is going to be quite significant. So I guess we're all hoping for a quick resolution to this issue. Certainly, where, I guess, the positives we're seeing would be to point to China. We have had contact with a lot of companies the last week or so. They had, had operations in China and they're all saying that China is back in business, not as strong as perhaps what it was a month ago, but still the economy is going very, very well. Let's hope they control any future outbreaks, but that economy has come back on the stream very, very quickly. We also get positive reports out of South Korea that's done a much better job of managing this issue than any other country, and that economy has continued to perform quite well. So we have hope that all these issues generate extreme stock prices. And with that, if you're willing to be a long-term investor and look through these issues, I believe they will be resolved ultimately. We certainly have seen some value in the market. And my final comment is that I look to the stocks we hold, I think the portfolio is in very good shape to withstand not just this issue, but to perform well once we come through this. The strong gets stronger in these times, and we have a portfolio of very strong companies and businesses. So with that, I'll pass over to Kieran.

Thank you, Mark, and good afternoon, everybody. So firstly, I thought it would be interesting to include a few charts, which really step back and take a longer-term perspective. There's obviously a lot of commentary out there at the moment about current events and when markets may bottom and such things, but we just thought we'd bounce that out, as I said, taking that long-term perspective. So starting on Slide 10. What we've showed here is the 10-year returns of Mirrabooka versus its benchmark. So if I'm looking at the orange line, just to explain the chart clearly, each data point on that chart is at month end, looking back, if you'd invested 10 years earlier in Mirrabooka, the returns you would have received if you've reinvested all your dividends and gotten full benefit from the franking credits that we've distributed to you. And then comparing that on the same basis with the blue line, which is our benchmark of the mid- and small-cap indices. So we do think that's [Audio Gap] on a long-term view. Then moving on to Slide 11, just sort of breaking that down and I guess trying to explain the difference between volatility you can receive as an investor in equities and in Mirrabooka in the short term versus the way that smooths itself out over the long term. So we thought we'd go back and look at that series of -- the portfolio returns that Mirrabooka has generated with the reinvestment of dividends and the benefit of franking credits and just looking at what were the worst and best returns you've received over a 1- and 10-year period. So interestingly, in the GFC, there was a year when Mirrabooka's portfolio return was negative 40%. We haven't -- we knew we were getting there the other day, but we haven't quite got anyone near that yet, but who's to say that can't repeat. And then coming out of the GFC, had a year where it was pretty much 50% sort of positive, that bounce back coming from those low points. So obviously, that's a very volatile outcome on both sides and can really bring about some investor emotions as you go through those periods. But if you look out over a 10-year period, you really get this smoothing of a cycle in that. And if you look at that same analysis for Mirrabooka, the work you've actually done with that reinvestment of dividends and franking is at 7.8% per annum return, which is still a very healthy return and the best is 16.4%. So a much narrower range in the outcomes you get if you're prepared to take that long-term view and stick with the market through thick and thin. Then on Slide 12, I guess just reinforcing some of the comments that Mark made earlier about our investment approach and really touching on what we've been doing in this environment over the last few weeks on your behalf. So Stuart and myself and our broader team has been in touch with well over half the portfolios in the company, it's probably closer now to 3/4 of the company directly in the last couple of weeks, which is actually a bit of a rerun because we've only just been through reporting season. But obviously, with things having changed so much, we thought it is important to get back in touch with companies just to really understand what their key issues are and how they're navigating the current environment. So some of the important things there is really understanding what's going on in the market at the moment, which is this cash receipt that are really drying up across a lot of industries. You have this sort of shutdown environment we're in. You can really see some pressure come to bear if you're not set up with conservatives getting -- going in and you don't have an experienced management team to navigate these times. So we've been asking similar questions of all of our companies just to understand the probability that they may run into some issues in terms of their liquidity and solvency and then to understand how they manage their cost base to keep themselves safe through this period. But just as importantly, then to think about if we do have the leaders in the industries as we think we do that some of the opportunities that can arise if they stay stronger than their competition through the most difficult times that we're going to see going forward because that's where you can really get some really good long-term opportunities to really cement your competitive position in your marketplace. So they're the sort of questions we've been asking, and it's been really interesting just to see the difference in responses of some companies with experienced management teams, just the way they've been able to really turn their mind very quickly to the environment we're in. And one of the consistent comments we've had from those people is the importance of cash flow at the moment being absolutely critical, and really profit and loss, and the profit result they're going to produce for this period is really secondary to that, and that's really an outcome, but in focusing on that cash, just to make sure you stay as strong as you can through this very difficult time. Then moving on to Slide 13, the top 20 holdings. Obviously, again, this is to the end of February and these weightings and relative rankings are moving around literally every day. It's quite extraordinary the moves we're seeing in the market. But I guess the message here is, again, just to talk about the diversification of having over 60 holdings. We're not trying to be a hero with any of these holdings. We like a good spread of companies across different industries. And I think recent events have really reinforced the importance of that because it would have been really hard to foresee some of the way these industries have really stopped overnight. And if you were too exposed to that, you're going to be caught in the sort of capital loss you're going to suffer as a portfolio on behalf of your investors. So that's good spread and also consistency of the companies that are there. We are a long-term investor. We don't chop and change at all. So these are names that have been in the portfolio for a long period of time, largely for those that have been following our meetings going forward -- historically. So we can come back to any of those companies in the top 20 or any others in the portfolio, I would encourage questions on any of those at the end of the meeting. But moving on to Slide 15, we thought we'd just touch down on the top 10, really just to bring to life some of those features that Mark talked about in terms of the way we invest and to give you a little insight into how resilient we think these businesses are to navigate these difficult times we're facing at the moment. So firstly Mainfreight, our largest holding. This is a freight logistics business globally with its home base in New Zealand. A very experienced owner-driver management team, heavy insider ownership in this business. They've got a very conservative balance sheet. The feedback we're receiving from them is, clearly, there's some economic pressure that will affect volumes in their marketplace. There's no doubt about that. But they're very involved in moving the goods that matter in this market, lots of food. And they're very nimble, so a lot of customers that have had issues with different restrictions in different markets. Mainfreight is very able to problem solve on the run for these businesses. So they're really on the front foot and looking at the opportunities to service their customer base well, to pick up market share coming out of this period. So we were quite encouraged by that. There'll be obviously some bumps in the profitability, but this is not one that we feel is a company that's got survival risks coming out of this environment. James Hardie, a building products company, mainly based in the United States, manufacturing products for the siding of homes. Again, a good business, generates really good returns and margins through the cycle. It's fair to say the environment they're going to face coming out of this with some of the unemployment that could arise in the United States will challenge them in terms of their volumes. But again, they are one of the stronger players in their market. They produce much better margins than competitors and have a reasonably sound balance sheet. So we think they're well placed to outperform their competitors. But we are watching that exposure if the United States does enter a recessionary environment, how well this business will hold up versus some others. SEEK is the employment classifieds business with the dominant position with their website in Australia and some investments in similar businesses around the Asian and Chinese markets. This business has been really investing for the long term, so they've been sort of sacrificing profitability in doing that. We've been encouraging that, but it has left them with some debt, which will challenge them at the moment. The importance of these businesses is they've got very, very strong margins, very strong cash generation. So in troubled times, if you sort of strip the business right back to its core and think about what really needs to happen inside these organizations, it's actually quite a low fixed cost base. So they do have some flexibility to navigate these times. And that will be important because volumes, obviously, on the job front, will be more challenged, but we do think its dominant market position will hold it in good stead. ARB, the four-wheel drive accessories business, run by the Brown family. Again, very conservative settings in this business, which at times like these highlight the importance of that. They're not the company that takes on bank debt. They haven't done that. They've got good property backing behind them and conservative settings all over the way this business is run, which for this business will be important. If you think about new vehicle sales and accessorizing those vehicles, with all the job losses we're seeing in the economy, that's going to be a challenging environment for a period of time. But again, the point we'd make with this is this is a company that was founded by the Brown's in the early 1980s. I think they're listed pretty close to the 1987 crash actually. So again, that importance of having experienced management teams that have navigated these cycles in the past and there's opportunity, particularly on a global stage, for this business that could come competitively due to their strength financially that's taken them into this environment. On to Slide 16, I'll mention a few more before handing on to Stuart. Just skipping over Objective and moving on to Qube Logistics. Really, the asset base that we've been attracted to with this one is their position in the freight market in Sydney from their Port Botany operations that they run in joint venture through to the Moorebank Intermodal Terminal, and the importance of the cost savings that they can deliver to their customers, we've been really attracted to that. That's been an asset that's been building out for a long period of time. They've been getting some good tenant traction on that in terms of people signing up to be part of that vision they've had. Obviously, times like these will make volumes more subdued across-the-board for the business, but we think the asset base is strategic in nature. They do have a bit of debt going into this environment because of the stage the business is in, in terms of developing that Moorebank precinct, and that has put more pressure on the share price than you might have ordinarily seen. But stepping back from that, we think that asset base is the sort of asset base that will attract capital where it's needed. So we do think, actually, there could be opportunity in that if they do need to come back to the market rather than one that we really worry, has taken their balance sheet too far and will have challenges to fund themselves moving forward. Again, just skipping over Macquarie, I'll hand that over to Stuart. But again, on Reece, this is another business run by founders. A great asset base behind the business, a lot of property that they own. Really, margins that stay a lot ahead of any competitor locally and world-leading in terms of their industry in plumbing supplies. They made a move into the United States a couple of years ago now and took on debt that they've never had before. So that is an issue in this environment, having debt. But importantly, again, you're seeing some of the experience of the operators here and the Board. The debt they did take on is very long term in its nature. It's not something they need to roll or renew in the short term. It doesn't have a lot of covenants associated with it. It's been set up for this sort of once-in-a-lifetime opportunity that Reece saw to secure the asset, take on the debt, make sure it's secure for a period of time and really ramp that operation up to grow the earnings into that debt over a long period of time. So that gives them some time and some security. Again, there'll be some challenges in this business in terms of some of the discretionary nature around the retail products in the bathroom area of the business. But it has a good core baseline in plumbing, in maintenance and they do have a dominant position there. So it's not as badly placed as many other retail consumer-facing businesses. So I'll just hand over to Stuart to touch on those other two.

Thanks, Kieran, and good afternoon all on the call. Still on Page 16. Objective is the next company I want to talk about. Shareholders may remember, we mentioned this one at the AGM in October. It's a great business founder-led by Tony Walls. He's co-owned a very large chunk of the business, probably nearly 60% of the business. So he makes long-term investment decisions on behalf of shareholders. This has been -- the business does content management services, which is primarily a lot of document sharing and communication technology for governments and local council. We deem this to be pretty critical technology, and they do charge on this as a subscription base. So they're not reliant on lumpy sales. They charge on a monthly basis, and obviously the government is a very good client and pays its bills. When we think about this business in the current environment, this is, as we say, it's very critical. So we expect this to not see the falling demand that we may have seen in some other industries. And what we really like about this business is it sits -- as Mark said, we like businesses with strong balance sheets. This business has $40 million of cash. So from a financing perspective, it's fine. Its receivables are paid and it's got a lot of capital there if required to make acquisitions or invest heavily throughout this period. The one part of the business that we will be watching is, that because it is government and local government, the year-end budgets will be interesting this year. No one really knows whether the government will spend more. They might take some money off certain departments and give to others. So that part of the business we'll be watching. We'll speak to management closely. But we think that one's really well placed to weather this storm for the next couple of months and they have very good long-term holding. The second business that I want to talk about is Macquarie Telecom, once again another one we mentioned at the AGM. We really like founder-led businesses. The Tudehope brothers, David and Aidan, founded this business, probably another one that was founded 20 years ago. It provides telecommunication to the small and medium enterprise service space and has a large data center business out of Sydney. We really like it's had a really strong balance sheet. And I guess, with current events when we chatted to them, as you understand, the telecommunications industry is one that's really getting heavy demand at the moment. There's a lot of working from home. There's a lot of resources on nbn and other parts of the business. So they're doing really well, we think. And data center, part of their business, as we expect, this will -- a lot of people working from home, a lot of people signing up for cloud services, finding ways to work remotely away from their primary business. So that's a very strong asset for them, and once again, with very strong balance sheet. So they're currently deploying that balance sheet by building out another 40-gigabyte data center in Sydney. But once again, balance sheet is very strong. They control their own destiny with that spend, and we think this is a very solid business for -- at least for the short term and obviously for the long term as well. Turning over to Page 17. The next business is Breville. We've talked about Breville previously. We think it's run as well as any small-cap business in the market. Jim Clayton is a very, very capable CEO. It's got a really strong brand locally and also overseas in the premium kitchen appliance space. Speaking to the company, we understand that this is quite an odd period where we've actually probably seeing a pull forward of demand. A lot of people working from home. I think, I said that the bread maker sales has gone through the roof. A lot of people are preparing for the life in a sort of quarantine environment. So whilst that's good, we understand that, that is just a pull forward of demand and not something we should project into the future. So we've been thinking and talking about -- management about what this business looks like if we went into a slower economic period because it obviously is a consumer-facing business. And we're very pleased to hear that Jim is considering ways to pull out any costs for that business. It has quite a lot of variable costs. It spends a lot of -- on people who do design work and that sort of thing, but they can pull back their marketing spends quite a lot. They've already, previous to this, had smoothed out their inventory. They had reduced warehousing capacity and moved to third-party logistics. So as we mentioned, Jim's a very capable operator. He's been doing all this in the background ahead of what we're seeing now. So they're well positioned. They have a very strong balance sheet. We don't know what will happen with demand, but we do know that it's very well placed from its balance sheet and also management are very capable and are looking at what might happen to this business going forward. So we think that they may have really strong, short-term performance, they may have weak medium-term performance, but we really like it under the long term with a really impressive management team. The last one, Iress, I'll hand back to Kieran.

Thanks, Stuart. So just quickly on Iress, this is a business we've held for a very long period of time. It services the financial services industry, larger these days, wealth managers and financial planners. Has a really strong recurring revenue model, so by that, we mean subscriptions are really the only way they like to generate revenue. It's a per month, sort of fixed charge, not due -- down to the value of the assets under management or the volume of work done. It's just a very reliable earnings stream. And it's interesting, I think the market has sort of been somewhat frustrated with this company over the last 5 years that it's not grown as quickly as a number of other sort of more high-profile software businesses through that time. But having caught up again with the management in recent days, you do reflect on that and think it's very difficult when you have really high-quality revenue that's really reliable to grow that really fast. So be careful what you wish for. And in times like this, the value of that resilience really stands out a lot and it gives them, again, some opportunities in their space as some of the sort of weaker competitors may fall over. So hopefully, that's given a flavor. And again, as I mentioned earlier, we're happy to answer questions on any of those or any of the other companies in the portfolio when we get to question time. So my final section is just the activity, and we looked at this on a financial year-to-date basis on Slide 18. So certainly looking to purchases. And for those that were looking closely before, you would have seen Oil Search in the top 20 holdings at the end of February. So there's probably a little bit of explanation required on this one. This is a company that once was Mirrabooka's largest shareholding going back a number of years. It's been a really successful investment for us. We've kept in touch with them throughout the period. We think that asset base in Papa New Guinea is really world class. It's very low cost. It has a lot of growth optionality around it. It's -- importantly, it's gas. So it's not at the forefront of some of the environmental and social issues that you're seeing around oil in those areas. But the problem the company has recently faced, and most of that's been since we bought it, unfortunately, is the collapse in the oil market. So these gas projects, the pricing is linked to oil. Unfortunately, arguably, maybe it shouldn't be, but that has seen the revenue of the business really come under a lot of pressure given what's going on with Saudi Arabia and Russia in recent times. So that's put some pressure on the company. They do have a bit of debt. They were really set up for growth, so there's been some debt in the portfolio. And I guess they had a balance sheet that was really resilient at $40 a barrel of oil. But at $25 a barrel, it does put some pressure on the company. So that's been a bit of a hard one in terms of the timing for us reentering the position into the portfolio. But stepping back from that, we do see that when you have a world-class asset with the position on the costs that they are, that does give you a level of resilience to give us some confidence to sort of ride this out and again look to the medium to long term on it. And if it does come to a point where they need to get extra funding to get them through this difficult time, these are the sorts of assets that we'll attract it. They'll be front of the queue because of the quality of the asset and the growth optionality, which, at the moment, is really not being factored in at all by the share market. So I guess the message varies. Poor timing, but we'll put it in the bottom drawer now and really ride it out from here. And we think on a medium- to long-term view, there's some really interesting upside in it. Just quickly moving through the others. Cleanaway, we talked about it at recent meetings. This is a waste management business. In the current environment, there's a lot of ups and downs in this portfolio. A lot of their commercial and industrial customers will be under a lot of pressure. But there are some other areas of the business. They had Coles and Woolworths contracts, for instance, or in municipal waste to be going really strongly. And importantly, there's a good management team, and it's a very solid balance sheet with a lot of opportunities opening up with the way that waste is going to be managed in the medium to long term, which will be different, much more recycling, much more responsible treating the waste in the Australian market. And as a market leader, we see a lot of opportunities for this company coming from that. Infomedia is a smaller company. They do software to automotive dealers and manufacturers. There's a lot coming on in that industry, but this is a company that's very progressive in the way they're thinking about that. They're really thinking about some data opportunities to really help those customers in both those areas, save some costs, and they have some really good products with sort of sticky customer bases and a good long-term track record. So we think, again, a good balance sheet to this one and some interesting opportunities that may emerge. Pinnacle is a fund management business. This is one we've been buying over the last sort of 6 to 9 months. It's obviously under a bit of pressure at the moment if the market falls. But really, the asset we think we're buying here is that this is the go-to for independent fund managers if they want to get their product out to the market. If you sort of think about it, historically, there was a small number of institutions you needed to speak to, to attract funds as a fund manager. That's moved, given some of the troubles that AMP and the banks have had, out to the suburbs, the suburban independent financial advisory practices. And to be able to raise funds from those people, you need a really strong distribution partner and that is what Pinnacle is. We think they're head and shoulders above everyone else in the Australian market on that. And the important thing about this business is it's quite diverse now. There's a lot of fund managers in it. It's not just equities. It has fixed interest in a number of areas. So they're really diversified, and again, run by a very experienced CEO with a lot of money invested in the company. So that's one. Short term, it will be volatile. But medium to long term, we see a lot of opportunity. And finally, on Netwealth. This is a financial platform business that listed about 3 to 4 years ago. We bought some at IPO. We've had a smaller holding than we would have liked throughout that whole period since IPO, but these recent events have really given us opportunity to get some long-term value in this and buy some more shares, which we've been really encouraged by. Again, some of the features here: $70 million of net cash on the balance sheet, a family that owns more than half of the business, expense all their R&D, no fundings in the accounting. All, as you see it, which is what we like. And this is a business with 3% market share, which we think, in fact, in the medium- to long-term view, can be multiples of that. And in the current environment, one of the attractions of these platform businesses is you're not waiting to receive money from anyone. You automatically deduct it from the accounts that are under management. So there's no bad debt risks or anything of that ilk. So let's move on to sales. Wellcom, we mentioned at our AGM that's been taken over, as has Dulux. Both good businesses, but nothing we could really do there. Computershare we've held for a few years this time around. We really saw the pressure coming onto this business. A lot of their earnings have dropped and interest rates and that's just looking very, very tough for a long period of time and makes it harder for this business. There is a good resilience to it, but we just felt there were better opportunities and moved on from that. TPG, following the merger with Vodafone, we just felt that changed that business so much. The dynamics that we -- attracted this to us in terms of the owner-driver, introducing a big joint venture partner, just a bit difficult to see how that would play out. So we stepped away from that one and watch how they evolve. And Lifestyle Communities is one we've been selling down. We still have a small position in the portfolio. We just think that one really got very overvalued for what it is. It's a really good core annuity stream underneath it, but people were really starting to put a higher multiple on the development activity in the business, which we saw as being quite a risky thing to do. So we reduced that position. And we still like it, but running with a smaller position for now. So with that, I'll hand back to Terry for some remarks on moving forward. And as I said, any questions at the end we're happy to take.

Thanks, Kieran. Starting off on Page 20, which shows the price/earnings ratios for the small industrials and the mid-caps over the last 15 years. I think it's a very useful point to trying to work out if we're at or close to a bottom in these markets, a similar sort of analysis from the top end of the market. The leaders suggest that we probably have been -- we might well have reached that sort of point. It's less clear with the small industrials particularly, and to a lesser extent, the mid caps. Just a general comment that I find interesting with the improvement in the market this week. The Australian market has a depth that a lot of markets of our size -- a lot of markets don't have as a result of the superannuation industry in Australia. And that encourages very large-scale selling in these sort of market crisis from overseas, and you see that. So quite often, they tend to do their buying and selling at the 4:00 market match, which is why you often get these very big swings round about the -- right at the end of the market. I -- looking at the market this week, we would say that, that has weakened off and we might have seen most of it. Going back to the small industrials price/earnings chart back on Page 20. If you look at it, you see that during the GFC, right at the bottom of the market, the price/earnings ratio was about 7% or 8%. It's based on this chart. It's now about -- or just a bit over 12. What's different is that the interest rates are significantly lower. They're almost 4% lower now than they were back in the -- since the time of the GFC, so that you wouldn't expect to see a price earnings multiple in the -- at the bottom of the market of 7 or 8. You'd expect to see something sort of effectively almost 4x higher, which would be -- which would bring the price/earnings multiple close to somewhere between 11 and 12, which is not all that far from where it is now. So on that basis, I should say we might be somewhere reasonably close to a bottom. The only trouble is, I think, is -- particularly with the small industrials, is that the earnings, it's almost impossible to predict them, but there will be a very sharp fall in earnings and it may well be that as -- it mightn't be the market as a whole. It might be individual stocks. But I think the market might get a bit of a shock on some of the smaller industrials when they come out with their results. So the recent low could well be tested should that -- at that -- in that end of the market. The mid-caps are a bit more encouraging. The -- simply back in the '08 or '09, we -- basically, the price/earnings multiple at the bottom was about 10%. Add 4% to that, you're getting to 14%, so that the multiples are more or less we had expected them to be. And also, too, I think that there will be a much less significant decline in earnings from the mid-caps. And they might well turn out to be the best place in the market to be, and they could well outperform on an earnings basis because the top 50 is dominated by the -- top 100 by bank earnings and they could come back quite significantly. So I -- based on sort of -- those sort of charts and watching markets over a very long time indeed, the fact that sort of the mid-caps tend to dominate our portfolio at the moment, I don't feel -- I feel a sense of comfort from where we're at on those. Just on the closing comments on Page 21. These are very testing times, you can say that again. But we are confident in the quality of the portfolio and the approach that we take. We have an investment committee meeting this morning, and the investment team was really tested by the Board. And they've made some very hard decisions in the last month, and I'd have to commend them for that. They're placed up to maintaining losses, but on the basis that this changes the business. And well, we know that we took some losses on some of those decisions, we -- with some of these stocks have dropped by another 30% or 40% since they have decided to sell. And the final point is some better value has emerged. It's a bit hard to identify if you don't know what the earnings are. But in the smaller companies, they're very difficult to judge. But we'll be cautious, but we've got a bit of buying, too, on the way down. So the -- all I can say is that I feel we're traveling along the bottom. The market might get another shock and it realizes how the things are out in the economy. Market lows usually get tested. There's a fair chance that the low last week might get tested early this week. But I -- it looks as if it might sort of go pretty close to holding. So with that, Miles, we'll now take some questions.

[Operator Instructions] So my first question today comes from the line of [ Carolyn Rant ]. Please ask your question, [ Carolyn ].

I assume, because of your cautious approach, Terry, that you won't be thinking of a share purchase plan any time soon.

Well, I'm not sure about that. The -- well, I guess, at the moment, the stock is trading at a premium, and later in the year would certainly be in the DRP. So the reason that we've come up with that estimate of the net asset backing is that we were looking at -- I mean we're constantly looking at whether we need a share purchase plan or whether we should do -- and look at the buyback, or certainly, with the stock trading at a premium, that's up quite nicely again today. The -- we would tend not to have a share purchase plan. So I'm not sure with any of my colleagues. I'm in a different room and I am in self-isolation at the moment. So I'm worried about the virus, but I'm taking it carefully. Really, would anybody else in the -- back in the office have some comments?

Terry, it's Mark here. Look, it's something we think about all the time. We've had a bit of cash along the way. So we'd like to put that in the market. But look, it's something we think about. If the market sort of another decent leg down and we saw some -- again, some outstanding opportunities, then we'd consider putting more funding on it. I guess, what we've done in the past across some of the investment companies, we can borrow a little bit of money in the short term and then replace that with a share purchase plan if we're seeing really outstanding opportunities. So yes, it's something we've thought about, but we're not looking at doing it immediately.

[Operator Instructions] Your next question comes from the line of Darrell Simpson.

Gentlemen, in view of the fact that the government is handing out huge sums of money, both federal and state governments, when the crisis is over, they'll either have to raise taxes or pay huge interest bills. Is the market factoring this in, do you think, for the longer term?

Terry, you like?

Okay. I don't think they are looking that far ahead. But what I think is important is that the, you don't -- the Reserve Bank had said that they don't expect to -- interest rates to rise or increase in official rates for some time -- after many years -- for several years. So -- and it will probably take quite some time for any sort of inflationary pressure to come up. And I think markets and investors are going to be quite forgiving of government budgets, so that I think we'll be in a deficit for some time because this is going to decimate the tax base for the government, both state and federal. Yes. Because of what's happening with the Reserve Bank and the Fed and the ECB, just pumping money into the system, the -- I think that what you say -- I think it's further up and sort of medium term. I think it's heading sort of quite a bit down the track.

Your next question just comes from the line of [ Garry Dowd ].

My question is a little bit off the current trend and it's in relation to cybersecurity. I was obviously aware of Toll Holdings recently with the attack and the major disruption, of course, to their business. I was just wondering whether you do any sort of risk assessment of the companies in your portfolio and their preparedness to handle any cybersecurity threats.

Look, it's a good question. We think about that ourselves with our own business as well. Look, it's a very -- I mean it comes up occasionally in discussions with companies. I think it's a real hot topic for pretty much every business at this point. And I know sort of internally here, it's always a big discussion with our Risk Management Committees here. And I think all companies will be spending a lot of time on cybersecurity because it would be very much high on their risk agenda so. Kieran, you want to?

Yes. And certainly from some of the members of the team, some of the conversations they've had, probably, to be honest, more with some of the large caps, it was pretty eye opening in terms of some of the attempted packs they receive, just on the volume of that. So it's clearly a big part of the banks and Telstra and the big organizations. But I think it's fair to say the current environment probably reinforces for every company just the importance of contingency planning and thinking about downsizing your risks rather than always know -- tell me why tomorrow is going to be better. So that's probably, it's not a question I hear a lot in sort of small-cap circles, but it's probably in that area or things that people are going to focus in a bit more on going forward.

[Operator Instructions] We've got a last-minute question from the line of [ Stephen Toms ]. Please ask your question, [ Stephen ].

Okay. Just maybe like a statement and a couple of rhetorical questions, and then I've got 3 questions down here. Just a heads up to you guys, I was on hold with the operator for near on 20 minutes. So I missed the first 10 to 15 minutes of the teleconference. So a couple rhetorical questions. I just wonder how many teleconference operators you had working today and what procedures you guys have put in place to improve this next time you do that. I don't necessarily expect you to answer that now, but maybe just think on it for the future. And then the question that I've got here. Could you please let us know what the -- and if you explained any of this in the first 10 or 15 minutes of the presentation, I apologize, I just missed it, all right? What is -- could you explain what the profit reserve is or what the current profit reserve is, please?

Yes. Andrew, are you on the line?

Yes. No. I am. Essentially, at the end of December, we had $17 million worth of retained profit, that was before the payment of the interim dividend. And we had $48 million in the asset realization reserve. Now that will change, of course, as we buy and sell stocks. And of course, the profits will also change as we receive dividends. So what I'm saying, I think, in summary, the good thing about LICs as opposed to trust is that we can put in reserves for a rainy day. And in that context, I would say Mirrabooka is very well reserved.

Did you know what the profit reserve is in cents per share?

Well, if you added those 2 together at the end of December, which is the latest figures that are publicly available, those profit figures in cents per share would have been in the order of some $0.41.