NAOS Emerging Opportunities Company Limited (NCC) Earnings Call Transcript & Summary

I'm joined by fellow directors, Sebastian Evans, Warrick Evans and Sarah Williams, Rajiv Sharma, our Company Secretary, is also present today with our auditor, David Salmon at Deloitte. Today's meeting is being held online by the Lumi platform, and this allows shareholders, proxies and guests to attend the meeting virtually. I'll just pause as everyone can everyone here at the meeting and it's running okay. I'm just checking here and looking. Right, so I have got the indication that you can all hear and things seem to be running well. This is obviously the first time [ we'll do this virtually ]. So all attendees can watch via live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit votes. The agenda for today's meeting will be the Chairman's address, the business of the meeting, followed by an investment update presented by NAOS Asset Management Chief Investment Officer, Sebastian Evans. [Operator Instructions] Please note that while you can submit questions from now on, I will not address them until the relevant time in the meeting. Please also note that your questions may be moderated if we receive multiple questions on one topic, they could be amalgamated. Voting today will be conducted by way of a poll on all items of business. To provide you with enough time to vote, I will shortly open voting for all resolutions, and obviously notify you. At that time, if you are eligible to vote at this meeting, a new voting tab will appear on your screen. Selecting this tab will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as a vote is automatically recorded. You do have the ability to change your vote up until the time I declare voting closed. I'm advised that we have a quorum.

Yes, there is.

And I now declare voting open on all items of business. The voting tab will soon appear. Please submit your votes at any time. I'll give you a warning before I move to close the vote. So we commence the meeting now with the Chairman's address. So fellow shareholders, the Board would like to thank all shareholders for your continued support, and welcome all new shareholders who joined the company during the 2021 financial year. For the financial year ended 30th of June 2021, the company achieved a record after-tax profit of $20.7 million. One of the objectives of the company is to deliver a sustainable growing stream of dividends to shareholders, franked to the maximum extent possible. I'm pleased to announce the Board has declared a fully franked final dividend of $0.0375 per share. Together with a fully franked interim dividend of $0.0375 per share, this brings our fully franked full-year dividend to $0.075, which represents a 3.4% increase on the prior year. This represents a 7.25% net yield based on the 30th of June 2021, share price and brings the total fully franked dividend declared since inception to $0.575 per share. Australia's economy has rebounded from a retreat last year and has now achieved net growth from January 2020. For financial year '21 was one of the strongest years on record for domestic equities. Although towards the end of the financial year, U.S. inflation concerns and rising bond yields have caused some volatility. We expect the volatility to continue over the short term. As we move into FY '22 the Board believes that the companies held in the NAOS Emerging Opportunities portfolio offer appealing long-term risk-adjusted value and are confident that through the NAOS investment team, maintained a disciplined approach in line with the NAOS investment philosophy, shareholders can look forward further outperformance over the longer term. The Investment Portfolio returned a record financial year return of 48.3%, significantly outperforming a benchmark S&P/ASX Small Ordinaries Accumulation Index, which returned 33.2%. The pretax net tangible asset backing per share of the company increased from $0.90 to $1.23 over the financial year. The positive performance of the investment portfolio increasing NTA per share by $0.448. During the year, $0.0725 per share was paid for the shareholders in fully franked dividends, and management fees and interest expense on the convertible notes decreased the NTA by $0.0151 per share and $0.034 per share, respectively. Corporate tax of $0.078 per share was also paid during the year. The franking credits attached to these corporate tax payments are available to be distributed to shareholders through the dividends. The dilutionary impact of the exercise of bonus options by shareholders decreased the NTA by $0.0227 per share. Total shareholder return measures the change in the share together with the dividends paid over the financial year. Assuming dividends are reinvested, the TSR for NCC for the year of 2021 was 39.2%, which was reflective of the strong performance of the Investment Portfolio. This measure does not include the benefit of franking credits received by shareholders through the franked dividends. While the NCC share price increased from $0.795 to $1.035 over the course of the financial year, the Board acknowledges the current discount to NTA and remains committed to addressing and closing a discount to NTA for a range of initiatives. These would include: Dividends. The company will continue to focus on delivering a growing stream of dividends, franked to the maximum extent possible while maintaining an adequate profit reserve balance. The company has now declared a total of $0.575 per share in fully franked dividends since listing in 2013; Dividend reinvestment plan. For those shareholders who participate in the DRP, it is important to note that the company did not issue shares at a discount to NTA but acquired the shares on markets to ensure this capital management activity was completed without any potential dilution for existing shareholders; Alignment. The Board has a strong alignment with our shareholders and continue to increase our holdings over the course of the year through both the exercise of bonus options and participation in the DRP and now hold a cumulative 5 million shares; Shareholder communications. The company maintained a focus on our high-standard marketing and communications so that all current and prospective shareholders have a clear understanding of the NAOS offering. Quarterly investor webinars are delivered to all shareholders, along with regular e-mail shareholder updates, which are sent to all current and prospective shareholders on the database, which is now over 11,000 subscribers. In March '21, the company issued $23 million of listed convertible notes. The NCC notes provide investors with a listed exposure to a fixed interest rate yield of 4.5% per annum and the possibility of benefit from appreciation in the price of the company's shares above a conversion price of $1.15 through an optional conversion into ordinary shares at any time until 30 September 2026. The issue of the convertible notes facilitated an increase in the overall size of the investment portfolio without diluting existing NCC shareholders. The proceeds of the issue were invested by the investment manager in a number of opportunities that arose during the year. The 1-for-4 NCC furnace options that were issued in June 2019 expired on 29th of June '21. During this period, 12.56 million options or 84% of the total bonus options issued were converted into ordinary shares at an exercise price of $1.02. This raised $12.8 million of additional capital. Our Board of Directors were delighted with the large number of shareholders who supported the company by choosing to exercise their bonus options. Along with the NCC convertible notes, the bonus options were a conservative way to allow our company to grow without placing undue pressure on the short-term performance and dividend reserves of the company. The Board remains committed to managing capital base of the company, using the most appropriate structure to maximizing potential shareholder return. The Board believes that growing the size of the company to between $125 million and $150 million is optimal. This size not only allows the investment manager to maximize performance by accessing meaningful positions in quality companies, but also scales the company to an appropriate size that lowers the expenses and costs for all shareholders. Now on behalf of the Board of Directors, I would like to congratulate the Investment Manager on its strong investment performance over the year, and thank them for the continued efforts and dedication throughout the year. I'll now move on to the business of the meeting. Slide 5. Voting on all resolutions will be decided via a poll. The poll will be taken at the end of the meeting, and the results will be announced to the ASX following the close of this meeting. I will disclose proxy votes on the screen when I put each resolution to the meeting. These figures are as at the closing time for receipt of proxies, which was 10:00 a.m. on 9th of November. I have been advised that all proxies received for the meeting have been checked, and I declare them valid for. Is this true?

Yes. That's correct.

A voting exclusion applies to Resolution 1 as outlined in the Notice of the Meeting. Resolution 1 is a nonbinding advisory resolution and will be cast, provided not more than 25% of the votes cast by or on behalf of shareholders in total today on Resolution 1 are against the resolution. Resolutions 2 and 3 are ordinary resolutions, meaning that to pass, they require more than 50% of votes cast by shareholders to be in favor of the resolution. I would like to advise that as the Chair of this meeting, where I am appointed as proxy, I intend to vote as follows: Resolutions 1 and 2, all shares in favor; Resolution 3, all shares against. All right. The first item on the agenda is to receive the financial statements, Directors report and Auditors' report for the company for the year ended 30th of June 2021. There's no formal resolution required on this item. I'll now take questions on the financial statements, and you may also direct any questions on the audit to the company's auditor, David Salmon. Questions, Rajiv?

No, David. Confirming that no questions have been received.

Okay. We might just pause a little bit, see if there's a good question there. No?

No, David. Nothing's come through.

Okay, thanks. I now declare the financial statements and directors' report as duly received and considered at the meeting. We now move to the resolutions. The wording for each resolution and the proxy results received will appear on the screen. Resolution 1. The remuneration report. I propose Resolution 1 as follows: The company adopts the remuneration report for the year ended 30th of June 2021, in accordance with section 250R Subsection 2 of the Corporations Act. Are there any questions regarding Resolution 1?

No questions have come through, David.

Okay. Well, you can see that the votes are on the screen, I think. And it looks like it's overwhelmingly for that resolution at the moment. Okay. We'll move to Resolution 2, the reelection of myself. I'm just wondering if I should pass that across now. The reelection of Board-endorsed Director, David Rickards. I propose Resolution 2 as an ordinary resolution as follows: That David Rickards, who retires in accordance with Rule 6.7 of the constitution, and being eligible, offers himself for reelection -- offers myself for reelection, actually, to be reelected as a Director of the company. Any questions, Rajiv?

Nothing has come through yet, David.

Okay. Thank you. Again, you can see the votes on the screen. All right. That brings us to Resolution 3. Election of the non-Board-endorsed director, Mr. Andrew Conlon. I propose Resolution 3 as an ordinary resolution as follows: That Mr. Andrew Conlon, who has offered himself for election, be elected as a Director of the company. Are there any questions regarding Resolution 3?

Waiting for anything to come through.

Right.

No questions received, David.

Okay. Thank you, Rajiv. No questions, and we'll close the voting. And the voting again is on your screen, and you can see the results. Okay. That concludes our discussion on the items of business. In a couple of minutes, I'll close the voting system. Please ensure that you have cast your vote on all resolutions. I'll now pause to allow you the time to finalize those votes. [Voting]

Okay. We've -- we'll now close the voting. Has there been any other questions, Rajiv?

Just confirming, David, there hasn't been any other questions that have come through.

So at that point, we will now declare this Annual General Meeting closed. And thank you very much for your attendance, and looking forward to a great year going forward. And thank you also, David Salmon, for attending as the auditor.

Thank you.

I'll now pass over to Sebastian Evans, who will provide an investment update for the company.

Thank you David. And thank you, everyone, for joining. For those of you who have joined today, obviously, it's a slightly different format than what we've usually done -- what we've done over the past 8 Annual General Meetings. So for those of you who don't know, obviously, I'm Sebastian Evans, the Chief Investment Officer of NAOS Asset Management, obviously, giving a short update in regards to the year that was, and how the year started in FY '22. The reason it is quite short is because, obviously, we've recently released our month-end investment report, and we also held our quarterly webinar for the first quarter of FY '22 just a few weeks ago. So a lot of this information has already been covered off on probably in even greater detail than what we'll give you today. Next slide please, [ Mitch ]. There you go. So this is obviously just a slide of not only the performance of FY '21 and how '22 year-to-date has started off. It also gives you an idea of how the performance for the fund has been over each financial year. And I would argue, obviously, this is extremely transparent, provides you a very good idea of the volatility of the fund, the return profile of the fund, and most importantly, from my point of view, our focus to try and preserve capital in times of significant market volatility. So we're very proud of the fact that we've really only had one negative year and also very proud of the fact that FY '21 was a very strong year. Albeit, we won't shy away from the fact that it was definitely required at FY '19, FY '20 and even FY '18, to a certain extent, were reasonably quite weak years in regards to what we want to achieve as an investment firm. With performance comes a lot of things, especially running an LIC. I think it gives you more performance. It gives you a lot more ability to obviously pay larger dividends, grow your dividend profile, frank those dividends if you can pay tax and realize gains over that period of time. So as you can see there, something that we're very proud of is, we're one of, if not the only, I think, I would say that has been able to grow its dividend profile consistently over many, many years. Not just 2 or 3 years. This is now over 8 years. And if you were to frank those dividends up and gross that dividend profile, almost -- I think, it's almost close to $0.78 have come back to shareholders since inception compared to $1 issue price. As David said, we're often very cognizant of the fact that this LIC, after many years of trading at NTA and out of premium has now come back to the discount, unfortunately. So it's something we're very cognizant of. And as David mentioned before, as we said, the good performance, we believe we can close that discount relatively quickly with higher dividends, and hopefully, other means, if necessary. Just finally, obviously, touching on Q2 and FY '22 in general. I think it's important to say how the first quarter has gone for this fund. It's probably been a little bit softer than expected. I think we're definitely under the -- we probably definitely realized COVID affected many investments this time around in regards to the second round or third round of lockdowns more than probably we anticipated and a lot more compared to the first round of lockdowns. As we've seen in the economy generally, we're seeing a lot more volatility in regards to supply chain issues, inflationary issues, the ability to even source quality staff at reasonable prices now becoming a significant issue. In saying that, I think the portfolio has an awful lot of potential remaining in it. I think if we're to criticize ourselves on anything in particular, it would be the opportunity cost of some of our investments. And many a people would know which ones they are. The likes of BSA would be one, BCC would be another one, and potentially one more. But in saying that, if you look at some of our other core investments such as Saunders, even COG, to a lesser extent, and Big River, they're really going into a period of arguably a sweet spot for many, many years. We think that provides all these business with an ability to grow their earnings significantly over the next 2 or 3 years. They're all very well funded. They've all got a clear competitive advantage. And we think if the first half is not quite as strong than what we think it may be, it will definitely lead to a much stronger 2H. And it's also pleasing that we're now starting to find a few more new investments as we exit some of their older investments over time. So many of you would know that Gentrack has recently come into the fund. We've also recently added another new investment, which we'll hopefully be able to touch on over the next few months as that becomes a much larger position. But I think looking at the fund more generally, we remain very confident on the ability for this fund to generate a very strong FY '22. And to be frank, it probably needs to, even though it performed very well in '21. We feel the momentum can definitely continue and will continue hopefully into the second half of the year. So with that, that's probably the end of my slide, and I'll pass it back to David and Raj and see if there are any questions. All right. Well, no. Thank you, everyone, for attending. And as always, if you do have any questions, don't hesitate to contact me or any other member of the investment team. And we look forward to providing you an update in December with our November investment report and NCA update. So thank you again for your support, and enjoy the rest of the day.