Mirrabooka Investments Limited (MIR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Mirrabooka Investments shareholder briefing. Without further ado, though, I'll hand the call over to your first speaker for today, Chair of Mirrabooka Investments, Terry Campbell. Thank you, and please go ahead.

Well, welcome, ladies and gentlemen...

[indiscernible] [ I'm sorry. Here ].

My name is Terry Campbell. I'm the Chairman of Mirrabooka Investments and have been since its foundation over 20 years ago. Thank you for joining you -- joining us this afternoon, on this webinar. Hopefully, at some stage, we'll have the opportunity to meet up with you on a more personal basis. Joining us today, we have Mark Freeman, the CEO and Managing Director; Kieran Kennedy, a portfolio manager from the investment team; [ Olga Kosciuczyk ] from the investment team; Stuart Low from the investment team; Andrew Porter, our CFO; Matthew Rowe, the company Secretary; and Geoff Driver, the General Manager of Business Development. Before we start, a bit of housekeeping. The briefing is based on material available on the company's website. If you're using your computer to access the material via the webcast, the slides will change automatically. If you are accessing by phone only, the PDF of the slides with page numbers is available on the website. Finally, please note that, following the presentation, there will be time for questions and answers. You can ask a question either via the webcast or through the phone operator. I will make some closing remarks after the team have presented and will now pass over to Mark Freeman to begin the presentation.

Okay, thanks, Terry. And good afternoon, everyone. Just moving through the slide presentation. Slide 2 is our usual disclaimer just to state that we're here to talk about the company. We're not giving any financial advice. On to the next slide just to remind everyone the objectives of the company. Our aim is to provide medium- to long-term investment gains through holding core investments in selected small and midsized companies. And we also aim to provide an attractive fully franked dividend returns to investors. And moving on to the next slide, our investment approach. This obviously hasn't changed. So what do we look for when we're investing in businesses? We always look at the quality of the company, first. So we're trying to find companies that have attractive, sustainable returns on capital. And we want that to be able to continue into the future, and we want to be in businesses where we see a good growth profile ahead of them. Financial strength is always important. Balance sheet provides -- a strong balance sheet provides resilience and reinvestment potential for the business, and we want the returns the company makes to be supported by cash flows. The management or people running the business are also a critical factor we consider. We want to see management teams that act like they're substantial shareholder, where often they are. And we often -- we call those businesses owner drivers. We want teams that are experienced, effective and passionate what they do. So our approach to managing the portfolio. We buy with a medium- to long-term view. We seek to pay value for quality companies and we're wary of overpaying. Our holdings often grow as we have increased conviction or confidence in a company, and we look for price dips to add to our holdings. We are happy to sell holdings when the investment case changes. We monitor our holdings for excessive valuations to managing our risk. And we seek to maintain a spread of holdings, enhancing consistency of returns. And with that, I'll pass over to Andrew Porter, our CFO, to talk through the financial metrics for the half.

Thank you, Mark. And good afternoon, everybody. The slide that you have in front of you, which is Slide #6 in the presentation, just I'm just going to quickly run through some of them and because we'll come on to some other ones later on. So I think the portfolio at the end of December was over $0.5 billion, so for those who've been in Mirrabooka from the beginning, it's been quite a journey. The management expense ratio, 0.46%, these are the costs of running the company as expressed as a percentage of the total portfolio. So although the management expenses that are incurred went down a little bit during the half, the main reason why that MER is so much lower than the previous half is, of course, the growth in the portfolio. So to put it into perspective: That's $0.46 for every $100 that you have invested in Mirrabooka. There are no outperformance fees or anything like that. That's simply the costs of running the company. The -- jumping to the total portfolio return. At the half year, that was 33%. That's our net tangible assets [ backing the group in that ] over 6 months was 33%. We've got some updated figures that we'll come to later. The shareholder return was higher than that at 43.2% because we moved from a small discount back up to a premium. The fully franked interim dividend, $0.035, that is consistent. In fact, it's been consistent since 2007. So in a world wherein a lot of dividends were being cut, that was maintained. In fact, that takes me to that profit figure, which is the top left-hand corner. The profit of $3.4 million, that was down 23% from 2019. In fact, our trading profit was actually up in a small way, and as I said, the admin expenses were down. The dividend as a whole were down 29% from [ half to half ]. That shouldn't come as a surprise to people, that dividends are down. What might be surprising is how well we did if you consider that in larger cap land dividends were down closer to 40%. And some of the -- we had companies -- like SEEK, for instance, didn't pay a dividend in the half. Iress didn't pay a dividend. James Hardie didn't pay a dividend. We've sold our Wellcom shares into a takeover. That produced a takeover dividend in the previous half. And Alumina, Reliance and Select all reduced their dividend. However, interestingly enough, since then, there has been a turnaround. Reliance increased their interim dividend actually in the half. James Hardie paid a very large dividend since the end of the year. And SEEK have announced that they will pay a dividend. The other thing that increased, slightly made our dividends better than perhaps the broader market were companies like ARB and which is the 4-wheel drive accessory manufacturer and Fisher & Paykel health paying delayed dividends in the half. So that all contributed. So although dividends were down, perhaps not as much down as people would have expected to see. And the recent results have been more encouraging than perhaps we would have expected this time last year. So with that, Geoff, over to you. Thank you.

Thanks, Andrew. Just very quickly on Page 7 just to -- obviously shareholders will be aware we did our share purchase plan, which was announced at the half year result and which was finalized and completed mid-February. So we're very pleased with the amount of money that was raised there, close to $39 million. And importantly, about 28% of shareholders participated, with a good average contribution around just under $19,500. Issue price was $3.10 per share. And obviously just noting that they're new shares, as they are [ only around ] about 50% of the final dividend. So in terms of the financial year ending this year. So we're very pleased with the outcome, good participation. And fortunately, the new shares are trading around about [ $3.21 ] at the moment, so for those who went in it, it's been a good investment so far. On Page 8. I guess this gets back to perhaps why people were happy to participate in the purchase -- share purchase plan. You can see over the 10-year period long-term share price returns relative to both the -- our benchmark, which is the combined small- and mid-cap accumulation indices but also the S&P ASX 200. So you can see the shares have been very strong over that 10-year period; and obviously even more so over the last year, where there's been quite a rebound in the share price relative to NTA, which brings me on to the next slide, on Slide 9. You can see over a period of time [ we actually have ] usually traded at a premium. More recently, particularly 12 months ago, we're trading at a discount. And that's bounced back to a premium, so that's really been why the share price has performed more strongly than the actual portfolio. Interestingly enough, with the share purchase plan price and given the entitlement to half the final dividend, the actual shares for the share purchase plan were actually issued pretty close to NTA, which we think is good outcome for us and for shareholders. So with that, I'll pass on to Kieran to talk about the portfolio and what has been done with the money raised through the share purchase plan. Thanks. Kieran?

Thank you, Geoff. And good afternoon, everyone. While a speaker phone is no substitute for a room full of friendly faces, we always look forward to updating shareholders on their investment in Mirrabooka. So starting my comments on Slide 11. Well, who could have foreseen that our corresponding briefing on the 26th of March last year had just 3 days earlier witnessed the bottom of a sharp 40% fall in equity markets in a little over a month? More remarkable has been the recovery of all of this 40% decline and then some in the 12 months that followed, particularly given the significance of the disruption that we've all experienced in our daily lives. The key message that this reinforces for us is that we must continue to focus on the long term to achieve the best results that we can for your investment in Mirrabooka. Many try and develop expertise in predicting or trading short-term stock price or market movements, but our observation is that very few repeatedly succeed. As we presented amidst the market panic of last month -- March, we spoke of the relative comfort that can be taken by maintaining a longer-term perspective on your investments, particularly as fear sets in. Looking into Mirrabooka's portfolio performance history, we share the information presented again on Slide 12, which highlighted a wide range of historical outcomes on a 1-year basis from the painful 41% fall we experienced during the GFC to a recovery of around 50% as the market rebounded in 2010, but the [ investor able ] to maintain a 10-year perspective, an average annual return range of positive 8% to 16% over Mirrabooka's 21-year history paints a much less-volatile picture. So what is the update to this analysis from the COVID-related market volatility that we just experienced? The low point of 12 months portfolio performance we saw through this period was a decline of 13%, which is modest compared to the GFC experience. There has also been no change to the 10-year return range that we presented last year. At 11 months on from the March 2020 low, we are on track to witness the strongest annual portfolio performance in Mirrabooka's history with a return of around 69% as we closed in on the anniversary of the market low point. Please don't expect a repeat of this from us anytime soon, if at all. On Slide 13, we provide a snapshot outlining this performance relative to our benchmark for 1, 5 and 10 years to the end of February. Pleasingly, we have seen outperformance across these periods. We remind shareholders that we recommend reading our performance charts from right to left on these slides, as the 10-year performance most aligns to our objective. As a long-term investor that has recently experienced such strong short-term portfolio performance, we felt it to be important to be transparent about the key drivers of this and the potential for short-term volatility to follow. On Slide 14, we have grouped large Mirrabooka holdings that delivered the strongest total shareholder returns over the 12 months to the end of January, with these figures ranging from 40% to over 100%, as outlined on the left-hand side of the slide. Of particular note is that these 12-month performance measures commenced before the pandemic-induced market fall of March 2020. Our investment process sees us remaining vigilant for excessive valuations, but we are also very conscious of the importance of allowing successful investments to deliver the full value of long-term compounding and the tax drag from too actively trimming them. While we have realized gains in some of these holdings, the significant majority of these positions have been maintained. Our assessment is that the longer-term outlook for these companies remains attractive relative to alternatives despite the higher price starting point. Shareholders who follow the financial press will have no doubt encountered the talk of a market rotation that occurred as vaccine, COVID vaccines, began to roll out and bond yields began to rise during February. This describes a period of recalibration by market participants, with a shift in the stocks deem most likely to perform typically on a 12-month view. Stocks exposed to economic recovery and particularly those with a depressed valuation multiple began to find more favor in this instance. To fund the purchase of these, many naturally look to sell the stocks that have had the strongest recent performance. The impact of this sentiment shift is reflected in the share price declines seen in the Mirrabooka holdings on the right-hand side of Slide 14, relatively sharp over a 5-week period but modest relative to the 12-month performance we saw prior. This rotation did not surprise us and remains a good possibility to reoccur periodically to some degree looking forward, but for us it's a clear secondary consideration versus the "5-year and beyond" outlook for the profitability of these businesses. So moving on to our top 20 holdings on Slide 15. Regular attendees of these briefings will observe that, while the rankings could bounce around from year to year on this list, there is strong consistency in the company names in our top 20, as you'd expect from a long-term investor. These regular attendees will also be aware that Mark, Stuart and I can and will talk about any of these companies at great length and given an opportunity, particularly those that we describe as being run by owner drivers, as Mark outlined in his earlier remarks. We genuinely view it as a privilege to be able to invest our shareholders' savings in owner driver businesses such as Mainfreight, ARB, Macquarie Telecom, Reece, Objective and others, as our track record for value creation in these stocks stands up against just about any alternative investment that you could have made over the last 2 decades and longer. So I might speak to the balance of our top 20 holdings on Slide 16 with the comment that we are more than happy to take questions on any of these companies or indeed any other Mirrabooka relevant stocks in the Q&A section that will follow this briefing. On to Slide 17. Following the pleasing support that we received for our recent share purchase plan, as discussed earlier by Geoff, we thought an update on where we have begun to invest these funds would be of interest, which I'll ask my colleagues Stuart and [ Olga ] to cover in a moment. To provide some context first: Part of the rationale for conducting the SPP was to provide capital to build up existing and new positions as opportunities emerge, a process that we have begun but will progress with relatively patiently. We see this as a good opportunity to provide some rebalancing in the portfolio, as many of those stocks discussed earlier have seen significant share price strength, which has grown their weightings within the portfolio. So with that, I'll hand over to Stuart.

Thanks, Kieran. And good afternoon to all those on the call. As mentioned, we've been selectively deploying some of the funds raised in the recent SPP. The first bucket of buying has been aimed at companies that we have been owners of for a long time, so we feel the current price is looking attractive. The first of those companies is Ansell, which continues to be the global leader in the production and supply of gloves and protective equipment into industrial and health care end markets. Whilst demand looked strong for a number of years, the stock has come back to attractive levels due to a rotation into companies that are viewed as vaccine beneficiaries, as opposed to companies that were viewed as COVID beneficiaries. Given the strong growth profile for the next few years, we've been happy to revise during this share price weakness. Iress is the next company we have been adding to. Once again it's been a long-term holding. It is a great industry position, selling software into the financial services sector. Whilst the focus of the market has shifted to some higher-growth technology businesses, Iress continues to grow and create strong cash flows. For such a high-quality company, we think the share price is attractive at recent levels. We see good potential growth from their U.K. business, super administration and their recent OneVue acquisition. Infomedia is the next business we've been adding to. As a reminder: Infomedia supplies software to the global automotive industry. As to be expected, the automotive industry was hit quite hard throughout the various lockdown periods, and this hampered Infomedia's ability to win and implement new business. We believe this impact is temporary and the business will be able to resume its previous levels of growth. Infomedia also has a very strong balance sheet, and we'll look to deploy that on accretive acquisitions at the right times. Select Harvests is the next business listed. This is a business we have owned previously and bought back into. Select Harvests is the largest producer of almonds in Australia and has been increasing its orchard acreage more recently. Due to COVID, we've seen the almond price come back to multiyear lows. From our experience, this has historically been the best time to buy Select Harvests. I will now turn over to [ Olga ] to discuss FINEOS and a new addition to the portfolio in Domino's.

Thank you, Stu. And good afternoon, everyone. We have also added to FINEOS during the period. We have held this owner driver business since it reset in 2019, but the company was founded almost 3 decades ago. FINEOS is a leading global provider of software for the life, accident and health insurance sector. The global opportunity for FINEOS is large as the insurance sector shifts from legacy systems to modern cloud-based operating systems, of which FINEOS is a leading provider. The company has a strong balance sheet and continues to invest in their products and technology ahead of their competitors. COVID-19 delayed the pipeline of new deals, which resulted in short-term share price weakness. We used this as an opportunity to add to our holdings. We also initiated a position in Domino's Pizza. We have been following the company for many years, and we're impressed with the management's execution on their offshore strategy. Since entering Japan in 2013, Domino's has doubled their store footprint and significantly improved their stores' profitability. In Japan, pizza is considered a special occasion food and is consumed primarily over the Christmas period and cherry blossom season. Domino's has made significant progress in increasing pizza consumption frequency and capturing new customers by offering both the cheapest and the most expensive pizzas on the market. In Europe, Domino's continues to see significant growth benefiting from their scale, increased marketing spend and store rollout. The growth runway for Domino's remains long. And we are confident the company can continue to grow their sales, margins and store footprint across all geographies while delivering excellent shareholder returns. I will now pass back to Stu. Thank you.

Thanks, [ Olga ]. We address the last 2 businesses mentioned, Temple & Webster and Fisher & Paykel, in a couple of slides time, so at this stage, I will turn back to Kieran.

Thanks, Stuart and [ Olga ]. And I'm on Slide 18 now with some brief commentary on the recent reporting season from Mirrabooka's perspective. We saw more results come in better than our expectations that those -- than those that disappointed us. While companies continue to operate in an uncertain environment, there was a more confident outlook [ time ] than we observed in August, when many feared that economic demand was heavily reliant on stimulus programs like JobKeeper. The view was that demand drivers have since broadened. We also had many instances of encouraging rebounds in dividend payments, as was earlier covered by Andrew, albeit they do remain below the levels we saw pre COVID, but repeating my earlier comments about market activity, share market activity that is, through February: Much of the information contained in company results was overshadowed by the market rotation to the perceived winners of the next wave of economic recovery. So in closing, on Slide 19 I thought I'd share an outlook perspective on how our long-term approach is interacting with our awareness of the potential for short-term volatility in such an uncertain COVID recovery period. Listed on Slide 19 are 4 key Mirrabooka holdings that have experienced a short-term benefit from the disruption that COVID has brought to the economy. The analysis that I'll describe in a moment is a common current task for our team across a lot of stuff that we follow. Fisher & Paykel Healthcare saw a very significant increase in sales of their oxygen therapy equipment into the frontline of the COVID fight in hospital ICU departments globally, a massive task that they handled exceptionally well, with life-saving results. While we are aware that these sales will decline post the hospitalization peak, which is great for everybody, Fisher & Paykel has had a long-held strategy of building this installed base of equipment in hospitals and has much supportive literature for the benefits of their therapy, so in the long term, we view it as likely that Fisher & Paykel will remain a larger business than they otherwise would have been as they supply consumable products to service this increased installed base of equipment. Breville benefited as consumers were forced into working from home and purchased kitchen appliances to bring things like a cafe-quality coffee to their home desk. Again we see a period where growth in mature Breville markets will be challenging as we cycle this benefit, but of much more interest to us is the still very low market share that Breville has in large offshore markets and the superior growth rates they are achieving against their competitors. ARB initially saw sales plummet, but as the economy recovered and overseas travel was restricted, many took to local highways and 4-wheel drives to get a break. This saw sales of 4-wheel drive accessories grow at a rapid rate, to the extent that ARB continues to struggle to keep up with the demand. Again this will see challenges to continue to achieve short-term growth in established ARB markets at some point in the future, but similar to Breville, ARB's products are showing increasing appeal in very large offshore markets. And we see this as a more significant factor in our investment case. And finally, Temple & Webster found themselves right in the sweet spot as a pure-online furniture and homewares retailer. Furniture and homeware sales will face a lull as travel and entertainment options begin to compete again for the discretionary dollar, but for Temple & Webster, the ability to provide a positive experience for many first-time customers increases both their sustainable market share and prospects for establishing a market leadership position, in our assessment. There are strong offshore market indicators that suggest online share of homeware and furniture sales and significant long-term upside in the Australian economy, and leadership in this market will be a very valuable position for Temple & Webster to obtain. And with that, I'll hand to Terry for his outlook commentary.

Thanks, Kieran. Given that we've been through the biggest health, social and economic shock for 100 years, the strength of the market, this causes me -- I sort of sit down and think that -- what reasons can I find to be cautious? So I read something recently from the United States. And there's no doubt that the United States market sets the psychological tone for markets globally and our market in particular. And it's quite possible that the Biden administration will come up with something that the market doesn't like; for example, tax. Biden has spoken about tax increases, but the -- and the market doesn't seem particularly perturbed, but when the proposals become an actuality, the market might not like it. The other thing we have to watch out for and we think about is inflation. The -- there's increasing evidence, from where I sit, to basically supply chain tightening both in sort of consumer goods and capital goods. And that -- based on some previous experience, that's a background for prices to rise. I know the financial authorities are quite sanguine, but I've got a feeling they might sort of start to move up ahead of the officials, the expectations. That would lead to higher interest rates. That will be -- but interest rates will still be reasonably low. So after a long -- for someone who's been in the markets as long as I have, 2% interest rates would seem pretty low. That's north of where we are now. And also too, the other side of that is that at least you get the sort of a yield adjustment which is negative, but that [ shouldn't ] be associated with higher profits which would be -- which will be positive. While it's sort of I guess it's unrealistic to expect returns at anything like the recent levels, I find it -- hard as I try, I find it difficult to become negative or bear. We're in the best part of the market and the portfolio is in excellent shape. I went through the portfolio last night, stock by stock, and going -- it was a summary of the results of the -- for the half year to December. And there's not a -- and I did this as a shareholder, more than I should as the Chairman. And I couldn't really find a stock that I wanted us to sell, so basically it seems here we are. We sit -- I think we can sit happily with our cash and our portfolio and wait for the inevitable sort of corrections that come and with a view to buying. And the -- so long as we take a long-term approach to the stocks that we buy, the success or the recent results of the buying we did about 2 weeks ago shows that this can be a pretty successful strategy. So with that, I think we'll close the presentation and invite your questions.

Okay, so we'll -- what we'll do now is take questions both from the web and also any phone questions. Miles, you might just remind us again about the how you ask a question on the phone.

Certainly. [Operator Instructions]

Okay, we have the first question through the web. So the questions is what segments or companies are we cautious on at the moment.

Yes, thanks, Geoff. So it's Kieran here. Look, it's interesting. I mean obviously the market has had a pretty strong run over the 12 months, as we discussed through the presentation. And I guess, in my experience in this role, it takes a while to learn this. And it's a hard-won lesson, but you get there in the end. It's that, when you get to that point, there's a lot of temptation to look for the things that are a bit cheaper or have been less behind. Or you can sort of see some more obvious near-term value, but that inevitably leads you down the quality curve. And we've learned that the hard way, particularly in the small end of the market. You just want to resist that at all costs. And particularly when markets are hitting higher levels again, that's not the time to be doing that. So I guess, that sense of really sticking quality, we've never been more focused on that than we are right now. And the other thing, I guess, that I'd add to that is in times like this you do see buoyancy in capital markets. There's a lot of IPO ideas being floated. And we just -- we've noticed over the last 6 months that we always take a meeting. We're always interested in seeing what's coming to the market next. You never know what you're going to uncover, but we haven't felt particularly compelled to participate to the same rate we might have historically. So we're a bit wary of that part of the market, but I'd caveat that with you don't know what's coming next and there could be a great idea next month. But at this point, quite wary of some of those stocks as well.

Thanks, Kieran. Andrew this question is for you, and it's about what sort of profit reserves and [ franked bits ] do we have for future dividends.

I'm going to answer the question as an accountant. It depends on what you mean, of course. If you were to take -- and this is publicly available information. If you were to take -- and we'll concentrate on franking reserves because profit is -- profit reserves are not really an issue at all. Profit reserves are more than the franking reserves. If you look at the publicly available information that's there last year at the half year report: We have about just under $0.23 per share of franked dividend reserves payable. However, that includes the tax that we are due to pay on the realized gains, so far, this half. And shareholders will have seen, last year, we had a lot more potential realized gains. And as the year went on, because of what happened, that was reduced. So if we were to exclude that figure, it's about $0.15. So it depends what you mean. Between $0.15 and $0.23 per share, I'd say, Geoff.

Thanks, Andrew. Just we might go to the phones now to see if any question is there.