Mirrabooka Investments Limited (MIR) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Mirrabooka Full Year Financial Results briefing. At this time, all participants are in a listen only mode. There will be a presentation followed by a question-and-answer session. All questions will be taken via the webcast. If you'd like to ask a question at that time, please enter your questions in the ask a question box at the bottom of the webcast window. I would now like to hand the presentation over to Mr. Mark Freeman, Managing Director of Mirrabooka. Thank you. Please go ahead.

Well, good afternoon, everyone. I'm Mark Freeman, the CEO and Managing Director of Mirrabooka Investments, and welcome to this full year results briefing. I'd like to begin by acknowledging the traditional owners and custodians from all the lands we are gathered on today and pay my respect to their elders, both past, present and emerging. On the call today, we have Kieran Kennedy, who is the Portfolio Manager from Mirrabooka; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; and Geoffrey Driver, our General Manager of Business Development. Before we start the presentation, just a bit of housekeeping on this webinar. This briefing is based on the material available on the company's website. If you are using your computer to access the presentation via the webcast, the slides will change automatically. Finally, please note following the presentation, there will be time for questions-and-answers. You can ask a question via the webcast using the tab at the bottom of the screen. And now we'll start the presentation On Slide 2, we have the disclaimer to say we're here to talk about the company, and we're not giving any advice as such. Then jumping ahead to Slide 4. Just to remind everyone, Mirrabooka, we invest in companies listed in both the Australian and New Zealand markets. We're focused on companies outside the 50 leaders. From time to time, we do have companies that are in the 50 leaders. And that's usually because businesses that we've owned may have performed strongly and moved into that part of the market. If that's the case, we don't have to sell immediately. Eventually, we will take money out of those stocks. So instead, our focus now is really on companies outside the 50 leaders. And we aim to provide returns through both fully franked dividends and capital growth. It is pleasing, the performance overall over the long term has exceeded the benchmarks. At the same time, investors have received substantial amounts of franked dividends from their investments. So with that, I'll pass over to Andrew Porter to talk through the results.

Thank you, Mark, and good afternoon, ladies and gentlemen. So the next slide is the financial year in summary that you can see there, the profit for the year was $10.7 million, which was down from $11.3 million in the previous year. Now [ although ] dividends that we received was up -- were up and we actually had an unprecedented contribution from the options trading. We've made nearly $2.5 million in options trading. And as I said, that's unprecedented. The reason for the difference or the reason for the forwarding profit was largely due to the trading portfolio. Last year, we had a particularly strong contribution from the trading portfolio with gains in Medibank, which was sold earlier this year and AMP, which was sold last year and also Macquarie Technology. So again, that was unusual. So as a result of that, the Board have declared a normal dividend [ $0.065 ] and a special dividend of [ $0.025 ]. So that brings up to $0.13 for the year. Portfolio return will come on to -- we've got a slide, which gives a long-term -- a more long-term view, which is what we like to look at rather than just the 1 year when assessing the company's performance. The management expense ratio 0.56% down from 0.59%. That is the cost of running the company. It's $0.56 for every $100, and those are the costs over the average portfolio for the year. And the cost themselves remain fairly constant from year to year, but the portfolio grew and that leads the MER to fall. The next slide gives some indication of the special dividends we've paid since 2014, $0.49 all in all. So that's one of the features of Mirrabooka. But when the Board thinks is appropriate, taking into account the franking credits that we have, what the outlook is, what the realized gains have been made during the year, they can [ left ] to pay a special dividend. So it's [ $0.025 ] this year, that will be as part of the norm with a final dividend of [ $0.065 ]. So in addition to that. On the next slide, something we like to draw attention to is the premium and the discount at the end of June 2024 Mirra was trading at a small discount. That was not unusual in the LIC market. A lot of LICs were trading at a discount and Mirrabooka was actually probably one of the smallest in -- amongst a group of LICs. I'd say now that, that has switched since the announcement of the result to a small premium. But obviously, we -- that information is shown with our NTA every month. And the next slide just gives some indication from a longer-term perspective of what Mirrabooka has delivered for shareholders in terms of wealth accretion. So as you can see, the figures there in advance of the index that we compare ourselves to is the mid-cap 50 and the small ordinaries, but also it is a point that Kieran has been making in presentations during the year ahead of the ASX 200. So with that, I'll hand over to Kieran.

Thank you, Andrew, and good afternoon, shareholders and participants. So I'm starting on Slide 11, just with portfolio performance numbers over the usual time frame that we present 1, 3, 5 and 10 years. I guess, the first pleasing comment is that we are outperforming over all those time frames. The numbers we're looking at here importantly, do what we call [ gross up ] for the franking. So it's just important to realize in Mirrabooka, given the area of the market that we invest in, we do generate significant realized gains. These companies do have capital growth, and there is a bit more activity with still a low turnover fund, but you do get capital gains from that. So importantly, we expressed that value back to our shareholders by paying those out as frank's dividends. You don't get that to anywhere near the same extent in the index. Obviously, index is not a company that pays tax. So it's important that we gross up our returns for those franking credits to make it a fair comparison with the indices. The other point I'll make on this slide, obviously, the 1-year return very healthily above benchmark given this is an annual result discussion. We'll go into some detail on what drove that. Important to note that is not our focus. We're not looking to optimize 1 year returns. We are long-term investors, but pleasing to have a good year, notwithstanding that. The other point, looking at the 3-year figure and also the 10-year figure, it's important to note, when you're looking at rolling returns over different time frames, the importance of the starting base within that. So if we go back to the numbers we're looking at earlier, the returns since Mirrabooka's inception in 1999. On average, we've outperformed the benchmark by around 4% per annum, but you get differences over different time frames when you look at those starting points. So if you look back 3 years ago, we just come off particularly strong returns going into that 2022 financial year, that then was a tough year for us in 2022. The 2 years since have been strong. So again, it's nice to see we're above benchmark for that period. And interestingly, I went back to look at the 10-year number and leading into that back in 2014, and these numbers were quite incredible. We had a really strong run for 3 years leading into 2014. We were up 14.6% per annum versus the benchmark. So obviously, that was a high point. Again, pleasingly, though, notwithstanding that, we've been able to outperform from a pretty high point in our returns. The reason I labor that point, we obviously -- it's important to look at the premium and discount to NTA at which Mirrabooka is trading when you're considering what to do with your investment. But I'd also say it's important to look at where we are in our cycle too. If we're having a particularly strong portfolio returns, it's important to factor that in because sometimes when you're a long-term low turnover investor, there can be some normalization of that going forward. So moving on to Slide 12, again, looking at these contributors to the strong year that we've just had. This is an interesting way we thought we might represent that on the chart this year just to sort of break down some of the key contributors. The most important point on this is there's some really large holdings represented on this page. So Gentrack being one that we've only bought 2 years ago, I think every result we've produced since then, we've talked about Gentrack because it's been such a spectacular performer. It's a billing software company to the utilities industry. We bought it at a really opportune time in hindsight. It's really got excellent growth going forward now. At that time, it was pretty beaten up. There's some specific industry and company issues that they are facing. They've navigated that really well, and they're back on a really good growth path. So it did another 160% return for this financial year. It's done 500%-plus since we bought it. It's now the third largest stock in the portfolio, and it wasn't a very large initial holding. So we don't get those very often at all, but it is the appeal of investing in this end of the market when you do get one of your investments, as right as we have in that case. Looking across the rest of this slide, there's some, I guess, [ lead ] stocks really. You look at HUB24, Netwealth, the financial software platform providers, Carsales and REA Group, the online classifieds businesses. And then some of our long-standing holdings like Breville, Reece, ARB, just particular strength across a number of our top 20 holdings, which is really pleasing. It does lead into the sort of portfolio activity we've had, as a result of this, but it's been a really good position for the portfolio. The other factor I will mention in terms of that 12-month outperformance, one of the things we talked about as being a drag on our returns relative to the market leading into this year was some of the strength in commodities, particularly areas like lithium, that's unwound quite significantly in the year, the financial year. So that has sort of held down the return of our benchmark. While we do have some investments in that space, we still are meaningfully underweight those sorts of companies. So move on to Slide 13, that investment portfolio activity, you'll see from the page, the buying and selling actually neatly matched this year, $124 million into purchases in the year, around $124 million in sales. So again, we're about a $600 million fund that shows that around that 20% turnover, an average holding period of 5 years and beyond is what we like to maintain with the way that we invest in this portfolio. What you'll note from this slide is if you're looking at the purchases on the left-hand side, those of $5 million and above, there are far fewer of those than there are sales on the other side. So really what we've done this year, given the strength of returns consistently across some of those large holdings, we're just taking the opportunity of trimming some of those positions. We still like those companies. We haven't sold out of any of them on the bottom right of the slide. They are still well represented in the portfolio. But rather than letting their share prices continue to appreciate and continue to grow their size in the portfolio, we just felt is prudent given the strength in their share prices across this area of the market to reduce some of these positions and just redeploy it across some new opportunities in the portfolio. This is not -- this is quite an unusual year, and I'll touch on that in a subsequent slide just in terms of the amount of that we've done in Mirrabooka, but we think it does set us up well to navigate, I guess, the market cycles that we see. So just touching on some of the purchases, those that were new to the portfolio, it's a mixed bag here. IGO is the world's largest low-cost lithium mine. We did buy it into the portfolio. In hindsight, we bought that too early. The share prices that we were paying well north now of where the stock is trading. But pleasingly, on the other side of that, we've had Telix Pharmaceuticals, which is a nuclear medicine business. They're really well placed with their prostate imaging in the U.S. market, a very large market, and they've got some really interesting therapeutics that they're bringing in behind that. Essentially, that's doubled in share price, while IGO has halved. So it's been quite a mixed bag, but they do cancel each other out. Region is the shopping center business, a real estate investment trust, which we think is well -- really well placed to give us very predictable income, very defensive. And we think given interest rates and some cost pressures, it's just been a good time in the cycle to buy that at good value. And Lindsay Australia, a small transport company, where we think the industry structure has improved significantly, and they're well placed to deliver better returns going forward than they have done in the past. And then in terms of adding to existing holdings, IDP Education is one we've been talking about. It's been in the portfolio for a number of years. We felt that there's really interesting opportunities emerged here. All of the destination markets for international students are putting similar policies in place at once, where they're trying to limit the immigration, take some pressure off population growth. That puts a lot of pressure on this sector. But we feel there's only so far that can go before you start having university closures and things that governments don't want to deal with. And most importantly, as all these pressures brought to bear on the sector, IDP Education continues to win market share. So when that -- we don't even need the industry to really start growing again. It just needs to stabilize. And then we feel that market share capture will start to be reflected in earnings growth for that business again. In terms of exits from the portfolio, there's only 2 material ones this year in Santos and Computershare, both were businesses that we were holding on to that it had run into the top 50 stocks in the market, so no longer really in our universe. So we felt it was time to move on from those. And at the bottom of the slide, importantly, as Andrew mentioned earlier, with this activity, another year of really strong realized capital gains of around $30 million after tax, which obviously has the benefit of bolstering our franking reserves going forward. So just on to Slide 14, just to further elaborate on this activity, we thought we'd pull out some interesting figures here, which is to say that of our selling around $57 million of that was a net reduction in top 20 stocks from 12 months ago. I don't think we've really seen that before in Mirrabooka. Time will tell whether we've been a bit too cute on some of this selling and whether we should just keep compounding in really good businesses. But the important point to note is we still have really strong representation in these companies. And we do feel that, I guess, just with this really strong run-up in the valuation of a number of these companies, we feel their long-term outlooks are pretty much consistent with what we thought they'd be. It's a prudent approach to take some of that in terms of realized gains and just look for other better relative value in the market to generate some returns over the next 3 years to 5 years. In doing so, we've put around $61 million into new stocks for the portfolio, and that's seen our stock numbers [ grow out ], where we put 14 new stocks in for the period, 5 exited. So we're now up to 66 holdings in the portfolio. We think that's probably at the top end now of what we want to run with. We don't want to go too far in terms of having too many positions, where our level of conviction in each is lower, and our ability to really cover them and understand their progress can become compromised if you go too far with that. We've also listed just the smaller new additions to the portfolio. So these are all positioned under $5 million in terms of initial investment. So you're thinking well under 1% of the portfolio. given that I won't labor them in terms of describing them, but we like to be really transparent and show investors what is in their portfolio, acknowledging that this is your portfolio that we're running. So you should have full coverage of what's in there. And we do think it's an interesting area to stimulate some questions at the end of the presentation. In terms of top 20 holdings, again, this is an area, where we have been trimming some of these positions. But as you'll see, really good weightings across some really good businesses here. And we do like to really differentiate what we do in Mirrabooka by showing these orange bars, our ownership period, which we think really does bring to life the fact that we are long-term investors. We are aware. We're active in terms of valuation. But at our core, we want to hold really good businesses for the long term, and that's what's been a secret to our return since Mirrabooka was formed in 1999. And with that, we'll move on to the outlook. So on Slide 17, we've just given some descriptions of how we're viewing the world here. I guess, the most important point we note is we're not macroeconomic focused top-down investors. We start from our investments in the companies that we have in the portfolio that forms our outlook. But you need to be aware of what's going on in the world to think about how they're being valued and where the opportunities are to deploy capital. So I guess, we're making the point here that we're fully aware of the strength of share prices we've seen across the board, as I've mentioned a number of times in this presentation. But we still like the long-term earnings growth outlook for the core holdings in the portfolio. where we do look to continue to rotate capital into better medium-term value opportunities. We're super mindful that we're just not buying inferior quality companies that look cheaper. We don't want to fall for that value trap because that just creates future turnover and really diminishes the returns you're getting from outstanding businesses. So that's a key consideration that we continue to have. We think we've managed that quite well so far, but that's a continued focus going forward. And then in terms of the bigger picture, obviously, inflation, interest rates, the healthy consumer has been the key topics for the last few years. It remains so. I think helpfully, it looks like some global inflation is moderating, which takes away some of those really, I guess, tail risks that we've seen where the economy can really slow down, which is helpful. It's a bit more sticky in Australia, which we do need to navigate to make sure we don't fall behind other economies around the world. And then the other wild card, I guess, that's being introduced is all the elections that are going on. It's quite a concentrated period. Lots of different policies coming out of different parties. But the point we make there is there's been a lot of different political regimes in place since Mirrabooka was started in 1999 across all economies around the world. And if you're in great companies with their own unique growth drivers, they tend to be resilient. And if things do come out of left field, they tend to be really well placed to adapt, and that's the key protection we have against volatility, the businesses that we own in the portfolio. which brings us to a close. And I think with that, I'll hand back to Geoff to queue some questions.

Okay. Thanks, Kieran. So I've got a few questions here. I'll start with this one about do we participate in the Guzman y Gomez float?

No, look, we didn't is the easy answer. And we obviously had a look at it in terms of -- we always like to look at interesting new businesses when they come to market. There's a number of characteristics of the business that we really like. But what we point out is it was a pretty narrow float in terms of the amount of money that [ they are ] raising, new shares being issued. And it did require investors to get a decent allocation, you really needed to have been in a pre-IPO. They've done a capital round and then those got the opportunity to follow up. So I guess, the way we look at it is, it's now definitely on our radar as a potential investment. We do like some characteristics. But we think given the way it was floated, that sort of tight allocation of new shares, it's a fairly generous valuation. So we need to see that come back a fair bit before we'd be looking to put it in the portfolio.

Question here. Looking at the recent portfolio sales and recent portfolio purchases, it appears management is moving down the spectrum of quality, is management comfortable with the risk that high-quality companies such as REA, Reece and JB HI-FI surprised to the upside in the upcoming reporting season or announced compelling capital management initiatives.

Look, I think this is a -- it's a great question because as I mentioned in our presentation, this is the question we're asking ourselves all the time. And most years, you'll find that we [ led ] companies compound their returns, and we'd [ say long term and they are ] investing. Perhaps the post-COVID period, where we had a particularly strong year, I think back to 2021 and the portfolio did 55% and had a significant outperformance. And we saw a really big runup in valuation across a number of companies that we saw a normalization of that after that. And perhaps that's a factor in mind this time around. But we are -- I guess, the point we'd make is, while this has made up a significant part of the selling we've done during the year, we own these businesses. And in terms of the weighting that we have in these stocks, the money we still have in them, it hasn't been diminished as much as it might appear by just looking at the transactions. And to date, the buying we've done on the other side has outperformed the selling on a net basis and that's something we do monitor. After 1 year, it's not that important. But after 3, 5 and 10 years, we want to make sure that sort of each cohort of transactions is generating that extra value because we're mindful of the tax you're paying the transaction costs, you're doing it. So I think we just fall back on the fact that our long-term outlook in these businesses as a general statement hasn't really changed a lot over the years, but their valuation relative to the market has quite a bit. So we just think we can navigate potential volatility in the market better by just locking in some returns on them.

Thanks, Kieran. [ Our ] first one to Mark. After paying the dividend and tax obligations that we have, there will not be a lot of cash left. Our directors considering raising more capital for a share purchase plan.

Yes. Look, we've done share purchase plans in the past, and it's something that always gets discussed. Mirrabooka does have ongoing activity. So it can come and go a bit. So we're not concerned about not having cash left because as Kieran points out, there's always something that looks [ like a bit choppy ] that we might trim a bit. But it's more about share purchase plans to grow the business. I think just to -- so we haven't made a formal decision on doing another one, and that's up for the Board. But I guess, one of the -- some of the things we think about is what opportunities we're seeing in the market, where we could deploy that capital, but also in terms of what it's doing to the size of the company. So making the company bigger is good in that it reduces the MER. The downside of making the company bigger is that potentially it can make it difficult to get good positions in the really small companies, and performance is what we think about. We're not -- we're not an external fund manager that needs to make the company bigger because we charge more fees. We don't charge fees. We just do cost recovery. Therefore, we're more interested in what's the best size of Mirrabooka to give us the best performance rather than actual size of the fund. So that's some of the things we think about. But it's always on the agenda, but nothing has been announced at this point.

I guess, also Mark, where the share price is trading relative to NTA is also important?

Yes, that's important. But at the moment, the share price is around at NTA. So that means that we -- it gives us a lot of flexibility. That's if we want to do something.

Kieran, a question about Domino's. It's had a few misses recently. Does Mirrabooka still own Domino's Pizza?

Yes. Look, we've got less in Domino's Pizza. So I guess, that does reflect the question quite well. We've been disappointed by those misses in earnings. We also need to acknowledge that our timing in buying it wasn't good in terms of looking at the cycle of this business and where the earnings were and the sustainability of that at the time. But I think the thing we're really reflecting now you can sort of look back and sort of have hindsight about some of those things we could have managed better. But looking forward, how are they going to navigate their way out of the challenges they're facing at the moment, what sort of earnings growth can that deliver and what sort of returns [ does that ] give investors from here. And I think some of the challenges they now have is, there's a number of global markets that they're looking to improve at once. It's a much more complicated business than it used to be in the earlier days when they had a really good run. So that creates some challenge. And I think also when the pressure comes on, you sort of have 2 different sort of sets of stakeholders to try and [ apace ] at the same time. Obviously, the franchisees, who put their hard-earned dollars into these businesses, they need to be getting a return or the health of the whole business struggles. And at the same time, they're trying to deliver the best returns they can to shareholders at Domino's Pizzas. And when the pressures on the margins are being squeezed, it's challenging to do both of those. So yes, so look, we do have less of it. If we do decide to exit it completely. It is one we still keep an eye on because there's characteristics of it we like, but we do feel it's a fair bit of work to get this one back on track is our current thinking.

Thanks, Kieran. Question here. Has management analyzed Step One, and have any comment appears to tick off a number of the characteristics at Mirrabooka [ cedes ] high quality -- sorry, high return on equity, cash flow generation, [ fan led and line ] and [ offices ] direct-to-consumer model, not unlike Temple & Webster.

Yes. Look, we have looked at it. So for those in the audience that aren't aware of its Step One, it's an online-only underwear brand started with men and has moved into a women's range more recently. We had a pretty close look at it at IPO for the reasons that have been listed. The returns are good. The really bankable founder. We didn't choose to participate. It had a particularly rocky run after listing, where they missed some numbers and profits really came under pressure. To their credit, we haven't seen them more recently, but they have rebounded quite well. I was looking at some numbers the other day, and their profit growth has been exceptional. I guess, the point I'd make, though, to just -- to water that down somewhat, particularly the comparison to Temple & Webster is, this is one range of products. They can come in and out of fashion. It's very competitive. Temple & Webster, we view more, as a really well-placed retailer, who can move their range that they're showing on the page at any point in time just on what people want to buy. We think that's a far more significant moat around that business than one brand of underwear and a very competitive space. So it's something we probably will touch on catch up with again, but probably not a high priority and not something we have a lot of money in.

Thanks, Kieran. So given the IGO share price has halved since purchase, so we're thinking about actually adding to that position.