NAOS Small Cap Opportunities Company Limited (NSC) Earnings Call Transcript & Summary

All right. Good morning, everyone. My name is Sebastian Evans. I'm the CIO of NAOS Asset Management. Clearly, this is -- we're doing a webinar for this. Normally, we would hold our -- I suppose, our half year roadshow around the country. But unfortunately, as many of you would be aware, we're unable to do that in these extraordinary circumstances. So hopefully, this does work. We've been through -- we've had a few run-throughs, but I must admit seeing a few other companies doing these recently, they haven't gone as well as they should have. So if there are any issues, obviously, e-mail inquiries, and for those of you who know me, I'm sure you can just send me a text, and we can try and fix any issues that come up. Just for those of you who want to know in regards to asking your question, the best way to do it for this webinar is either e-mail inquiries at naos.com.au at any time or you can actually write -- if you're on your computer, you can write your question based through the software and then it will go through the Jules, and Jules will run through every question at the end of the presentation. So I will get straight into it. The first slide obviously is a just introductory slide. Clearly, this is -- it would normally be a half year update. But in regards to what is going on globally and domestically, I thought it would be more of an update on the portfolio, and obviously, the ramifications with COVID-19. So we'll go past the disclaimer and then go straight through the investment beliefs and competitive advantage. I'm not too sure if the slide is changed or not. Has the slide changed, Ben?

Yes.

Here we go. Yes. It's turned in. So this might be a bit clunky. So I know I go through this slide a lot and I'm sure many people will be sick of it, but I'll go through it again. So I think it does provide a framework for how we invest, and hopefully, how we can invest successfully through these times. We have added a new one here, but just going through the top 3. As everyone would know, we invest in value-type businesses, but we expect all of them to grow no matter, I suppose, the ramifications at a macro level or a domestic level. Clearly, we are very concentrated. So this is really going to put us to the test when we only own anywhere between 8 and 14 positions in all of our funds. We take a very long-term view. So we're not traders. We're not looking to sell some positions and go into placements and then sell them out again and then look for 50 new investments in these extraordinary times. We're really focused on performance versus liquidity. Yes, some of our positions are illiquid. And I think you've already seen many funds and investors look to exit these illiquid positions simply because they run open-ended funds. So it's a big advantage for us running a closed-end structure, whereby we're not forced to sell these positions, thankfully. We don't follow the index. And clearly, that can be beneficial. But at the same time, it can hurt us from time to time, especially in bull markets, and we tend to only focus on industrial-type businesses. And then finally, and this is probably an interesting one, because we've seen a lot of change recently around this, we tend to invest in businesses where the management are firmly aligned with equity holders. So they will -- they tend to have large ordinary equity positions in their businesses. So therefore, they're highly incentivized by the share price performance. We have a strong ESG screen. And the new one we've added at the end there is, we tend to engage constructively with management teams and the Boards of our respective investments. So we're not activists, but as you would know, we often own 20%, 25% positions in some of these businesses. So we try to engage with the Board and management teams and discuss things like capital allocation, acquisitions -- funding of acquisitions, broader long-term strategies and even just generally communications with the market, and we feel that gives us a big competitive advantage relative to some of our peers. Moving on to the next slide. And yes, I brought this up just because -- yes, I think it's worthwhile saying this from a NAOS' point of view, but we've been saying this in the letter I put to shareholders recently and in our month-end reports. But the fact remains, we don't know what is going to happen either tomorrow or in the next 3 months or 6 months or 12 months. Everyone would have seen some of the capital raisings that have been completed, Webjet, Flight Centre, some of these businesses have raised enough cash for the next 12 to 18 months. And I think I find it very hard to believe how you can make a sound investment in some of these businesses where they've got 0 revenue today, but only enough cash for the next 12 months. So a lot of people have been asking us, "Well, what are you doing about your own portfolios." And I think it's the most topical question and probably the most or the best question you can ask the investment team. And the first thing is ensuring all of our investments have enough short-term liquidity. So they've got enough liquidity to keep the lights on and pay the bills and get through a period of very low revenue, in some cases, no revenue for certain businesses. As many of our long-term shareholders would know, it's always a big part of our investment process. Sometimes we're criticized for it. We don't tend to invest in businesses that are highly geared. And thankfully, in this case, that served us very well because we don't believe 90% to 95% of any of our businesses will be requiring equity in any shape or form. The next one is obviously a little bit harder to manage because it really depends on, I suppose, the long-term outlook for equity markets and the economy in general. I'll just go back one slide, Jules, sorry. Yes, it's long-term solvency. So can a business meet their long-term obligations? And obviously, with things where they are today, it's simply too hard to know if you're in the travel industry or hospitality industry, for an example. If you own your assets, well, that obviously puts you in a much better position. I think as we've seen any business that has -- is in lockdown but has no hard assets, it puts them in a very hard position. And some of those businesses that have been invoked for a very long time, everyone's been talking about you don't want to own assets, you want higher ROIC businesses or return on invested capital with no assets and generate lots of free cash flow, which is fine when things go well, but when things come to a grinding halt, it can put businesses in a very vulnerable position. But we feel very, I suppose, comfortable with the long-term solvency of our investments. The quality of our investments, I think, this is the thing we can be very proactive about. And Ben will touch on a slide later on in the pack, but it's interesting to note that the premium quality investments in this market have come off just as much as what people would consider low quality. People -- Ben will give some examples. But even yesterday we were looking at Seek as an example, Seek's gone from $24 to $14. And clearly, they're going to be hit hard as no one's looking to employ really apart from the grocery chains, but a good business, almost a monopoly-like business. We can find those quality businesses that have sound long-term trends as well. So things like an aging demographic. Health care is another example. Some of the ones we've looked at before. That's how we can improve the quality, I suppose, of our portfolio, and we think that all place us in a very sound long-term position. Another example we've been looking at is radiology, as an example. So IDX, high-quality business, gone -- went from $4 to $1.78 at one stage, now back to about $2.10, but essentially halved in an industry that has sound long-term fundamentals, albeit no one go to the radiologists currently. And then obviously, the most important one for us is prudent management team. So management teams that have been through this before, whether it's a significant cost-cutting exercise or an extreme event and are able to handle not only the financial side of the business, but more importantly, and just as importantly, I suppose morale and staff morale within a business and long-term strategy. So going on to, I suppose, the implications from a business point of view. Clearly, some of these will sound obvious. I think it's gone to the next slide. So what we've seen across the board in, I would say, 2/3 of our businesses is, there has been some revenue reduction, whether or not you operate. Good example is funds management. Fund managers have definitely seen a reduction in revenue. But some of the ones we've been hit harder, I mean the most obvious one is our newest investment, which is Experience Co. They operate -- they are Australia and New Zealand's largest provider of skydiving experiences. In today's environment, you're not allowed to do a skydive for obvious reasons. They also do tourism charters up on the Great Barrier Reef. Clearly, that is on hold as well. So they basically have $0 worth of revenue today. Some of the more, I suppose, softer examples would be things such as Enero that does PR. Clearly, when you look at -- I'll use the example of Flight Centre, we were on that call yesterday. They're planning to cut, I think, their cost base from about $240 million to $60 million per month and the 4 buckets they used, I think was staff, CapEx, rent and marketing. So clearly, marketing and PR will be under pressure in certain businesses, albeit Enero does operate in that technology space. There are plenty of other examples. So as I said, health care there. And then obviously, the issues arising from bad debt. This is the one that no one knows about, and a lot of businesses are very concerned about. So if you have -- if someone owes you money, clearly, you would expect that money to come in. But if that counterparty is under pressure, chances are they will definitely extend terms. And in some cases, they may not pay for a very long time. But under some of the rules that have come in under the recent government changes, you're actually not allowed to chase that person very hard or that business for money, let alone take out legal action. So it puts businesses in a bit more of a bind. Clearly, they want the best for their customers, but at the same time, they want their cash flow to run their own business. Cost structures is a big one. Everyone talks about a fixed cost base. If you have a high fixed cost base, unfortunately, with no revenue, you're going to be in a very, very tight spot. AXP is a good example. But clearly, they have no revenues, but they've got a very high variable cost base. So planes aren't flying. They're not paying for the planes, the pilots, the casual staff and so are the jump in structures. So they can take a lot of cost out of that business. But unfortunately, some people just aren't able to do that, the big ones, the retailers. And I think we don't have any retail exposure. Once you've really analyzed that, it really comes down to funding. So I've really used 4 buckets. In essence, this is how businesses can get through. And the first one is the ability to use cash reserves. So hopefully, a business has cash to pay the bills in the next few months. If they don't, then generally, they'll have a facility which they haven't drawn on, so they can use those funds to draw down on or in some cases, they may have assets, which are unencumbered and they can get debt facilities against those assets to keep the lights on. We've entered the third point now in a big way. So company is raising money. Everyone's talking about Cochlear. Cochlear was the first one that ever raised equity as a business. A lot of businesses, especially the top 50, are going hard and going early. Oil Search raised $1.2 billion last night. And then the last 4 and 5, we haven't really seen yet, but it really comes down to can businesses just have to do a complete recapitalization. So that ultimately means the debt holders will own that business at some stage or the fifth point is it just becomes insolvent because the long-term fundamentals relative to the capital structure of that business just does not make sense. And the fifth -- the fourth, I suppose, box, I wanted to touch on is long-term demand. A lot of people think what we're going through currently will change long-term demand thematics and the way we really do work and go about our daily lives. So whether it's do we now need this office space, do we need this much office space, do we need to travel around Australia to see our investors or see our investments as regularly as we do or are we better off using a webinar or a Zoom conference call, things like that. Will people consume as much as what they did, I think, is really the big question? Will people want to go on holidays? Will they be a bit more conservative? And I think it's all well and good for these companies to raise the money that they are now, but I think for people to say that things will go back to normal in 12 months or 18 months, I think, is a very big if. I think the way people will spend and the way business will spend will change almost forever in some cases. And that will mean how a business was valued 3 or 4 months ago is not necessarily how something is valued today. And just on Slide 6, this looks at all the stocks or a majority of the stocks within the portfolio. So this really looks at -- we've tried to pull out some of the positive contributors to performance over the past month or 2 and some of the more negative ones. And we're being very transparent with our investors here. As you would know, we don't release our holdings, we do tend to talk to them a lot. But in this case, we're showing you some of the effects within the portfolio. So for once, I'll actually start with the positive effects. As you would know, MNF is the largest position or one of the largest positions across the group, especially in [ 2 funds ]. And surprisingly, they've actually been up. Their relative performance was almost north of 40% relative to the index. And they've been a big beneficiary simply because they operate a voice network over the internet that provides a lot of these over-the-top providers, such as Zoom and people who do webinars, the ability to hold these services. In talking to that business, they believe the usage through their network is up almost 80% on what it was not that long ago, almost to the point now where they've doubled the size of their network, it's now full. And they're in the process of looking to increase the size of that network or double it. Again in what would normally take 12 months, they're trying to do it in 3 weeks. I think when you go through the rest of them, and Rob's going to go stock by stock, but as you can see, it's the businesses that have more of a variable, I suppose, revenue base have been hurt the most. So Experience Co., I've mentioned before, People Infrastructure does workforce management. Well, obviously, where people aren't doing hiring, they'll be under pressure, albeit they do have a health care exposure. Enero in PR, Consolidated Operations Group in finance. I haven't even mentioned finance yet, but with the banks today looking like they won't pay a dividend at all for the next 3 to 6 months or defer it at least. If that's a big 4 bank, I think that gives you a very, very good insight to how some of these more non-prime finance businesses would be going in regards to bad debt and funding challenges. Then you can see we've had -- thankfully, we've had a few more neutral examples. So Saunders remain unaffected, BSA does a lot of work with NBN, and clearly, lots of people using the NBN. So therefore, NBN would be trying very hard to ensure that their network is up to scratch. So we've got a very good, I suppose a varied response from some of our businesses, and you can see that's very much reflected in the share price movements of those stocks. I'll now pass on to Rob who will go through all of the positions within the portfolio.

Thanks very much, Sebastian, and thanks to everyone for dialing in today. Jules, can you just put on the next slide, if possible?

Yes, sure.

Yes. Thanks very much. So over the past few weeks, we've done extensive work in terms of the investment team here going through all the core operations in all the companies that we hold, speaking with the management on a very regular basis. Understanding what the drivers are, both positive and negative, and certainly understanding the balance sheet and liquidity requirements and positions that all these businesses are in. What we try to do today is -- the way we think about it is we've got some that are certainly benefiting from this situation, some that are in a neutral situation and then some that are certainly having negative headwinds based on the COVID situation at the moment. So coming to the positives first here on this page, the clear kind of trend is the work-from-home environment and the move to digital communications, which is in one way, shape or form driving the 3 of these businesses listed here. Firstly, with MNF, I won't touch too much on that given that Sebastian has done a great job already. But as our largest position, I think the key here is why they're getting the benefit from the likes of the Zooms, the 8x8s and Ring Centrals of the world, all these webinar and online digital communications platforms is that their network can provide these next-generation software companies with the services that they need, although the other companies out there, all of the other infrastructure, Telstras of the world may not be able to provide the same services and on-time that MNF can do. And the key for us is the core earnings here, the recurring best part of the mobile phone numbers that are used. The more people are using the voice traffic, clearly, you need more numbers, and that's the real growth engine of this business going forward. Secondly, coming to BSA. Obviously, they are a direct beneficiary of the NBN rollout and the maintenance of that. More stress on that network and the more use. Clearly, there's going to be a requirement for more maintenance. Again, a very strong net cash balance sheet at the moment. And with a field force of thousands of subcontractors in some way, shape or form and NBN being a government organization providing them with work is a way of getting stimulus out to wide market. Thirdly, Over the Wire. Again, a beneficiary of the higher voice and data usage that we're seeing across all the telco providers out in the market at the moment. But I guess also the softer side of their business in terms of cybersecurity and hosting and managed services. Everyone is working from home and the companies are going to the digital thing and bringing a lot of their -- maybe their medium-term plans forward. It's a company like Over the Wire, which can provide those services. And the key for us is most of their revenue is recurring in nature. Coming on to the neutral investments. Jules, if you wouldn't mind skipping forward a page. Thank you. So I guess the way we're kind of looking at these neutral terms is there may be some slight ups and some slight downs. But overall, it's typically business as neutral or business as usual, I should say. Firstly, with Saunders, which is a tank and sales business. We had a good chat with them yesterday. Their key customers are very large organizations, such as Sydney Water and RIO and the Department of Defense. It's unlikely that there's going to be any sort of risk in terms of those particular projects going ahead at the moment. So we're very comfortable with them in the business-as-usual scenario. Eureka Group. It's important to say this one is independent seniors living, and it's not aged care. Their business had put all the protocols and what not in place that you would expect of a company in that situation. They're trading below net asset value. And again, it's pretty much business as usual there. Their revenue line item is predominantly paid for by the government in terms of the pensions. Thirdly, Wingara, which is our hay and meat processing business out of Victoria. It's pleasing to have some agricultural exposure in the portfolio at the moment. We expect quite a few people in the agricultural space of late, and all indications are that things are quite positive. I guess the key for them is they've done their hard work for this season in terms of their hay operations. They're now in a situation where they sell that hay over a 12-month period. All their customers, a lot of them are export customers, up in the Asian markets. They haven't seen much problems to date in terms of logistics, getting them the product they need. What is also important to note is those customers are some of the largest dairy and agricultural trading houses in the world and the products that Wingara are providing are very essential for some of the diet of the agricultural livestock that these companies have within their portfolios. And also on the blast freezing and meat business, it's key to note that they don't actually own any of the meat. It's simply a toll processor, and that service is very much still going ahead at the moment. They've paid down a lot of their of debt of late and they're backed by hard assets, albeit they are in a net debt position at the moment. Coming on to the Big River. They've got operations in New Zealand. And unfortunately, they've had to close that down for the foreseeable future. What is pleasing though is there's still been inbound inquiries and potential future sales based on the operations in New Zealand. So yes, it's a halt at the moment, but we don't see that being a long-term thing. In Australia, of course, you're going to see -- likely to see residential construction and potentially commercial construction come back a bit, but Big River are also exposed to the infrastructure side of the construction market. All those construction markets are clearly still open today. That infrastructure has been spoken about as a key driver to get us out of the hole that we're in at the moment as an economy. It's also worth noting Big River is a 100-year-old business. They've survived many cycles in the past. They've got flexibility in their balance sheet still at the moment. So we're comfortable with that being somewhat of a neutral exposure. And finally, Objective Corp. It's an enterprise software with public customers in terms of being councils and local and federal governments that use their software. They're in an absolutely excellent position given their balance sheet, $35 million of cash and no debt. They could benefit from the work-from-home kind of thematic over time, but we thought it was too early to say that. So we put it in the neutral bucket. But very happy holding that at the moment. If we can skip on to the next page, please, the negative impacts. Thank you. So firstly, COG here, Sebastian has touched on it briefly already. But I think the key thing here is they've actually ceased writing SME loans. That's probably a good move in the market given there's likely to be delinquencies going forward. What's pleasing for us is now that this loan book has been shut down, that's in runoff mode where they should receive in excess of $20 million of cash over the next 2 to 3 years. A lot of that is front-ended in the next kind of 18 months. So it's a pleasing result for us in this market with COG, and what's best is that cash can come back to the parent company with very little cost. The broking businesses are actually seeing a bit of an uptick. Last time we spoke to them. Obviously, the stimulus measures are in place now, that should be a positive going forward. And the key for us as well with those businesses is they're highly cash generative. Coming on to Enero. Again Sebastian has touched on this already, but marketing and PR services clearly cost out for a lot of businesses and will suffer. But I think what's important to note for us with Enero, it's not a dire straits situation at all because they've got a very, very strong net cash balance sheet. Some of their key customers are the likes of Aldi, Facebook and Adobe. And a lot of those customers are actually seeing some sort of benefit in this environment. And also -- what is also good to note is that their cost base being highly variable, over 80% of their cost base is in staff. So should the revenue line drop, obviously, you can match your cost base accordingly. People Infrastructure is actually in a trading halt today to raise money for balance sheet and also future acquisition purposes. This business has been -- in terms of the share price performance has been very weak over the last month. They are obviously placing workforce into health, IT and other areas. Generally speaking, some of their businesses will certainly suffer in terms of minimal hires going forward. But they are the largest provider of nursing, IT on the Eastern Seaboard -- sorry, nursing placements, and that is likely to see quite a benefit given the stress on the hospitals at the moment. So we're very happy that they've reassured their balance sheet today, and they've got acquisition opportunities, hopefully in the future at lower prices. And finally, Experience Co down the bottom. Obviously, they shut down their operations at the moment. I think what the market might be missing and what we're comfortable with is their liquidity position going forward. We believe they've got well in excess of 12 months' worth of liquidity in terms of their cash and then further more with their debt facilities as well. They can really wind that cost base of theirs quite significantly over time because a lot of it is variable. And so however the longest period continues, we think they certainly survive and come out the other end with a stronger position to be able to buy future businesses. So that's the summary of the portfolio at the moment. And with that, I will hand back to -- hand over to Ben.

Thanks, Rob. So having a look at Slide 10. As Sebastian mentioned at the start of the presentation, the selloff hasn't been purely confined to poor quality businesses. It's really been quite indiscriminate selling across the board. And even the impact on what we would call the quality businesses has been quite severe. So the average shareholder return for March for companies on the All Ordinaries Index was down almost 21%. Only 43 companies produced a positive return and 450 had a negative return. So it was quite hard to escape the savage selloff. And then of the larger companies, companies with the market cap of over $1 billion, there was only 14 with a positive return. And if we click on to the next slide, Slide 11. Okay, so what we're showing here is just the impact on certain businesses, which we perceive as high quality in various sectors across the market. Starting with funds management. Pendal Group and Macquarie, and you can probably also put Magellan in that category as well, share prices off between 35% and 40% for the month. Obviously, these businesses have a recurring revenue base in their base management fees. However, the significant drop in the market has meant that the businesses have a lot of funds under management, and therefore, lower fees to go with it. Just an anecdotal point that is worth mentioning, which was spoken to with other people around the market is, we're really yet to see a significant level of redemptions or outflows from some of these funds, which potentially will place further pressure on the market. And I guess a good example of that is the government's policy to allow people to access $20,000 of their super funds. The money coming out of some of those large super funds, obviously, the most liquid assets that they own will be held in the stock market. So if that money all comes out at once, then potentially that's a good example of an outflow, which we'll start to see impact to the market over the coming months. If we look at some of the software providers, so AD8 and REA Group are the 2 that were called out there. Not sure whether it relates to AD8 or not, but it's worth noting that a majority of these software companies or software-as-a-service businesses they're yet to prove their business models in a recession. A lot of them are quite new and have only been listed for a couple of years. A lot of them also talk about their high levels of recurring revenue, which I guess in times like these, will really see how recurring their revenue is. But it hasn't just been the smaller players which have been hit. Obviously, REA has come under a significant amount of pressure as well. If people are unable to buy new homes because they can't afford them or listing volumes go down, then someone like REA will be affected. Probably one of the most obvious impacts that we've seen so far has been across the real estate investment trust sector and in particularly some of the shopping center real estate trusts. So many tenants have temporarily ceased trading, and they've also stated an intention to not pay their rent during the closure period. So Scentre Group, which is the portfolio of Westfield assets in Australia, the share price is down 55%. I'd be very surprised if the valuers of those assets mark their values down 55% from here. But clearly, there will be an earnings hit as some of their tenants are unable to pay their rent. On the other side of that, though, the banks have so far stated their intention to allow the deferred payment of interest and principal. But the question then becomes what is the longer-term impact on the landlord? And in the case of shopping centers, Australasia, I mean their portfolio is quite heavily underpinned by Woolworths. And anyone would know that supermarkets in this environment have been one of the better performing categories. But notwithstanding that, share price is still off 25% as the rest of their businesses within their malls suffer. Education. IDP Education is probably a fantastic example of a quality business in that space. They do English language testing for people coming into Australia. The issue is obviously with people's ability to enter Australia significantly impacted, then it will impact IDP's business as well. And we saw that company raise some capital last week, which I think is probably a prudent measure and will potentially get that company through. But a high-quality business that's had a significant impact to its revenue. And then finally, just the health care sector. Companies like Ramsay Healthcare, the hospital group, which you would have thought is a very, very stable asset. What was seen lately is that Stage 2 and Stage 3 elective surgeries will no longer be allowed and that's to increase the capacity of hospitals for COVID-19 cases. What we're seeing at the moment as well is actually a lot of the hospitals are not full because they're winding down some of those elective surgery type operations and clearing space for people potentially coming in for COVID-19-related symptoms. And then also to Pacific Smiles Group, the dental care industry -- so dental care player, stock price down 40%. Dentists currently have to put their operations on hold. That's certainly a sector which one would have thought would be very defensive and very high quality in nature as people continually need to go to the dentist. But unfortunately, in a selloff like this, it's a stock that hasn't been spared. And so if we click over to Slide 12. So what we're trying to show here is the market over long term since 1987. This is a chart of the All Ordinaries Index since 1987. And just some of the issues that were seen in the market across that time, there's obviously been 2 Australian recessions, with the last one being in the early '90s. We've seen the stock market crash in 1987, the great bond massacre in '94. Obviously, the tech wreck in September 11 in the early 2000s, the global financial crisis and then when U.S. lost its AAA credit rating, all of these -- and then obviously, today, with what's happening with COVID-19, all of these events have had a significant impact on the market. And the media commentary has been particularly bearish at every single event. The issue with these events since 1987 is that they don't really show a similar event as to what we're seeing today. To get something, I guess, comparable, we have to go back all the way to 1918, where we had the Spanish flu. Now we've gone ahead and looked at -- kind of looked at what the reactions were during that period. And they were very similar to what we're seeing today. So that flu killed about 6,500 people in New South Wales and many more around the globe. But the response was very similar. So all library, schools, churches, public transport, theaters were all closed. And New South Wales government also put in a client's protection program to support businesses that were affected by that flu pandemic of having to be shut down. So it's a very similar environment to what we're seeing today. But what's interesting is that during those periods, during 1918 and 1919, the All Ordinaries despite having a severe selloff initially actually rose 11.5% in 1918 and then 18% in 1919. And since that time, from 1917 to 2019, the Australian stock market has delivered a return of 10.2% annualized each year. So I guess the point we're trying to make there is that, yes, these incidents are severe and they're quite scary because you're obviously seeing portfolios lose an incredible amount of money in a very short period of time, but as Buffett and Munger always say, that [ the price of admission for ] investing in the stock market is that at some stage in your career, you're probably going to see your share prices fall by 50%, which won't be easy to stomach. But when that happens, obviously, the logical response is to sell out and go to cash where what history would tell us is that's actually been the wrong response over time. And if we go to Slide 13, so what I've shown here is, again, since 1987, there's been 7 cases of the market falling in the order of 20%, which signifies a technical bear market. So on the far left-hand side, that red line is what we're seeing today. So you can see that it's been the fastest fall that we've seen, even faster than the crash in 1987 from the peak of the market. The line in the middle there, the orange one, is the GFC and then the black line, which looks similar to the GFC, although not as bad in nature, is the early '90s where Australia obviously had a recession. So I guess what to take away from this chart is there's no formula for how far the market can fall or how quickly or how long the bear market lasts. But as I mentioned before, panicking once the market has already fallen and significantly increasing cash levels has historically been the wrong way to behave in a market that falls as what we're seeing today. And so with that, I'll hand back to Sebastian for Slide 14.

Thanks, Ben. I believe everyone can you hear me. So just going on to the next slide, just finishing off from where Ben touched on, obviously, the bear market since 1987, I think -- but we're spending a lot of time doing, clearly, for the last 4 to 6 weeks, really, everything has been on ensuring the liquidity, and as I've said in the letter, the survival of our current investments. And I think that's the most imperative thing you can do is because going through the GFC myself, everyone went down at a similar rate. I mean it could be 17%, it could be 30%. I think some other performance figures might be 40% or 50%. So there's a varying range. But I think what really changed or what set people apart was the recovery and what they've invested in and, obviously, the subsequent performance of that. If you can be in businesses that don't require a recapitalization or they're not impairing large bad debts or there's no structural change in their earnings profile, then obviously, they will recover at a greater rate. If you can get the earnings to increase, obviously, over a 3- or 5-year period, then also the PE to increase at a similar rate, then you can ultimately make 2, 3, 4x your money in reasonably high-quality investments, and that's obviously what we're looking for. But I do feel, and I think a lot of people do feel this as well, which is a bit of a worry, that, clearly, the market has recovered to a certain extent. It's almost probably, give or take, 10% to 12% off its lows. And we are probably more cautious than what the market is implying. And I think the reasons for this are in this slide. And I've mentioned this before, but no one knows how long these restrictions are going to last for. We've heard all sorts of anecdotal evidence from people who are quite high up in government to people within industries. And it's just things such as when will international clients be allowed to return, when will international tourism return, even interstate tourism? Schooling, education are big ones. Health care is a big one. When will private hospitals be back up and running? When will elective surgery be back up and running? These are probably the most critical questions. But I think, as I said, to minimize that risk, you've got to invest. You've almost got to take the question away and try and invest in the industries that you know will be there regardless whether it's shut for 12 or 24 months. I think leisure, tourism and travel, I think that's a bit of a question mark. When you look at private hospitals and elective surgeries, that's a given. If people want a knee reconstruction, it's going to happen regardless of whether it's in 6 months or 24 months. So that's where we're looking for investments. It's the same with radiology. How sharp will the demand recovery be? All the bears are talking about government debt, the amount of debt the public sector has taken on off the private sector, how will landlords deal with this situation and tenants. And everyone's saying, one of our investments, as an example, I won't -- they are a tenant for a very, very large rate, almost probably the largest rate in Australia without giving away the name. But to give you an idea of what they were after, they'd expect if we're going to give you 2 months' rent-free, then we'll do it, but we want a 2-year extension. Now in our view, that's not overly equitable for both parties. So I think questions like this still need to be answered. And as I said before, will the consumer bounce back as hard as what people think. The U.S. economy is driven by the consumer. But as soon as everyone comes out of this, we are going to go on a domestic or international holiday and spend X, Y and Z just to give ourselves a breather. I would probably argue not because so many people have been put out of a job or even just put in sort of hibernation phase in small business. I think there'll be a lot of catch-up to get these businesses back to break even and profitability and to profitability of what they were prior to this. And we just don't know how long that's going to be. And then the last 2, I've mentioned structural demand changes and long-term credit issues. In the finance space, Rob mentioned and we've mentioned before that consolidated operations group have closed their lease books. They've just taken a view that it's a better use of their shareholders' capital to get the cash back out of that lease book than to continue to write loans. Afterpay have put out a -- they're holding an investor conference call on Tuesday. The million-dollar question is, are they seeing bad debts? The bulls would be saying, well, now everyone gets a job keeper or a job seeker payment so that basically makes Afterpay immune from the bad debt cycle. Some people would argue different ways. But I think from our point of view, the bad debt piece is very real, especially if you're a big bank, unfortunately, because they've been taking the brunt of this because they're so well capitalized as opposed to what they were in the GFC. So we'll be steering very clear away from finance companies, in our view. Obviously, we were lucky enough in hindsight to completely sell out of CGR or CML Group, and that proved to be an exceptional outcome for us. Thankfully, we're only left with one finance business. So just going on to the next slide. And this just touches on our performance figures of all the portfolios across the years. We don't hide from it. We wanted to make this very clear. We wanted to be very transparent and upfront with all of our investors. We've always said we want to preserve capital for all of our investors. And yes, clearly, when I look at this slide, leading this business, my stomach tends to, I'm not going to lie, sinks, sinks to a very low place. But I think for myself, I'll try to put it in perspective. And I think when you look at NCC, as an example -- and NSC is really only down 11% for the financial year. We are a very real prospect depending on where you think the markets are going, hopefully, driving potentially getting a better result than where we're looking at today, hopefully, a breakeven result in what's been an awful stock market. I think when we look at the structure of the portfolio, I would say that this really does show -- a lot of people would say, when you run concentrated portfolios in microcap and small caps and small to mid-caps, that we should have performed a lot worse than what we should have. And I would argue that's definitely not the case. If anything, we've performed better. So the key for us, I don't want to look back in the rear-vision mirror, but the most important thing we can focus on is how we get out of this. That's going to really make -- in essence, it's going to really make or break NAOS. It's how we invest in the next 3 or 5 years. It's not about falling in love with our current investments, it's really making the hard decisions, and we've already made a couple already. And saying, well, yes, we used to like that as an investment, but relative to where we are today and what we can invest in, in other businesses at different multiples and different industry trends, we're better off swallowing our pride and taking the loss and putting our capital -- shareholders' capital into a much higher quality business that we believe will drive a much stronger risk-adjusted return. And it makes you feel awful, and it makes you feel sick, you've got to do it because it's shareholders' capital, and we're here to get you the best risk-adjusted return that we can. And these are once-in-a-generation event, albeit we've gone through -- unfortunately, we have gone through 2 of these in the last 10 or 12 years. And that's what you need to do. And if you can do that well, you'll come out the other side in a much stronger fashion, and that's what we're ensuring we'll do across all investments. And I would say that -- the other thing I would say is, some of our investments, if they can find the right acquisition as well, they'll come out of this in a much stronger fashion. So if we can help fund that that also puts us in a very good position. Just on Slide 16, this is probably going to be the most topical slide. We've had plenty of e-mails on this, and we wanted to make this as clear as possible. So dividend history and profit reserves. Everyone's asking us what's the dividend going to be and how much -- what's your profit reserve look like. So you can see here for each of the funds, we've put what our dividends have been since inception and then what they have been, including franking credits and then what our profit reserves are. So I'll just use NCC as an example because it's the easiest one to do. NCC has roughly $0.31 of profit reserves. We pay, I think, based on last year, $0.075, gives us, give or take, 3 years of profit reserves. So we feel like -- I will make this big disclaimer. This is a Board decision, not my decision. If we were to maintain that dividend, then that gives us 3 years of profit reserves. If you look at NSC, we've paid $0.01 quarterly. Well, you would argue, that gives us more than 4 -- 3 years, close to 3.5. And then for NAC, it probably gives us close to 3 years as well. So give or take, funny enough, they're all within 3 years of profit reserves. But the bigger issue, and I want to make this clear, is franking does become a little bit harder for these businesses, so our LICs. To get franking, as anyone would know on this call, you need to pay tax or you need to derive a franked income from some other place. So generally, what we've been able to do is to sell profitable positions at times to pay tax or supplement them with special dividends from takeovers as an example. Clearly, in this environment, we haven't seen too many takeovers being completed. We would argue that's probably going to change in the next 3 to 6 months. So we may be able to supplement them. But the bigger issue will be tax. Clearly, we're not paying tax for the next 3 to 6 months. Depending on what the market does that might change. So I will say franking is definitely much tighter. We feel comfortable for the next dividend but any time after that. And this is how we've run the LICs. It probably gets a little bit harder, and we're probably relying on 2 variables, which we probably don't have too much control of. When looking at the profit reserves, these 3 LICs, I would argue, look stronger or the strongest of any of our peers. And just to finish off before we get to questions, there's lots of questions. So from a NAOS point of view, as I said, short-term earnings are irrelevant. You don't know what they're going to be. It's purely guess work. No one knows what short-term earnings are going to be. It's really just purely about business survival, business strength and ensuring there's long-term viable strategy that's adequately funded. We've got to ensure that we can upgrade the quality of our investments, so the quality of the businesses, the quality of the investment teams, the management teams and the quality of their balance sheets. That's imperative for us, as I mentioned and really focus on those long-term trends. We're not the smartest people in the room. So if we can invest in high-quality businesses with sound long-term trends, you look at Cochlear, for example, they've raised $800 million, and it was my understanding they had total bids for almost $6 billion. Those quality businesses are in high demand, and they will survive. And the one thing I haven't mentioned is we don't know what earnings are going to be, but the one thing I do feel comfortable about is, I do have a very strong feeling that valuations will increase over the longer term and the reason being that cash rate is 0. So when we come out of this and people are looking at their term deposit or even house prices or whatever it may be, then they think, well, I'm probably happy to have a little bit more in equities or pay a bit more for equities because they're giving me a fully franked income or they're giving me a bit more growth, maybe I'm happy to have a bit more in Cochlear that's paying me 2% fully franked because it's a sound long-term business and a good industry structure. And as we always do, we focus on long-term valuation scenarios, and I gave an example in there. Using Enero for example, it's gone from $2 to $0.80. They will not be raising money. They've almost got $20 million in the bank with no bank debt, and we would argue they're trading on 6x bear case earnings. And it's our understanding that they really haven't seen a material effect in their earnings yet, but we have no idea what's in store for FY '21. So we've really got to focus on the longer-term scenarios and what these businesses have earned previously as long as we feel that, I suppose, industry fundamentals haven't changed too much. As always, and I added this one in very late in the piece, and this is what does make me more nervous than anything, I must admit, is going through the GFC and coming out, small caps always lag. And the reason they lag is a few reasons; the forced selling and the indiscriminate selling is last to happen in small caps, and obviously, it hangs around for a lot longer because there's no liquidity. If someone wants to sell 3 million or 4 million shares in something, it can take months. I think we'll see a lot of funds exit the small and mid-caps, the small and microcap space, and obviously, that takes time. Everyone is going to buy a CBA before they buy a consolidated operations group, if you can even try and say them in the same sentence. So I think people need to be aware of that. We may go through periods where the market is up 10% or 15% or we may not be up at all. It's just a fact of life. But what we can do is we can definitely catch up and, hopefully, definitely exceed the index return over the longer term, assuming we make the right investment decisions. So with that, I'll now go to the questions, which I believe Jules will be reading out the questions if I got this correct.

Yes. Seb, you there? Can you hear me, Seb?

You there, Jules?

Yes, I'm here. Can you hear me?

Sorry, I turned it off. There you go...

No worries. You probably covered this one in the dividend slide, but a few people have asked so just to make sure that we go through it. And there's a second part to it as well. So this question comes from Peter. He says given NSC has strong profit reserves, how likely is that NAOS will continue to pay quarterly dividends? And how will this be balanced against the share buybacks. If you could be able to sort of raise that share buyback question. So if you could address that...

Yes. So -- yes, great question. I can happily say we had a very, 1how to say, the Board meeting was -- discussed this topic at great length. And I think it's the right thing to do. Clearly, to pay -- I've spent a lot of time when we started this business in NCC. We've managed to maintain and grow the dividend every year, and that's something I'm very proud of, I think all of us are very proud of. But at the same time, you've got to consider some other variables and the other variables are, well, if we can buy back shares, like in the case of NSC, I think the NTA is $0.60 relative to $0.44, that's a huge discount. So you would argue what we -- it would be wise once we believe that the market has probably calmed down a bit to obviously be a bit more aggressive in the buyback. And then the third point is we're obviously seeing some opportunities in regards to businesses that require money or may need money in the future. And the return we may get out of those investments may be even more accretive than what a buyback would be. So they're what we're trying to sort of manage. There definitely will be a dividend. There's a wide-ranging view on whether or not should it increase, should it be maintained or should it fall slightly relative to the share prices. Ultimately, it'd be a Board decision. But as I said, at least we're in a very comfortable position that we do have the reserves there for a rainy day.

Great. Thanks. Next question is in relation to COGs. This is from Mel. He's saying nonbank lenders have been widely affected. Is there a scope for mergers with competitors, for example, Thorn Group over time as a way to restructure these businesses and make sure they survive through the tough times?

Yes. Good question. So I think I've probably touched on that before. So COG has made a decision to get out of nonbank lending for that particular reason. So COG is just a distribution business. So it's like Mortgage Choice fit for finance brokers, so they just clip a ticket. I think you will see consolidation in the space because the reason why you will consolidate is because there'll be low volumes, you'll have less funding flexibility, and therefore, you need to take a lot of cost out of your business to have more distribution capability, and hopefully, maintain margin. So I think you will definitely see a lot more of it, keeping in mind that there are a lot that are unlisted that are owned by private equity. So yes, I think you'll see a lot more consolidation over the next 6 to 12 months.

Yes. Moving on, there's a question from Peter. NAOS has always stayed clear of the WAAAX stocks citing that they're on very high multiples. However, OCL trades on a similar multiple. So what makes it different?

Yes. Good question. So I'll answer this. I know it's really Rob's stock, but I'll do my best. So what makes it different is we've followed OCL for years. It's one of the great businesses. If you go and look at the issued capital since listing, issued capital has actually gone backwards because they've never raised money, and they've only bought back shares, and the founder owns 65%. So I think that's what makes it a bit different. It's a proven model that's been around for 3 or 4 years. It's been around for a couple of decades. And their client base is very different, so they deal with a lot of state governments, a lot of local councils, even federal government. So that's why we feel it's different. And the one thing that's probably not as tangible, but I think definitely makes a big difference is, it's not widely owned. So I think there'll be 3 fund managers on the register, not 1 broker, maybe 1 small broker covers it. So we feel once we come out of this, and it becomes more, I suppose, widely known, so UBS had it in a couple of months ago just for a chat to introduce people to the business, then I think things will definitely change. And hopefully, that valuation will increase, especially as OCL is in a very strong position with $30-odd million in the bank and the ability to, hopefully, add on a new service offering.

Thanks, Seb. Next question is stock-specific. So what's your view on XRO, which I believe is Xero; and SHL, which is Sonic Healthcare?

So 2 stocks we don't own, one we definitely should have owned. So in regards to Xero, look, I'm coming off of a very low base, but I think the bears would say this is a business that's got a huge exposure, small to medium business. So far, small to medium businesses are under pressure. Therefore, they will cancel their subscription if they can or request a, I suppose, a reduction in what they're paying. But without a doubt, a fantastic business that we think is going to continue to grow, albeit at the valuation you're really paying through the nose for it. And then in regards to Sonic Health care, look, we haven't looked at Sonic Health care because it's much larger than what we will tend to look at. But I think just in that health care space, in general, if you have a business that operates in a sound industry with strong thematics, such as health care, then I think they're the investments you should be considering, but I really can't give you a sound thesis on Sonic Health care.

Moving on to a question from John. Will NAOS be looking to undertake a capital raise over the next 6 months, be that in equity or debt market?

Look, I think your first question is you say no, but I think you think about it, and I think we had an Investor ring us up planning investment. So well, maybe now is the time to do it. All I can say is if we can do it at NTA; and a, we can do it at NTA; and b, we can put it into investments that we think can derive a very strong long-term return, then it's probably the ideal time to do it because you can't put money to work. The problem with raising money is most companies can raise money right at the top, but it doesn't really benefit shareholders because they can't do much with the money. The time you want to be raising money is at the bottom when you can put that money to work and generate much stronger returns, but hopefully, it's not dilutionary. So the other things we're trying to -- we would balance out. So the 2 main points would be, you can never be dilutionary, and we'd have to be able to put the money to work very quickly.

Next question, which we may have touched on, but which company is in the portfolio or companies on your watch list you're expecting to raise recap cash?

Okay. Yes, look, I've touched on it before. We thought 95% wouldn't. We've had one that's gone in today. It's People Infrastructure, which is a NAC holding, which has done a very small capital raising. They're raising $17-odd million. But once again, they're raising money because they feel like the acquisition pipeline actually is sound, will be sound anyway in the next 6 months and there will be lots of capital to do it. Apart from that, we would say that -- look, I mean the ones that you would say, if it really went pear-shaped in regards to maybe consolidated operations group, they've got plenty of money. But obviously, they've got -- a lot of their money is tied up in CGR shares, which is on the takeover. So that needs to go through. The only other way we can see any of our businesses raising money, whether it's Wingara or -- I'm trying to think of another one -- and maybe AXP, they would be doing to acquire something to tack on to that business to grow the earnings base and ensure the long-term success of those businesses. When you look at our core holdings, MNF is the biggest, it's $40 million in cash; BSA is net cash; over the Wire is net-neutral, net cash potentially, we feel very comfortable with where they stand.

The next one has been asked a number of times across a range of investors. So the question is, will the company consider putting out more frequent NTA reporting, like a weekly NAV or daily NAV is something...

Yes. So yes, when we get a loss in this environment. And look, I can definitely understand why people want it. It provides them with clarity, and I suppose, what the underlying assets are worth today. I think from my point of view, and not necessarily the Board's point of view, but I would say, the one thing I don't agree with is it doesn't really time with our long-term investment thesis. That's why we do monthly NTAs. We feel like we provide a lot of information in that NTA because it does focus on the long term, and it gives you a 30-day NTA. Obviously, we'll try to move those forward to the very beginning of the month. So for us, the other bit is the way NTAs have been moving, they've obviously been moving almost 4% or 5% a day in some cases. So we feel if you start doing that, it could start to give people the impression that the portfolio is a lot more volatile than probably what it is on a long-term basis, so people probably have the expectation that this fund is very, very high risk, which it is high risk, but it's probably not a fair illustration of the value of the underlying investments.

Thanks. I think that's it. There is one final one, which we probably touched on during the presentation, but I'll just make sure we address that in case. So this question says -- specifically interested in knowing your investment philosophy in redeploying the cash. Once we've reached market capitulation, can you see opportunity in taking positions in quality companies, et cetera?

Yes. I think the big one you'll see is some companies just won't -- especially in our end of the market. But one thing, some companies won't be able to raise money. And I think a great example is, I remember 5 or 6 years ago, I don't know, how long ago -- like when BSA did their recapitalization when Nick Yates took over, they raised, give or take, might be $10 million or $15 million at $0.10 and literally 2 funds took it, and we were one of them. And they couldn't get the money from anywhere else and, obviously, $0.10 has turned into at one stage turned to $0.40, and you've had a few dividends. Today, it's $0.29. They are the opportunities you're looking for. So the opportunities, where your downside is minimal, whether or not it's back by property or cash or a bear case earnings profile and where you've essentially got infinite upside depending on the earnings and the multiple acquired in the future years. Unfortunately, we don't have an infinite capital base. So you really -- I think our job is to try and get the best 3 or 4 investments and try and sell down on some of those investments that we think are more fairly valued, and that's what we'll be looking to do. And to be fair, we've probably already had 1 or 2 that have come across our desk in a more informal fashion, but I think it will take people another 2 or 3 months to get up to speed and find what they want to do with the money more importantly.

Seb, I've got a few others coming through, so I'll keep going if it's right with you?

Yes.

So this one comes from Andrew. For someone considering buying shares at this point in time, can you explain how the additional benefit of having an even higher post-tax discount than pretax? How does this work? Can you explain with example how you realize that benefit in the future?

Yes. So the benefit is -- it's pretty easy is if we have a -- so when we put money to work in something that goes from $1 to $2, normally, we'll be paying 30% tax on the capital gain, which comes out of your NTA. But because now we're sitting on some longer-term tax losses because we haven't realized those gains, it gives you basically a benefit of realizing all the upside before we have to start paying tax again. So basically, you get more of the upside before you have to pay tax or the company tax rather.

Thanks. So it comes from John. Are there key macro or micro events that you're waiting to see that will give you confidence to act regarding further investments or you investing capital now?

Look, we're very stock-specific. We listen to a lot of -- you listen to a lot of podcasts, you listen to a lot of economic research and people looking at interest rate spreads, corporate spreads, debts, debt loads on public and the private sector and you can look at a range of indicators. Even the Australian dollar is an example, when potentially that's bottoming out. I think you can use some of the indicators to minimize the risk and you'd argue that potentially, you'd say we're much closer to the bottom than we are to the top, albeit there could be a 10% swing. So then it really comes down to -- as I've always said, we try to minimize our risks through the stock selection. So I think if you can find the right stock with minimal risk, you would invest in the next few months as opposed to waiting for a certain indicator. But obviously, using those variables, as I said before, industry structure, management teams and balance sheets, to try and minimize any potential for permanent capital loss.

Thanks, Seb. Just one final question, which you might not like. Where do you think the ASX 200 will end at the end of the calendar year? Give us a number.

I don't even know what it is now.

5,227.

You said 4,000?

5,227.

That tells you how much I -- how closely I follow the market. Look, I don't know, to be honest. I mean I would say, we -- I'm probably going to sound a little bit more bearish than the rest, but I would say maybe 5% higher than where we are today. So maybe it's 5,500. I just think when you look at some of those bigger stocks, especially that got -- there's a lot of water to go under the bridge and, unfortunately, when you look at the ASX, it's driven by the banks, CSL and the miners. So you would argue that the banks are paying dividends, they're probably going to have a lot of bad debt issues that they need to work through. The miners probably don't have so much to review, but you would say in a more deflationary environment, the commodities are probably under a little bit of pressure for a while. And then CSL, well, CSL just goes from strength to strength. It always seems to go up. I just think with the amount of capital raisings and equity going into the market, I think it's going to take time for things to digest, and therefore, it will become much more of a stock -- biggest market as opposed to the whole index rising.

That's it for questions.

Well, thank you, everyone, for attending. As always, we get a lot of questions on e-mail and even people calling in. So if you do have any other questions you don't want to say over the webinar, don't hesitate to speak with us via e-mail or phone. Thanks again for your support. I know it's very challenging times to everyone, not only in the equity market, but more importantly, personally. So hopefully, you're all managing to get through these times as best you can, and stay safe and stay well. And hopefully, we'll provide you with a much better update in April. So thanks again, and we'll talk to you soon.