NAOS Ex-50 Opportunities Company Limited (NAC) Earnings Call Transcript & Summary

Good morning. This is a NAOS Ex-50 Opportunities Company Limited Annual General Meeting. My name is David Rickards, and I'm the Chair of the company. I'm joined by fellow Directors, Sebastian Evans, Warwick Evans and Sarah Williams. Rajiv Sharma, our company secretary, is also present. And today, together with the company auditor, David Salmon of Deloitte, and thank you all for attending. Today's meeting is being held online by the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit [ facts ]. The agenda for today's meeting will be the Chairman's address, thence, the business of the meeting, followed by an investment update presented by NAOS Asset Management, Chief Investment Officer, Sebastian Evans. Online attendees can submit questions at any time. [Operator Instructions] Please note that while you can submit questions from now on, I will not address them until a relevant time in the meeting. Please also note that your questions may be moderated or if we receive multiple questions on one topic, it 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. At that time, if you are eligible to vote at this meeting, a new voting tab will appear. Selecting this tab will bring you 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 the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. I'm advised that we have a quorum.

Yes, David, that's correct.

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 voting. So we'll commence the meeting now with the Chairman's address. Right. 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 year ending 30th of June 2021, the company achieved a record after-tax profit of $19.4 million. I am pleased to report that for the financial year ended 30th of June, the NAC investment portfolio returned a record financial year return of 63.4%, significantly outperforming the benchmark, the S&P/ASX 300 Industrials accumulation mix, which returned 27.9%. Australia's economy has rebounded from a 2020 retreat and has now grown to a level larger than January 2020. More recently, U.S. inflation concerns have caused some volatility in financial markets, and we expect this may continue over short term. When markets are volatile, it is important to remember that they may move in cycles and volatility is a natural part of any economic cycle. The Board is confident that though -- that the NAOS investment team, maintaining a disciplined approach in line with the NAOS investment philosophy, shareholders can expect further outperformance over the longer term. One of the objectives of the company is to deliver a sustainable growing stream of quarterly dividends to shareholders, franked to the maximum extent possible. I am pleased to announce the Board has declared a fully franked final quarterly dividend of $0.0155 per share for the year ended 30th of June. This brings the financial year '21 full year dividend to $0.0575 per share, representing an increase of 9.5% on the prior year. The profit reserve balance at year-end was $24.8 million or $0.56 per share. And since listing, the company has now declared an aggregate of $0.332 per share of fully franked dividends. A pretax net tangible asset, NTA, backing per share of the company increased from $1.06 to $1.59 over the financial year, with positive performance of investment portfolio increasing the NTA per share by $0.718. During the year, $0.054 per share was paid to the shareholders in fully franked dividends. Performance fees and management fees decreased the NTA by $0.071 and $0.029 per share, respectively. And interest expense on convertible notes totaled $0.013 per share. Corporate tax of $0.03 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 fully franked dividends. As the buyback of shares by the company at a discount is accretive to NTA per share, this was also a positive contributor to the company's net tangible asset backing during the financial year, adding a further $0.018 per share. Total shareholder return measures the change in the share price together with dividends paid over the financial year. Assuming dividends are reinvested, the total shareholder return for NAC for the year of '21 was 57.2%, which was reflective of a strong performance of the investment portfolio. This measure does not include the benefit of franking credits received by shareholders through franked dividends. While the share price closed the financial year to $1.18, the Board acknowledges the current discount to NTA and is committed to addressing a closing discount for NTA through a range of initiatives. Now these initiatives include dividends. The company will continue to focus on delivering a growing stream of quarterly dividends franked to the maximum extent possible, while maintaining an adequate profit reserve balance. The company has now declared a total of $0.332 per share in the fully franked dividends since inception. We also commit to an on-market share buyback. Over the course of the financial year, 3.6 million shares were bought back and the company has now bought back a total of 8.9 million shares or 17% of the shares on issue since the buyback commenced in June 2019. The Board renewed our market buyback facility for a further 12 months in June '21 as the buyback of shares, at a discount, is accretive to NTA and thus, a benefit to all shareholders and intends -- and we intend to continue an active buyback of financial year '22, should a significant discount to NTA persist. Dividend reinvestment plan. For those shareholders who participate in the DRP, it is important to note, the company did not issue shares at a discount to NTA, but acquired shares on market 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 their holdings over the course of the year through the purchase of shares on market and participation in the DMP and now hold a cumulative 8.1 million shares. Shareholder communications. The company maintains a focus on a high standard of marketing and communications, so that all current and prospective shareholders have a clear understanding of the offer. Quarterly investor webinars are delivered to all shareholders along with regular e-mail shareholder updates, which are sent to over 11,000 subscribers. The Board remains committed to managing the capital base of the company using the most appropriate structure for maximizing potential shareholder return and scaling the company to an appropriate size that minimizes the expenses and costs for each dollar invested. With this in mind, the company issued $17.5 million of listed convertible notes in November 2020. The NAC notes provide investors with a listed exposure to a fixed interest rate of 5.5% and the possibility to benefit from an appreciation in the price of the company's shares above a conversion price of $1.15. And this is through an optional conversion into ordinary shares at any time until 30th of September 2025. The issue of our convertible notes provided the ability to increase the overall size of investment portfolio without diluting existing NAC shareholders, with the proceeds of the issue reinvested by the investment manager in a number of opportunities that arose during the year. The NAC notes are listed on the ASX under the code NACGA. During the financial year, a total of 718,000 of the 1 for 2 NAC bonus options issued in March 2020 were converted to ordinary shares. The NAC bonus options are listed on the ASX under the code NACOA with an exercise price of $1.03 and expiry date of the 31st of March 2023. The Board believes the long hold of NAC notes. The bonus options are a measured way to allow the company to grow over the next 2 years without placing undue pressure on the short-term performance and dividend reserves of the company. On behalf of the Board of Directors, I would like to congratulate the investment manager and their strong investment performance throughout financial year '21 and thank them for their continued efforts and dedication through the year. I'll now move on to the business of the meeting. Voting on all resolutions will be decided by 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 the 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 11:15 a.m. on the 9th of November. I've been advised that all proxies received for the meeting have been checked, and I declare them valid for voting. 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 passed provided not more than 25% of votes cast by or on behalf of shareholders entitled to vote on Resolution 1 are against the resolution. Resolution 2 -- Resolutions 2 and 3 are ordinary resolutions, meaning that to pass, they require more than 50% of votes cast by the shareholders to be in favor of the resolution. I'd like to advise that as the Chair of the 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. It brings us to the financial statements and reports for the year ended 30th of June 2021. This is the first item on the agenda, that is to receive these financial statements, director's report and auditor's report for the company for the year ended 30th of June 2021. There's no formal resolution required on this item. David Salmon, who is the company's auditor, is present. And I'll now take raised questions on the financial statements. Any questions, Rajiv?

No, David, no questions have been received.

Okay. We might just wait a moment.

No, nothing has gone through.

Okay. I now declare the financial statements and director's report as duly received and considered at the meeting. So now we move to the resolutions. The wording for each resolution and the proxy results received will appear on your screen. Resolution 1, the remuneration report. I propose resolution 1 as follows: That the company adopt 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, Rajiv?

Nothing has come through, David. [Voting]

Thank you. The votes are on the screen for the proxies. All right then, we'll move to Resolution 2, 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, be reelected as a Director of the company. Are there any questions regarding resolution 2?

No questions have been received, David. [Voting]

Right. Okay. The votes are on the screen for the proxies. Resolution 3, election of 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. Any questions?

No questions have been received. [Voting]

Okay. Again, the proxy vote is on the screen. Okay. So that brings us to the conclusion of the items of business. In a couple of minutes, I'll close the voting system. Please ensure that you've cast your vote on all resolutions. I'll now pause to allow you to finalize those votes. Okay. I'll now close the voting. Any other questions?

No, David. No further questions have been received.

Okay. I'll now to declare this Annual General Meeting closed. Thank you very much for your attendance and time. Final voting results will be posted on the ASX following the meeting. And I thank you very much for your attendance and time and support of NAC. I'll now pass over to Sebastian Evans, who will provide an investment update for the company.

Thank you, David, and thank you, obviously, everyone, for attending. As David mentioned, I'm the Chief Investment Officer of NAOS Asset Management. And as per all AGMs, I will provide a brief update on, obviously, the performance of the previous financial year as well as, I suppose, the first 3 months of this financial year. Next slide, please. This obviously just gives maybe a longer-term view of, obviously, the NAC investment portfolio performance since inception. So as David mentioned, FY '21 was an exceptional year, close to 64% for the financial year. But more importantly, I think when we measure ourselves internally, I think the most important thing to come across is that from a capital preservation point of view, we've really only had one negative financial year return, which was just under 3%. So very minimal. And the ability for this fund to generate reasonable, if not very solid returns year in, year out, has been very consistent now for close to -- coming up to its eighth year in FY '22. Pleasingly, for this fund, even though we had an excellent FY '21, this FY '22 has also started exceptionally strongly with the first 4 months of the financial year, we're just trading at 8%, slightly over an 8% return. How that translates for shareholders, I think it's obviously very important. NAC, out of all of our 3 lets, has probably been the one that has been under-owned by many of our investors, has the smaller shareholder base and it's probably the most illiquid, but funny enough, it's actually been the best-performing by some margin. Pleasingly, that performance has translated into much higher dividends over time. As you can see, the FY '21 dividend was a significant step-up by $0.005. And obviously, looking at that FY '22 initial quarterly dividend is a step-up again. So we're very proud to translate the performance, not only into dividends, but into fully franked dividends, which, if you were to gross it up, would be close to $0.50 now since inception. And when we're looking at the NTA, the NTA now was closing in on $1.70 on a pretax basis, albeit that doesn't factor in any dilution for the options, which we issued about -- it might be close to 12 months ago. And as you can see there, the long-term performance of this fund has been very good, over 18% per annum. It's still remaining very true to our label of being very concentrated in nature, and we just take holdings now. Providing an outlook and an overview, I suppose, for the structure of the fund in FY '22. As many of you would know, I provided quite an in-depth summary with Rob just in our quarterly presentation webinar update just a couple of weeks ago. So there's really just one slide here. But as we've said for some time, FY '21, even though our performance was very strong, I think we look back on it and feel that many of our investments were probably impacted negatively by the COVID lockdowns, probably a lot more negatively than we expected going into the second or third round of lockdowns. What that has essentially meant is that many of our holdings have probably experienced some form of delay or adverse event for the first 3, 4, 5 or even 6 months of this financial year. And in saying that, we feel like the investment portfolios across the group and also, obviously, NAC, in particular, remain exceptionally strong. And obviously, we started the year very strongly. We've mentioned corporate activity for a number of months now. And as many of you would know, one of our largest holdings, Over The Wire Group, have announced that they've received an indicative proposal from Aussie Broadband. And we don't believe that, that will be the last corporate action that will occur across any of our portfolios. Pleasingly, though, many of our businesses have still been able to grow organically and inorganically, we've seen an experienced group go through many years of probably streamlining that business and simplifying it and then coming into FY '22, making a significant acquisition to diversify that business and give it scale. EGH, Eureka Group, which is another port holding, we think will fully go through a similar transition over FY '22. But even so, our core holdings have been very strong. We've been able to hopefully find a few new positions such as Urbanise and a couple of others more recently. So we feel very happy about the outlook for the fund. It is exceptionally -- it's very high conviction. It's only 8 holdings currently. So we would like to broaden that out. That saying, that we won't broaden out for the sake of it, especially at the potential detriment of performance. So we believe that FY '22 has started very strongly. We also think that the second half of FY '22, hopefully, will provide much more momentum to this fund, especially considering some of the tailwinds behind some of our core investments. So if anyone does have any questions on this presentation or just the fund in general, don't hesitate to contact me or any member of my team here, either by e-mail or phone, and we'll endeavor to get back to you as soon as possible. But as David said, obviously, thank you very much for your support. We appreciate everyone remaining NAC shareholders and welcoming all the new shareholders who joined us over last financial year and now this financial year as well. So thanks again, and enjoy the rest of your week.