Mirrabooka Investments Limited (MIR) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Mirrabooka Half Year Financial Results Briefing. [Operator Instructions] 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, and welcome to this half year result 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 respects to their Elders, past, present and emerging. Joining me today on the webinar, we have Kieran Kennedy, Portfolio Manager; Stuart Low, the Assistant Portfolio Manager; Andrew Porter, our CFO; Matthew Rowe, our Company Secretary; and Geoff 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're 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. [Operator Instructions] I'll now turn to Chart 2 of the slide presentation, which is the disclaimer just to say we're here to talk about what we're doing in the company, we're not giving any advice as such. So just moving on to Slide 4, talking about what Mirrabooka is. So Mirrabooka is a listed investment company, specializing in investing in small and medium-sized companies on the Australian and New Zealand stock markets. Our general definition of small- and medium-sized companies is those that are -- that sit outside the 50 Leaders Index, noting that we can hold stocks that perform well to move into the 50 Leaders, but we will eventually move them out of the portfolio. Just our objectives, our aim is to provide medium- to long-term investment gains through holding core investments in selected small and mid-cap stocks while paying out very attractive fully franked dividends. And with that, I'll pass it over to Andrew Porter, our CFO, to talk through the result highlights.

Thank you, Mark, and good afternoon, ladies and gentlemen. So we're now on Slide 6 for those of you following it on the screen. And the profit for the half year, $4.6 million. So that was in line with the same time last year. So slight mix of variable levers there, the dividend was slightly down and trading and option income slightly up. But the net result in line with 2023. As hopefully most of you are aware, the interim dividend was increased from $0.04 to $0.045. The earnings per share for the half year, $0.024. So as ever, we are paying out realized gains, we had about some portion of realized gains, as most shareholders are aware, that's something that Mirrabooka does all the time. We are conscious that these LIC gains that have paid out of realized gains have some real value for shareholders who do pay tax. So as a result, all of that $0.045 has come out of realized gains and has LIC gains attached to it. The management expense ratio 0.56%. So that's $0.56 for every $100 invested. That's the ratio that we use for showing shareholders and interested parties what our cost ratio is, and that's consistent across the year. And the portfolio, as you'd expect, when you see the return figures, up from just under $600 million in 2023 to just under $670 million in 2024. Having now a look at Slide 7, you will see that for most of the year, most of the half year, we've basically gone from either a small premium to a small discount, that trades -- I think probably at the moment we're about par or at a slight premium. Most LICs in the sector are trading at discounts. Mirrabooka is very rare in not doing that and trading either at par or, as I said, slightly above. And there are number of different reasons for that, but they don't, as you can see, necessarily apply to Mirrabooka, although the premium, of course, has come down significantly in the last 2 years. Slide 8, just gives a long-term view of what happens if you had put in $10,000. And you can see that the Mirrabooka return, over those 25 years, essentially has been in advance of both the mid-cap and small ordinaries, which is what we measure ourselves against, and also interestingly enough above the ASX 200, which is above that small and mid-cap. So normally, you'd expect the small and mid-cap to be more variable and perhaps have slightly lower returns, but that's not been the case over the long term. And with that, obviously happy to answer any questions in the Q&A session, but I'll hand over to Kieran.

Thank you, Andrew, and good afternoon, everybody. So I'll move through to Slide 10 for those following on screen. The first comment I was going to make with this presentation is we've deliberately kept our prepared remarks and content fairly brief. We found that this presentation in prior periods, we've had good engagement in terms of the questions coming through. So we'd really encourage those, particularly those to do with companies, those who have listened in before, you'll be well aware that Stuart and I are fairly passionate about what we do. I'm very interested in the company and always happy to share our thinking on what we've been investing in and what we're looking at. So first, starting with our performance. Looking at over various time frames, we always encourage investors to look long term as we do. First, obviously, the short-term numbers are also interesting. One of the features of returns like this is the [ rolling ] periods. So the returns factor in how we've gone for a period of time, but it also -- the starting point matters in that. So if you look at the 10-year return, obviously, healthy outperformance of 2.4% per annum, but that was coming through a period where we've had strong numbers in the lead up to that 10 years. So if you look back right back to inception, the outperformance versus our benchmark, on average, has been more like 4% per annum, which is obviously a number we're very encouraged by and working very hard to continue, with the obvious caveat that past performance is no guarantee on the future. Looking shorter term, again, the 3-year number, that is about the starting point. We had a very buoyant period leading into that 3 years. It's encouraging now we've got [ a nose ] back in front of the index after we've had very strong outperformance. And on the 1-year performance, obviously, very healthy numbers of 18.2% for this calendar year versus the benchmark of 11.1%. I would just say a couple of things on that, that I think are worth noting. One is we've had a pretty decent tailwind in terms of market trends as part of that outperformance. We're long-term investors. We're trying to buy really good quality companies that we think can deliver earnings growth for the long term because that's what drives long-term share prices. Those sorts of companies have been well recognized in the market in the last calendar year. They've had valuation support. And on the flip side of that, cyclical companies, resource companies have lagged quite significantly, and we're well underweight in that space. So we internally do look at a peer set of other fund managers that we think go about things in a similar way to us. And in that cohort, our performance has been solid, sort of well in the middle of that pack, but there have been others with more spectacular numbers for that year. But I will point out, our genuine performance numbers with no leakage of performance fees, management fees and a better tax outcome than many others because we're long-term investors. Just moving on to recent activity in the portfolio on Slide 11. So I guess following on from those comments I made about the valuation tailwind we've had with the performance of what we own. One of the challenges that brings is it makes it harder for us to find really good value to buy new things that are similar to what we own. So what that's meant is our purchase activity for this period has been quieter than usual. Normally, we turn the portfolio over at around 20% to 25% per annum, so average holding period of 4 to 5 years. Now that's been similar from the selling side in this period. But on the buying side, it's been well below that as we've been patiently looking to find new ideas, but importantly, with good valuation support on a long-term basis. The sort of companies we have added to the portfolio, a couple of new ones listed there, Cuscal, the recent IPO, and Channel Infrastructure out of New Zealand. Cuscal provides payments infrastructure for financial players that don't have the scale to do themselves. So I think about banks that aren't majors and fintech players that need that infrastructure from another company. Again very solid business. It doesn't have spectacular growth profile ahead, but the valuation was very reasonable, we thought. It's well run. Management have been there a long time. It's a reason to exist. It's not going to go away and it has that solid market position. So we felt that stacked up quite well against the opportunity set at the time. Channel Infrastructure is now the key import terminal for fuels into the New Zealand market. Again, very solid asset. We think there's some strategic land around it. Not going to grow spectacularly. But again, [indiscernible] valuation, a very solid asset. We think will generate good returns for the portfolio. And then we've been adding to existing holdings things like Life360, EVT, Cobram Estate where we found good value. Again, happy to take questions on any of those. On the selling side, we have found a number of positions that have done really well for us, have sort of risen up to valuations that just make us question our long-term conviction from here to have such a big weighting in them. So if you look at that bottom right box of reduction in ongoing holding, these are the most material of those. There's a number below companies like Fisher and Paykel Health care, Netwealth, Gentrack, REA Group and Pinnacle, have all been really good reasons why we've generated good returns in the portfolio in recent times. But the valuations they've gotten to, we just think it's prudent to reduce those positions somewhat, generate realized gains, which helped support our dividends and just ensure sure we maintain a holding because they're still great companies, but just run with a little bit less. In terms of what we exited, JB Hi-Fi, we -- candidly, we sold this one a bit too early. We felt that the valuation is getting a bit ahead of its growth prospects. It's an outstanding company. It's one we'd happily own again if the opportunity presents, but we think it is a bit stretched at the moment. Domino's Pizza is disappointing for us, so we've moved that one on and PSC Insurance was -- excuse me a moment, nearly got through the slide, but the PSC Insurance was a very successful investment that was taken over through the period. With that, I'll hand over to Stuart.

Thanks very much, Kieran, and good afternoon all. Now moving to Slide 12, which is a snapshot of our top 20 holdings. I really like this slide. I'd like to include it in every presentation. I think it illustrates a couple of things. One of them being that we do like to say that we're long term. I think this illustrates some of these holding periods that we really do try and invest in companies we think we can hold for many years and have them compound throughout the portfolio. And I think the other thing we talk about too is -- and sort of referencing Kieran's comments a little bit earlier, when a new position comes into the portfolio, we tend to take modest starting position, starting sizes. And then as we earn trust with the company and management, we watch them execute. We then build that position up and then hope that it sort of earns its way into the top 20 stocks rather than buying really large positions straightaway. In terms of the moves in and out of the top 20, over the last 6 months, as Kieran alluded to, PSC exited the top 20 through a successful takeover. Realestate.com and Fisher & Paykel were both companies that have just dipped outside the top 20 now. We trimmed some of those. As Kieran said, just found the valuation is very stretched at these levels. So we haven't exited those positions. They're just sitting a little bit outside the top 20 after some profit taking. In terms of 2 others that have -- sorry, exited the top 20, but we still own relatively significant positions. One of those is IPD Group. It's an electrical distribution company. We've talked about it in previous AGMs and other shareholder updates because it's been one of our real success stories over the last probably 3 years since we bought it at IPO. It had a very strong run. And over the last 6 to 12 months, we've taken the opportunity to just lighten that position, took some profit. And then we actually saw an update in November where they saw some weakness in their ongoing business. Nothing alarming, but just as we expect, business isn't linear. So it had a slight slowdown, which saw that one fall a little bit over the last 6 months and come outside of our top 20. The other one that's come out is PEXA. Once again, we still have a position there. We really like the Australian business, that infrastructure-like asset, but we had seen the issues in their U.K. business, just taking a little bit longer than what we previously envisaged when we took a position. So we have been doing a little bit of selling there, and that share price has probably underperformed in the last 6 months, hence, why it's come out of the top 20. I thought I might touch on some of the newer holdings in the top 20. If you look through the slide there, you can see Redox, Cobram Estate and Vista all have an ownership period less than 3 years. So I'll touch on each of those individually. Redox was an IPO, a family-led company, chemical distributor that's been around for 30-plus years. We really liked a lot of its characteristics: Net cash, balance sheet, family ownership, a leader in its space. It came to market with little fanfare and the share price underperformed, so we took the opportunity to increase our position over the last year. And subsequently, as the companies continue to execute throughout the last 2 years since listing, it's getting a little bit more hearing with fund managers and its valuation has gone up. So that one has been quite successful. And I think the share price has gone up about 85% in the last 12 months, hence, why it sort of earned its way into the top 20. Cobram Estate, we talked about that on the previous slide. We really like that brand, the positioning. It's the major producer in Australia. And I guess the reason why it sort of had a little bit of a run in the last 6 months is that its U.S. business, which has started about a decade ago, has reached an inflection point, now profitable and really going strongly. So that one, once again, we've been buying over the last 6 months, and we've also seen some strong share price appreciation. Lastly, Vista Group, I'll just call that one out is a business that we've owned previously. It produces software for the cinema industry. It has a sort of a staggering 50% market share, which is unusual for small caps to have such a dominant market position. We owned it previously and sold it just in the onset of COVID, which in hindsight was a wise decision. Obviously, we didn't know what was going to happen over that 2-year period. But we reflected upon that. We really like its position. We added it back to the portfolio in 2022. And it's had a really strong run in the last 6 to 12 months on the back of they're migrating a lot of their customer base to its cloud offering, and that business has now reached profitability and free cash and has seen the share price rerate, I think, probably close to 100% over the last year. So once again, another example where we took a modest starting position and then let it compound into the top 20. I'll now move back to Kieran for some closing remarks on the last couple of slides.

Thank you, Stuart, and hopefully, give me enough time to get my voice back up after those earlier issues, apologies for that. So we're now on Slide 14, just looking at some outlook comments. We started with just a graphical representation of what we think has been a bit of a dislocation in the market. There's a bit of complexity in this chart, but I'll try and explain it in simple terms. So what this is representing is the relationship between valuations in the share market. This is U.S. based. So in the blue line, this is the market multiple, price-to-earnings ratio for all the companies in the market -- in the equity market. And then the orange line is the real 10-year bond yield on U.S. government debt. So essentially, what that's saying is U.S. government debt is assumed to be the lowest risk asset people can buy, and therefore, other assets around the world, the pricing is referenced back to the lowest risk assets you can buy. So what the chart is saying is taking inflation away, so a real return on U.S. 10-year debt, you can now get around 2%, 2.5%, and it's been a long time since you've been able to do that. That's quite attractive compared to what it's been through that period. If that relationship were to hold that, that was the risk-free asset that sets the returns for everything else, you would expect to be able to get a higher return from here on shares. And what hasn't happened is, we haven't seen the share market sell off to reflect that relationship. That doesn't mean it's going to sell off tomorrow. It doesn't mean a lot. It's just something we observe is an interesting dislocation we've observed over the last few years and something in the back of our mind to sort of say we need to make sure when we're buying shares today. We're thinking about the real fundamental cash earnings-backed return we're going to get from that company rather than drifting into saying if we buy at this share price, it might do that in share price terms. We want to step away and really think about fundamental real-world cash flow earnings for those businesses. So on to some broader outlook comments, I guess, on Slide 15, in closing, just reiterating what we've been saying really, which has been, it's been a bit of a sweet spot in equity markets. There's been a view that inflation is abating, which is good for valuation. The economy is hanging in there. Interest rates have peaked. So that's encouraged people that it's been a good time to be back in equity markets. Obviously, the earnings support needs to come through to keep that momentum going forward. We take a long-term perspective and are aware that we've had a pretty good tailwind recently in short-term terms. So that's meant we've been quite quiet in terms of what we've been adding to the portfolio. We're always a bit cautious. We think it pays to be, especially in this end of the market because you can get some extreme volatility and you can get disappointment. I think this valuation setting, just leaves us a little bit more cautious than usual at the moment. But at the end of the day, what our job is to do is to provide shareholders who want to put money in small and mid-cap companies in the Australian market, we want to find the best opportunity set within that, that we really believe in, in a way that we can be low turnover, i.e. we can be long term, stick with those companies. And we think the secret to Mirrabooka's success has been choosing companies that deliver really good returns in their own businesses over the long term and then being along for the ride with that. So we won't move away from that, notwithstanding this valuation caution at the moment. And with that, we'll close the formal presentation. I'll hand back to Geoff to queue for questions.

All right. Thanks, Kieran. [Operator Instructions] So got a question here about the half year and final year dividends. Are we planning to even those out? And how we plan to equalize the interim and final fund dividend over time?

So -- yes, look, we always -- we understand that shareholders probably have a bias towards seeing more even spread between dividends. But a big part of Mirrabooka's dividend has been sort of a special dividends and that component that really comes from capital gains. We really don't know the outcome of that until the end of the year. So I think you will continue to see quite a split between the interim and final because of that.

Thanks, Mark.

Also on that, Andrew, the level of franking we have within Mirrabooka?

So last year, after allowing for the final dividend, we had essentially an up franking for $0.33 per share. And with the income that we received, that, you'd expect to see an increase in that. So we're slightly more than $0.33 per share. Probably more so if you look at including the tax balance that we've got outstanding at the end of the year, we don't know what that is going to be, of course, yet. But overall, consistently with -- we're consistent -- on a consistent basis probably about $0.36. So I would say that we are well [indiscernible].

[indiscernible] 3 years covered basically.

Not if we did -- just on the ordinary dividend, if we didn't allow for any special dividends, which, of course, we've done in the past, of course.

A question here on Sigma, does Mirrabooka own Sigma, which is...

Yes. No, look, we do, thankfully. There was a pretty small window there where you had the chance to buy it, we think was pretty good value. So just to explain to everyone, they did a quite clever transaction where the existing business, Sigma, was listed on the share market for a long period of time. It's a pharmacy distribution business. Rather than Chemist Warehouse IPO and listing their own right, they proposed a merger with Sigma. So that meant there was a period of time where Sigma is trading on the share market. You're hoping it becomes Chemist Warehouse, but you've got to get through the ACCC inquiries and other things to make sure the transaction is formalized. So we did quite a bit of work through that period and felt that Chemist Warehouse is one of Australia's best businesses in our view. It's got growth ahead of it. It's an outstanding success story. It's something we definitely want to own. So we felt that it was worth taking that risk that they get knocked back by the ACCC to make sure we had a position in the portfolio, and we're thankful we did that. The stock has more than doubled since they've got the green light and the ACCC and the merger is now about to happen. But interestingly now, because of the way the transaction was conducted, there's going to be a bit of -- a lot of people are going to want to own the stock, so there's going to be a bit of a squeeze of people trying to get onto the register. And we think that's pushed the share price now at levels that are fairly high, and therefore, it's hard to keep buying it at this price.

While we're on that sort of -- I guess, on that subject a little bit, the IPO market, how are you sort of seeing that over the next few months or 6 months?

Yes. Looks interesting, Geoff. It's been quite dormant. It's been fairly quiet, which is a bit weird because in a lot of sectors of equity markets, you'd say it's a pretty bullish market at the moment. And normally, when you're in a bullish market, that's when it's a good time to list the new company and find a good audience and get away. But it feels like there's been a bit of a quiet period. A lot of investment banks are keen, obviously, to see them list because they get fees out of it. There'll be companies queued up to do it. But there just needs to be the confidence of a few going really well to see that, that window is open. That's the way they describe it. We find all that a little bit strange, to be honest. At the end of the day, listing is only the start of your journey. As a listed company, the IPO is just day 1. So whether it's a great success in the first month or not doesn't really make a lot of difference to us. It's really whether we're getting access to good businesses. And it's really interesting, the last 3 that we bought meaningfully have all been really poor initially. So we go back to Redox, IPD Group and then Cuscal. They came on at a discount to what they were floated at. They traded under in both -- in all 3 cases, we liked the business. We had no reason to change our view. We bought more. And then once they settle into the rhythm of a listed company, delivered some results, others catch on to whether they're a good business. So we do view that window and that's sort of the way to sort of treat investing in IPOs quite differently to others we think.

Thanks, Kieran. Does Mirrabooka -- Audinate any thoughts on the outlook?

Yes. Thanks, Geoff. I'll take that one. Yes, we do have Audinate in the portfolio. For those on the call, Audinate provides digital networking software called Dante, a really interesting business. A little bit of a history. We bought it quite well in hindsight at probably $2 a number of years ago, and became very successful. I think it's sort of the market leader in its space. And then over the last couple of years, they had some really staggering revenue growth 30%, 50%, probably over the 18-month period through 2022 to 2024 became, I guess, what we call a bit of a market darling, really well-owned; and attracted very high valuation. So we, fortunately, trimmed quite a bit of it at sort of $20, $18 per share. And then, I guess, quite surprisingly, maybe only 6 months ago, they had quite a negative outlook instead of growing 30% to 50% like they had been, they were going to go backwards this year. And it looks as though -- we weren't smart enough to see that coming. We've just been trimming more on valuation. But it looks as though there was a bit of inventory build in the supply chain across the COVID period. It was quite hard to understand what the underlying demand was, but it looks as though they're in a period now where they have to work out a lot of different inventory across all the supply base. And when I say inventory, this is chips, cards and modules that will be in speakers and other audio infrastructure. So the shares have fallen quite heavily. We haven't sold any for a while. And I think we'd be -- it's become a much more position in the portfolio. I think we are still cautious right now to truly understand what the underlying demand is. So we're not doing anything at the moment. It is coming back to more interesting levels. We do think it's a market leader. It's got a net cash balance sheet. So we do like those attributes, still run by its founder, but we're just trying to understand what the underlying demand for the product is because we've had such a variability. I hope that helps, Geoff.

Thanks, Stuart. Kieran, so you talked to Slide 14, which we see P/E ratio and interest rates. So what are you basically trying to say, you're saying the market should be closer to interest rates as an earning rate or?

Yes. So I think the key observation is just to observe the difference. So one way to look at it is to say the equity market should be lower because that's where interest rates are. The other way to look at it is maybe the interest rate roll. Just there's 2 different views in very big financial markets. So I guess the way we reflect on that is cash is a drag in what we do. So we don't like to have much cash long term because equity markets do better than what you can get in the bank. But right at the moment, we do have a little bit of surplus cash. And I must say at the moment, you can get 4% plus. And then you look at some of the multiples on the great companies on the Australian share market, and we think, well, the starting point in earnings yield on those companies is low because the multiples are very high. You've got to factor in a number of years' growth to get back to sort of getting a 4% return, which we can get in the bank is a certain number today. And then there's the obvious point that equity markets are volatile. So there's an extra return you should be getting for the volatility and the risk that comes from that. So we're just mindful of that. We're not smart enough to predict markets, but we just think it's an interesting observation to see the dislocation between those 2 markets at the moment.

Thanks, Kieran. So any thoughts on IDP Education?

Yes. Thanks, Geoff. Yes, look, IDP Education, it's a business we've talked about in the past. It's a top 20 holding. It was, at one stage, a $30 stock. It's come back a long way to probably $12 now. And for those not familiar with the business, they're the leader in student placements globally and also English language testing. So they take a lot of students from international markets, place them into universities, other high-level tertiary education in Canada, U.K., Australia and the U.S.A. And this is a business that has grown pretty consistently for a number of years. But I guess in the last 18 months, we've had a sort of confluence of events where, post-COVID years, we had a lot of immigration, a lot of student inflows into each of these home destination markets. And then since then, there's been a lot of media, which probably people are aware about with potential changes in government occurring in Canada. We've got an election coming here in Australia shortly. The U.K. went through a period last year and student numbers was a key topic. So we saw a lot of tightening of immigration and student numbers, which has directly flowed through to IDP's earnings. We still think it is the market leader. It's the high-quality provider in the space. A lot of the changes to regulations have centered around some of the lower-quality students potentially coming in on English second language courses and looking to just get work visas, whereas IDP targets higher-end tertiary and post-tertiary students. So we think that will come through and weather this storm better than the others. We think it's really well run. It's the global leader. But safe to say, we're probably -- on our buying, we underappreciated the fact that all 4 of the destination markets having similar policy timing at the same time would have a stronger impact to earnings than what we thought. So a lesson for us there, but we still think it's a really good business. And with a long-term hat on, we think it will remain the market leader and we'll come through with a much stronger industry position.

Thanks, Stuart. There's a question here about companies operating in the retail space. We obviously have Temple & Webster [indiscernible] I believe in the top 20. The ASX has a number of retailers that have been strong performers over many years. I won't name all of them. But is management looking at companies such as Universal Store and Step One who appear to be up and coming with ASX retailers with strong fundamentals and management?

Thanks, Geoff. So, I guess, the way I'd sort of address that is to sort of step back to what builds an investment case in any company for us and then apply that to this sector. And as a long-term investor who buys things with the intention, hopefully, don't have to sell them because they're going to win for a long period of time. The most important thing to look at is sort of competitive advantage, what sort of differentiation, what sort of moat is around that business. It gives you the confidence in most economic environments, they're going to win and they're going to beat competitors, grow their earnings and deliver returns for our shareholders. We think in the retail space, that's generally a bit harder to find. At the end of the day, most retailers operate in a pretty competitive environment. They've got to have the lowest prices, the best service. They got something different to say that they're going to pull ahead of the pack through most cycles for a long period of time. So that's why we've tended to be a bit underweight the sector. The best time to own most of them is when you find a good format in it's early days where you think there might be 30 stores, and you can see a time when there's going to be 100. That's been the formula historically in the space to make good long-term returns through the cycle. We're always on the look out for that. I mean a company like Temple & Webster is really interesting because that's changed that dynamic. It's now not about having 30 stores and going to 100, it's about being an online-only business where we think they have really good brand recognition, we think will grow further. And they've got some really compelling advantages if they pull ahead as the leader in that space because you don't have the rents, you don't have the wages that you have in offline retail. So, yes, we don't really have a set view around sectors. It's really just a bottom-up, company-by-company analysis on who has a competitive advantage and the reason why we think they're going to win for the long term.