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

My name is Trevor Carroll and I am the Independent Chairman of NSC. I'm joined by my fellow directors, Sebastian Evans, Warwick Evans and David Rickards. Rajiv Sharma, the company secretary is also present today, together with the company auditor, [ David Simon ] of Deloitte. This 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 votes. The agenda for today's meeting will be the Chairman's address, the business of the meeting, followed by an investor update presented by NAOS Asset Management Managing Director and Chief Investment Officer, Sebastian Evans. [Operator Instructions] While you can submit questions from now on, I would not address them until the relevant time in the meeting. Please also note that your questions may be moderated, or if we receive multiple questions on one topic, they may be noted together. Slide 3. Voting today will be conducted by a 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 up a list of resolutions and present you with voting options. To cast your vote, simply click one of the options. There's no need to hit a submit or enter button as the vote is automatically recorded. You do have the ability to change your vote up until the time I declare voting closed. I'm now advised that we have a forum and I now declare the voting open on all items of business.

Yes. Trevor, that's correct.

Okay. The voting tab will soon appear. Please submit your votes at any time. I will give you a warning before I move to close voting. Let me commence the meeting now with the Chairman's address. Dear fellow shareholders, the Board would like to thank all shareholders for your continued committed support and welcome all new shareholders who joined the company during the 2021 financial year. Although the initial onset COVID-19 pandemic presented challenges to the company in FY '20, I'm pleased to report that for the financial year ending 30 June 2021, the company achieved a record after-tax profit of $51.5 million. That compares with FY '20 after-tax profit of $1.4 million. The Board has declared a fully franked final quarterly dividend of $0.0125 per share -- the FY '21 fully franked dividend to $0.05 per share, which represents a 25% increase on the prior year. This represents a net dividend yield of 5.1% based on the 30 June 2021 share price. Since its inception in December 2017, the company has now declared an aggregate $0.185 per share of fully franked dividends. The company will continue to focus on delivering a growing stream of quarterly dividends franked to the maximum extent possible whilst maintaining an adequate profit reserve balance to enable the company to pay dividends when it is more difficult to generate a significant performance. The profit reserve balance at year-end was $32.79 million or $0.214 per share. The NSC investment portfolio returned a record financial year return of 58.4%, significantly outperforming the benchmark small ordinaries accumulation index, which delivered a return of 33.3% in an exceptionally strong year for domestic equities. The pretax net tangible asset or NTA backing per share of the company increased from $0.68 to $1.10 over the financial year. The [indiscernible] of the business portfolio increasing NTA per share by $0.477 over the year. During the year, $0.0475 per share was paid to shareholders in fully franked dividends. And management fees and interest expense on borrowings decreased the NTA by $0.0121 per share and $0.085 per share, respectively. The share buyback was also a positive contributor to the company's NTA, adding $0.071 per share. The strong investment performance has been reflected in the company's share price, allowing the company's total shareholder return, or TSR, which measures the change in the share price and dividends paid over the financial year, to return 133.6%. This media does not include the benefit of franking credits received by shareholders. The TSR for the year is reflective of both the strong investment performance and the significant reduction in the share price discount to NTA over the course of the year. The NSC share price closed the financial year at $0.98, and we ended FY '20 at $0.45. The Board remains committed to managing the capital base of the company in a manner to maximize shareholder returns, including on-market share buyback. Over the course of the financial year, 5.78 million shares were bought back by the company. And the company has now brought back 15.96 million shares or 9.45% of the shares on issue since the buyback that commenced in April 2019. The Board reviewed the on-market buyback facility for a further 12 months in April 2021 as the buyback of shares at a discount is accretive to NTA and thus a benefit to all shareholders. Dividend [indiscernible] DRP. For those shareholders who participated in the DRP, it's important to note that the company did not issue shares at a discount to NTA but acquired shares on market to ensure the capital management activity was completed without any potential dilution for existing shareholders. In May 2021, the Board of NSC announced a 1 for 3 issue of bonus options to eligible shareholders. A total of $51.44 million bonus options were issued with an exercise price of $1.02 per option. The Board believes that the issue of bonus options is a measured way to allow the company to grow over the next 3 years without placing undue pressure on the short-term performance and dividend reserves of the company. The options are listed on the ASX under the code NSCOA with an exercise price of $1.02 and an expiry date of 20 June 2024. The company maintained a focus on a high standard of marketing and communications so that all card and prospective shareholders have a clear understanding of the NAOS offering. Further investment 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 now totals over 11,000 subscribers. While equity markets remain vulnerable to short-term corrections, it is the opinion of the Board that the disciplined NAOS investment philosophy will continue to generate strong performance for shareholders over the medium term. The Board continues to have a strong alignment with its shareholders increasing its holdings during the year to 2.29 million shares. On behalf of the Board of Directors, I would like to congratulate the investment manager for a strong FY '21 investment performance and [ for the team ] for their dedication throughout 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 of closing time for seat of proxies, which was 12 p.m. on 9 November. I've been advised that all proxies received for the meeting have been checked. And I declare the poll open for voting. Is that correct, Raj?

Yes, that's correct, Trevor.

Okay. Thank you. Voting exclusion [ is biased ] to Resolution 1, as outlined in the notice of meeting. Resolution 1 is a nonbinding advisory resolution and will be cast provided not more than 25% of votes cast by or on behalf of shareholders in total to vote on Resolution 1 are against the resolution. Resolutions 2, 3 and 4 are ordinary resolutions, meaning to pass, they require more than 50% of votes passed by shareholders to be in favor of the resolution. I'd like to advise that as Chair of the meeting, where I am appointed as proxy, I intend to vote as follows: Resolutions 1, 2 and 3, all shares in favor. Resolution 4, all shares against. Financial statements and reports. The first item on the agenda is to receive the financial statements, directors' report and auditor's report for the company for the year ended 30 June 2021. There's no formal resolution required on this item, but I will now take questions on the financial statements. And you may also direct any questions to the company -- on the auditor -- to the company's auditor, [ David Simon ]. Raj, are there any questions?

No, Trevor. No questions have come in.

Okay. Thank you. [ Financial records ] and directors' report as duly received and considered at the meeting. We now move to the resolutions. The reading for each resolution and proxy results received will appear on screen. Resolution 1 is the remuneration report. I propose the Resolution 1 as follows: That the company adopt the remuneration report for the year ended 30 June 2021 in accordance with Section 2 -- Subsection 2 of the Corporations Act. Are there any questions regarding Resolution 1? Any questions, Rajiv?

No questions have come through, Trevor.

Okay. Thank you. Resolution 2, which is reelection of Board and Board Director, myself, Trevor Carroll. So I propose Resolution 2 as moved and resolution as follows: That Mr. Trevor Carroll, 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? Rajiv, any questions?

No questions received, Trevor.

Okay. Thank you. We move to Resolution 3, which is the reelection of [ one of the Board's ] director, Mr. David Rickards OAM. I propose Resolution 3 as -- move the resolution as follows: That Mr. David Rickards OAM, who retires in accordance with Rule 6.7 of the constitution and being eligible, offers himself for reelection to be reelected as a Director of the company. Are there any questions on -- regarding Resolution 3? Rajiv, any questions?

No questions have come through, Trevor.

Okay. Thank you. We move to Resolution 4 which is the election of non-Board-endorsed Director, Mr. Andrew Conlon. I propose Resolution 4 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 4? Rajiv, any questions?

No questions have come through, Trevor.

Thank you. That concludes our discussion on items of business. In a couple of minutes, I will close the voting system. Please ensure that you have cast your vote on all resolutions. I'll now pause to allow you to finalize those votes. [Voting]

Okay. Thank you. I'll now advise that voting is now closed. Any further questions that have been received by Lumi?

No further questions have been received, Trevor.

Thank you. I now declare this Annual General Meeting closed. Final votes will be posted [indiscernible] following this meeting. Thank you very much for your attendance today. I'll now pass over to Sebastian Evans who will provide an investment update for the company. Over to you, Seb.

Thank you, Trevor. And obviously, thank you, everyone, all shareholders who joined the call today. Some of you may not know me. I'm Sebastian Evans, the Chief Investment Officer at NAOS Asset Management. As most or all of the AGM, I'll provide just some very brief updates on each of the funds in this case, the NSC. The reason why it is brief is, obviously, we provided a very detailed update with myself in our quarterly webinar just a couple of weeks ago. And our investment in [ AHZ ] provided just yesterday over the forum, so this is really the third piece of information in quite a short period of time. Next slide, please. Just -- we've done this, obviously, with all the funds, and this won't be the last time. So it's more of a visual representation of performance since inception under the stewardship of NAOS. As Trevor said, very pleasing is something we would say after a very slow start in '18 and '19. Not only did we produced the returns during FY '20, when COVID was upon us but FY '21 turned into what was an exceptionally positive year for the fund and pleasingly generated those performance from a lot of the core holdings that we did hold in '18 and '19 and didn't really bear for it until '20 and '21, especially. So pleased that we now have the fund over 1, 2 and 3 years well above the benchmark. And as of the end of November, we're just 1% per annum behind the benchmark since inception. So that was really the last stick. And we really -- we've been trying, now 3.5 years to get. And we feel very confident that FY '22 has started reasonably well. Maybe not as strongly as what we envisaged, but it is off to a positive start. And we feel like the momentum behind many of our investments, many of our core investments, is sound. And hopefully, that will provide, hopefully, a strong FY '22 results as well. And obviously, performance is one thing. But how that translates into shareholder returns is another entirely different equation. And as you can see, the NTA as of the end of October, 31st of October, the pretax NTA was $1.11. Clearly, that's quite a discrepancy between pretax and post tax because of many of the gains that we're still sitting on, which haven't been realized. And then as Trevor mentioned, that discount to NTA at the end of June closed substantially, albeit had widened again more recently. As of the end of October, share price was $0.925. But as we said time and time again, capital management is at the forefront of our minds. And as many people would notice that buyback has started to become a lot more active in recent times. We're very proud of that dividend profile. We really wanted to emulate the other 2 links that we manage and really want to grow that profile over the longer term and maintain that fully franked capability if we can. We are very true to label. It's a small fund with just 9 holdings. So we are highly concentrated. We feel that as we've shown over the last 3 years, no concentration doesn't necessarily mean higher risk. If anything, we believe it derives a better risk return outcome for all investors as we've shown over the last 2 years. The outlook for FY '22, as I mentioned in the last webinar, as I said for the other funds as well, many of our investments will probably -- definitely more affected by the third round of lockdowns this time around, given if many of them weren't affected in the first round of lockdown plenty enough. And what we've seen is that probably has entailed delays to some of our core investments. So whether or not that's -- in the case of -- maybe it's a Gentrack or Eureka Group or BSA or Big River, all investments have definitely been affected this time around. But I think anyone who's escaped, ultimately, that will delay earnings growth or acquisitions or capital management or whatever it may be. But as we've seen with some of our trading updates more recently, we've seen that a lot of the execution behind some of the investments has been very sound. And we've seen trading updates from the likes of Big River, and their trading update was exceptional. Even Gentrack more recently, and they've been under a lot of pressure due to some of the issues around U.K. energy prices, even provided a guidance that was above consensus and even '22 guidance that we thought was very strong. We'll probably get a lot more detail of the full year results in late November. It's also pleasing that some of the new positions have started to rotate into some new positions. As many of you would know, Gentrack's a new position in the fund. It's a very large position in the fund after we rotated out of MNF Group more recently. And then even more recently than that, we've rotated into another business called MOVe Logistics, which is based in New Zealand. Really more of a turnaround story, I suppose, that's run by some people who have excellent pedigree out of the likes of Mainfreight and Linfox in New Zealand. So that's a business that we hope can be much larger over the next 3 to 5 years and hopefully can be a much larger position in that portfolio. I think it's also worth mentioning that all of our investments, we believe, do have a very strong plan, very motivated. As some of you would be aware, we have been a lot more active with some of our investments. Brendan York joined us recently. He's on the Board of some of our key investments. And we really want to ensure that -- yes, with our large shareholders, we want to ensure that shareholders do receive the value that they deserve over a longer period of time, assuming that these strategies are sound and they are executed appropriately. And based on that, we do feel very confident about the outlook for many of our investments, if not all of them. They won't go all up in a straight line. But we think the ability to grow the earnings base for many of our investments probably never looked better considering the macro backdrop of more recent times and the demand environment. So with that, we hope FY '22 plan plays out as we hope. But I'm sure there will be some bumps along the way. But as always, if anyone does have any questions or suggestions, don't hesitate to contact me or any member of NAOS team either by phone or email, and I look forward to providing you hopefully with another positive update in our November investment report, which will be released in early December. So thanks again for your support. Enjoy the rest of your day.

Goodbye.