Plato Income Maximiser Limited (PL8) Earnings Call Transcript & Summary

Well, good morning, shareholders. It's 11 a.m., and I think we should get started. Welcome, everyone, on the call to the Plato Income Maximiser FY 2021 Half-Year Results Presentation. We'll refer quite a lot today to the company as PL8, by its ASX ticker. My name is Amelia McKinnon, and I work in [ unlisted ] products team at Pinnacle Investment Management. Pinnacle is an equity partner of Plato Investment Management and manager of the PL8 portfolio. Pinnacle manages all marketing, sales distribution and investor relations on behalf of PL8 shareholders, and I'm delighted today to be the host of today's results call. Today, we are joined by Company Director and Plato Investment Management -- Managing Director, Don Hamson. Don, if you want to just wave your hand? There's Don. Don will be providing an overview of the financial results year-to-date, the company portfolio and also give us an update on how Plato is seeing the market. At the end, we'll take some questions from shareholders. [Operator Instructions] I'll also take this opportunity to mention the presentation slides in today's presentation are also made available on the dashboard, together with some other relevant links to the company. I will, of course, be flicking through today's presentation up on screen and you will be able to follow. So Don, if you could please just refer to the slide you're speaking to so that listeners can also follow who aren't watching the video. And if you aren't, please note that these slides are being made available on the ASX under the ticker PL8, and also available on the company website. So without further ado, I will hand over to PL8's Company Director and the Managing Director of Plato Investment Management, Dr. Don Hamson. Don, over to you.

Thanks, Amelia, and welcome fellow shareholders to this results presentation for the first half of 2021. The all-important disclaimer on Slide 2. And today, as Amelia said, we're going to look at a quick update of the company, outgoing dividends, et cetera, then look at the market update. And I think it's quite a positive update from what we had last year. And in fact, we're far more bullish even today than we were a month ago, and we were pretty bullish then. So the results season has been very strong. We think this augurs well for a much better 2021. Firstly, turning to the business and performance update. It was actually a strong second half of the year. The portfolio underlying PL8 was -- rose 13.3%. It was a little behind the market, and I can explain that. I mean we actually saw a strong rebound in markets. We also saw a very strong rebound in November of what you might call the recovery trades, the flight centers, the Qantases. A lot of the beaten-up stocks that got significantly affected rallied very strongly when the vaccine came out. They're not the sorts of stocks that we own because they're not -- no longer paying any dividends, and so we trailed a bit, but we're only 40 basis points behind the market in that second half of the first half of this year. Importantly, we actually outperformed the market over the whole year. In fact, if you look at the 12 months, and I think this is quite important, the portfolio actually had a positive return in calendar 2020, which I think is quite important because with all the negative news of COVID and the market fell, et cetera, we ended up actually making money over that year and beating the index, which is, I think, pretty good given the volatility, et cetera, over that period. And we continue to be ahead over the last 3 years and, indeed, since inception. So a pretty good period of performance, but we just didn't own a few of those beaten-up stocks that rallied strongly in November, but they don't pay dividends. If we look at the longer-term performance. Now this is of the underlying portfolio that PL8 invests into. It actually invests into a thing called the Plato Australian Shares Income Fund. This was started way back in September 2011. And you can see that the light blue line is the total performance, dividends and franking credits and capital return of that underlying fund. First is the market, again, including franking credits and dividends, which is the dark blue line. And you can see that we've sort of always tracked similar to the market, but we've consistently eked out higher returns over that long period. And that is one of the aims of PL8, is to outperform the market over the longer term but deliver higher income along the way. Now on this slide, we actually look at the amount of income that was generated last year, and it was a very tough year. I mean we actually made a call not much later than this, it was just -- well, I suppose early April, that dividends will be cut in 2020. And the market yield there is the lowest I've ever seen it. Last year, the S&P 200 delivered a cash yield of only 2.9% and a franking yield of 90 basis points or 0.9%, giving the market return generated dividends, gross dividends of about 3.8%. And normally, that's closer to 6%. So there was a substantial cut, I would say, around just over 30% cut in dividends. And we made a call very early last year that, that -- we thought that would happen. In fact, it was probably slightly more than we thought. But importantly, I think PL8 continued to deliver pretty strong dividends, and I'll get to those levels in a minute. 4.9% cash and 2% franking was the return there. And so as you add that up, 6.9%, it was substantially more than the market. So we have performed on our -- having more income than the market. And if we look at the distribution, though, we continue to pay consistent regularly monthly dividends. With the one exception, I suppose, on that consistency is that when we saw COVID and the impact it was going to have on dividends across the market, particularly the banks but other stocks as well, it was very clear to us that the dividends were going to be much lower and that we probably had to trim back the dividends paid by PL8. And so directors made a decision very early, basically, in the start of April to reduce the payout of fully franked dividends by the company from $0.005 a share to $0.004 a share a month, but we want to continue to pay a regular monthly dividend that we have done so all throughout the year. So that cut of 20% is actually substantially less than the broad market-wide cut in dividends of about 35%, as it worked out. So we actually haven't reduced them by as much as other companies, because there are some retained earnings in PL8, and we have been working hard to actually get more income from the underlying investments. So that is where we are today. Look, directors, every time they meet to declare dividends, will look at whether it's appropriate to maintain the current dividend or to increase it or whatever may be the case, and we do that every quarter, and we announce 3 regular dividends. But they're currently $0.004 a share. But I think importantly, the reduction in those dividends was less than if you've been in just the general market where you've had a much more substantial cut in your income. It was -- so it's a pretty positive period. The market rose quite strongly. So portfolio performance was a substantial increase in the NTA of the company over the last 6 months, less some expenses that are pretty minor and less the dividends that were paid. Obviously, they have to be taken out of the NTA. What it meant was the NTA went from $0.00959 (sic) [ $0.959 ] a share to a $1.047 at the end of December. So it's good to see the NTA rising, and that's reflected the fact that the underlying investments were increasing in value over that period. And I think importantly, PL8 has continued to trade very strongly versus its underlying NTA. In fact, we're now sitting -- at the end of December, we're actually sitting almost $0.10 above where we traded -- what the NTA was at the 31st of December last year. So healthily, we've pretty much kept above that NTA. And in fact, virtually have always been above the NTA mark since the end of the last federal election, when there was some uncertainty about franking credits. I think the other important thing, mention it now, I suppose what's here is that the ALP announced around, I think it was 1st of January, there's a virtual presentation by the opposition leader, Anthony Albanese, and he formally retracted or rescinded the ALP franking credit policy or nonrefundable franking credit policy. That has been taken off the table. So I think that means that franking credits are much safer. So I think it's important. But PL8 has been trading strongly versus NTA, which I think is a good sign of that. And I think it's partly because there are very few -- well, I don't believe there's any companies, any listed investment companies that pay regular monthly fully franked dividends. There are a few other instruments that pay monthly income, but probably not as high as the level of PL8. So I think in this income-drought environment, which I'll go into in a minute, companies like PL8 are quite attractive -- are found quite attractive by shareholders. So let's move to that market update. And indeed, one of the reasons why I think it's very attractively bid, and we're now on Slide 12, for those who may not be looking, so sorry, I haven't been telling every slide that's there, but I'm now on Slide 12. I think the RBA has very clearly signaled that interest rates in Australia are going to be low for the next 3 years. In fact, they basically came out and said interest rates are going to be where they are until 2024, 3 years from now. They said in 3 years when they made the decision in November, but they repeated it in February and maintained those rates, obviously, at 0.1% yesterday -- Tuesday. So we've virtually got nothing from cash rates, and that is why income-hungry investors are searching for alternatives. And I think that is one reason why PL8 is being well bid is because you are not going to get any money out of term deposits anytime soon. Like that's on this chart here because if cash rates have dragged down, which is the bottom line on Slide 13, cash rates are now basically -- the gray line are basically at 0 and term deposits are not much more. I mean the latest number I saw, I think February was like 30 basis points is what the average 1-year term deposit, according to the RBA. And even things like investment-grade credit, the yields there have dropped dramatically. That's the yellow line. We also have the market. So this is the Australian equity market. And you can see that it just dipped below 4%. So the yield in the Australian market dipped below 4% at the end of December. You can see how it fell quite substantially over the course of last year. And this is the underlying -- the top line is the underlying income that is generated -- gross income that is generated from the investments -- underlying investments of PL8. It's not the PL8 dividends that are paid out, but it's the yield on the underlying investments. And you can see that, firstly, that dark blue line is substantially higher consistently than the market yield, and it still is. It's come back a little bit last year, but it's still at a pretty attractive level. So we still think actually that the yields on Australian equities, fully franked dividends are still pretty good in a relative sense. And that the underlying investments of PL8 are well positioned to continue to deliver substantially more income than the market and certainly from other asset classes. Now this is where things are looking really good, I think. And it also highlights why they looked bad last year. We have a proprietary Plato dividend cut model, and we forecast the likelihood that any company in the Australian market that pays dividends, we look at the likelihood that they will cut those dividends in the next period. And this -- the model actually comes up that at any time, on average, there's about a 20% chance that a company will cut its dividends. So that's the orange line. You can see on the very right-hand side of Slide 14 that last year, that probability that we calculate across the market, which is blue line, rapidly went from sort of the average level in basically February last year, this time last year, it rose rapidly to 45%, which is the highest it's ever been. It actually exceeded the level -- it exceeded the level of during the GFC, around 2008, '09, which got about 40%, which is the previous high. But the really good news is the fact that, that blue line is now back to the long-term average. Basically, all the dividend cuts have happened, and we're now looking at a more normal periods for dividends. And that is a very, very positive sign. Now we use this signal that rapid increase in dividend cuts was one of the things we looked at when we, within the Board, cut dividends last year because we could see what was going to happen. I mean the world was coming almost -- not quite coming to the end, but it was coming to a standstill, particularly in many sectors like travel and tourism and those sorts of things. But for many sectors, but in fact, not those, things are now getting back to normal. There are still some that are not. But I think that's important. And indeed, the reporting season that we've just gone through has been very, very positive and exceeded our expectations. So things are actually getting better. But there are still some dividend traps around. Even though things are getting better, there's always going to be some companies that have their own little problems. And it's not all over for travel. It's going to be a while before travel opens up. Qantas is saying October. You're going to have to have agreements between governments, not just states, to open up global travel. I think state travel will be looking a lot stronger, but I think it will be some time before we see free skies internationally. Everyone is still working out whether you'll need a vaccine passport, whether you'll need to be tested. Some countries will vaccine a lot. So -- but then there'll be third-world countries, et cetera, where vaccine rates will be very low. So I think it will be a while before we have free travel for all. So we still have stocks like Flight Centre and Sydney Airport as unlikely to pay dividends for some time. But this last reporting season, 3 stocks in particular that we forecast as dividend traps were AGL Energy. It also is an electricity generator, and that's been the problem with it because there's a lot more renewables around and it's actually cheaper now to sign up to renewables energy than coal-fired power stations or coal-fired energy, and that's what's hurting AGL. And AGL did cut its dividend in the reporting season. It's still paid one, but it cut the cash dividend, but I think pretty importantly, both AGL and Origin, which are sort of both affected by this, cut their franking levels of their dividends to 0. Then basically, what that means is they don't pay any tax anymore, which is not a great sign for the quality of their earnings, and so they can't frank their dividends. So they had to cut the dividends anyway, and those are now in franks, so they're worth a lot less. And G8 Education cut them to nothing. So there's still some around, but there's a lot less than there was even a few months ago. Just to highlight AGL and our definition of a dividend trap. It's interesting that AGL -- this is now on Slide 16. This chart looks at the price in blue of AGL, and it fell for much of last year from $20 to $12. Now the problem with dividend yield, and we use gross dividend yield, which is the gray line, is the gross dividend yield of AGL started at 8%. And as the share price fell, the actual gross dividend yield rose to 11%. Now for someone just looking for a lot of yield, which I think some investors are at the moment, they might have said, "Gee, AGL, oh, we know that company. It's pretty solid, and it's trading at 11% yield. Let's jump in and buy this stock, and we'll get a great yield." Now the problem is, that is before it declared its dividend in the February results period. And because it cut that dividend, this 11% yield is actually illusory. You ended up getting a lot less. Because the 11% is an historic yield based on what it paid last year's dividends, but it's divided by the current price. So the only reason the gray line rose last year was because the price fell. And if anything, that is a definition of a dividend trap. If the reason that you have an increasing dividend yield that -- is that your price fell, that is one of the big signals we use to -- it's a warning sign to say, "Is this a dividend trap?" And as it turned out, AGL subsequently cut its dividend. The other good news, so -- but there are a lot less of those dividend traps. The other good news, I think -- well, I know, was that APRA, who put some or basically told the banks and the insurers last year, firstly, they couldn't pay dividends, and then -- and when things were really bad. And then in July, they said, "Well, things aren't quite as bad, but we want you to reduce your dividends and pay no more than 50% out of earnings." Well, in December -- mid-December, APRA came out and said, "Shackles are off now. You can pay whatever dividends that are available." And that means that bank dividend forecasts are forecasted to increase substantially after falling substantially last year. Bank dividends on average, on Slide 18, fell about 60%. But now that those shackles are off, now that APRA said you can pay what you like, just subject to board prudence, we expect substantial increases in dividends. And in fact, this chart was developed a couple of weeks ago, and based on what was reported during reporting season, we would actually increase those numbers. The actual dividend expectations have increased just in the last couple of weeks because the results from the banks. So whilst CBA was the only bank that reported for the half, ANZ and Westpac and NAB all reported quarterly earnings, which is not a sort of -- it's an early indicator, I suppose, in the next half, and they were all strong. So in fact -- and this is, I think, the really positive sign there was ANZ and Westpac in their quarterly results, basically said, "We put aside too much money last year for bad debt provisions for COVID, and we're actually going to release those provisions and -- which means we're going to increase our profits this year because we're actually going to have a negative charge on -- for bad debts." And ANZ and Westpac actually had negative charge for bad debts because they overprovided last year. But we're not through the woods yet. There is some concern about what happens when JobKeeper comes off at the end of this month. But things are very bullish out there and all the signs are positive with vaccines rolling out. We're pretty positive about bank dividends, especially now that the banks really can pay whatever they want. The big problem last year was that there was a -- in the second half, APRA said, "You can pay no more than 50% of your earnings out." The other areas, and we've been banging about this for, well, 2 or 3 years now that the outlook looks pretty good for iron ore miners and not only pretty good, I mean, very good. And in fact, we saw record dividends if you exclude specials in previous years from Fortescue, Rio and BHP. And these aren't incorrect. Fortescue's trading in something like a 14.5% fully franked yield. That is not a dividend trap. Its price hasn't fallen over the last year. It's not trading at that because price fell. Price actually rose, but it's got a high yield because it's paying out supernormal dividends because it's making supernormal profits because iron ore prices are maintained at very high levels. They're a very efficient producer, so they're making a lot of money on every time they export. And steel production numbers have been very good. China really didn't change its steel production much due to COVID. The rest of the world had a pickup, but the rest of the world is now catching up. And so we've got record steel production. There's only 2 places in the world that you can get high-quality iron ore, that's Australia and Brazil. And Brazil has many challenges at the moment, COVID, where it's really bad there. But there are some -- there have been a number of dam issues and other -- and supply problems in Brazil. So supply there is limited, and they could never provide as much iron ore as China wants. And a lot of people say, we're worried about Chinese trade wars. Chinese, I don't believe, can afford to not buy iron ore from Australia. They put tariffs and things in other areas where they can afford it: wine, beef, lobsters, barley. They can get that from a lot -- a number of other countries, and particularly the U.S., but they can't get iron ore from the U.S. So we're quite -- still quite bullish about them. They've been very strong performers and record dividends, which is what we expected. But that's not the only great area. I mean the retailers have got record sales, massive sales. I mean 20% plus sales in a year. A lot of this is COVID related. So there are actually many companies that benefited from COVID, the likes of JB Hi-Fi, Bunnings and Officeworks, which is part of Bunnings. And these groups had fantastic sales because we're all working from -- well, not all, but many of us are working from home, we're buying office equipment, new computer screens. I bought a couple myself. These are helping our sales. And we're not spending as much. We're not spending anything on overseas travel. So we're buying other things, and it's flown through to many retailers. And so there's been some bullish results there, and that flowed through to strong dividends from many of those stocks. And here's the picture which we started to look at last year. We're now on Slide 21 for those who not be -- not on the call, not looking at that screen. What we found is, last year, there were a lot of stocks where the dividend outlook was ugly or bad, and there weren't that -- too many bright spots 9 months ago. But now -- and if -- there's a lot more companies that are good, and good means you're likely to increase your dividends, you got strong increases or there's very 0 probability that you cut the dividends. There's still the odd one. We've already mentioned it, really, AGL, Sydney Airport. It's still going to be a while since international travel kicks into gear. And Crown has, obviously, got its own little problems with its casino here and license issues here in Sydney, but now in Victoria as well. And to be honest, actually, after the latest results series, we probably put groups like Scentre and Vicinity are probably should be moved almost to the good as well. They're probably at the bottom of their dividend cycle. Cuts have all been made, and they can only go one way, but it might be a little slow for them to increase their dividends. But I think the upshot is that the outlook for dividends is now very good this year. I'm not saying we're going get back to where we were pre-COVID in the next few months. It might take another year or 2 to do that, particularly for some of the sectors, particularly the travel-related ones, but things are changing back to -- getting back to normal even quicker than we thought. So it's very positive. Here's an interesting chart, which I just draw your attention. If you actually -- and it's one of the reasons I think why we believe, or I believe, anyway, that a diversified portfolio of income stocks like PL8 is actually a better way to generate your income than just by buying a couple of income stocks. This chart -- and we've done it for a number of years, tracks the top 6 -- looks at the top 6 dividend payers in the Australian market or at least the contributions to the dividends of the ASX 200. Now around the time PL8 was launched, if you looked at the top 6 dividend payers, it would have been the big 4 banks, Telstra and BHP. So you had 4 banks in Telstra, and they are the traditional income stocks. Since -- and this chart really looks at the listing date of PL8. We've tracked the price performance of the banks in Telstra versus the market. And you can see they've performed miserably. The banks in Telstra have all underperformed. They've all cut their dividends over that period. Telstra has virtually halved them and the banks basically did last year. So you've seen substantial cuts in dividends and underperformance. Put those together, you're not a happy investor. You've been better off in the market, but you might not have got as much income. PL8's, I suppose, aim is to beat the market, beat that gray line, and we've done that after fees, but also to deliver more income, and we tick that box as well. Also, you can still get good income, but you can also get good performance, and that's what the aim of PL8 is. But the other interesting thing is, look, now on the left-hand pie chart, now the top 6 dividend payers are only 3 banks and 3 iron ore miners. Westpac dropped out last year because it didn't pay an interim, and Telstra dropped back out years ago. But it's amazing, we still have that incredibly concentrated index. I'm not advocating or saying you should jump in and -- right, Fortescue is the next income stock forever because in 3 years' time, iron ore prices might fall, and it might drop out of the top 6. It's great now, and we're an active manager, and we always try and position the portfolio to get the income. We like the likes of Fortescue, Rio and BHP now. I'm not -- it could change in the next 2 or 3 years. We're not wedded to those stocks. We'll go where the income is. So that's why we think we're better off in an actively managed portfolio. The other thing we look at to generate income, it's a little, I suppose, low-hanging fruit, we call it, but there are some after-tax opportunities. And we saw one probably earlier than we expected. Ampol announced an off-market buyback in December last year, pretty small, $300 million. But for savvy investors that owned AMP -- sorry, Ampol, and we're in a certain tax position. So it's really for tax-exempt investors such as pension phase superannuation funds and charities who can fully value franking credits, and now we have the ALP say, they're not going to question that. If you look at what happened in the AMP -- Ampol, sorry, I keep saying AMP -- Ampol buyback, which was completed in January, essentially, investors in that company were able to get around $36 worth of value, if you value the franking credits, while participating in the buyback versus the share price at the time trading at about $30, which meant you made about $6 a share, which is pretty good money. It's about 20%. So these buybacks can be very valuable for certain types of investors. They're the types of investors that we target in PL8, by the way. So summing up. Look, if you're still in cash and term deposits, you're going to get less income for the next 3 years. That's been very, very clearly signaled from the RBA. And indeed, those low rates have pulled down the rates on most other assets. So income levels have fallen across the board. I mentioned it in passing, but the ALP, I think this is good news, has formally retracted its franking credit policy. So sort of uncertainty we had a couple of years ago around that election is now formally off the table by the ALP, and I think that's very good for PL8 investors. But really, the big news, the great news is that things are looking better in terms of dividends. They have been cut, they're now improving and they're improving at a rapid rate. APRA has taken the shackle off bank dividends and basically, we're back to normal in terms of our dividend cut model, but we're seeing strong rises from companies we mentioned, the likes of the iron ore miners and the retailers, very strong dividends. So that's it from me. Well, it's not it for me, but it's -- that's the presentation. We now may have some questions from shareholders on the line.

Indeed, we do. Thanks so much, Don, for your prepared remarks. Plato's outlook for dividends certainly fills us with some more confidence for the year ahead. So we only have a minute or 2 remaining on today's results call. So I have time for one question. [Operator Instructions] So the first question, Don, that has come through today is from Sam. On Slide 14, you made reference to Plato's proprietary dividend cut model. Do you have a dividend increase model that is the reverse of this dividend cut model? And if yes, what is it telling you now?

Well, no, we don't. I mean we don't have a model that goes the other way and looks at what the dividends are like. We actually predict, I suppose, at the individual stock level what's happening, and we look at that -- at the individual company one by one, and things are looking better, I suppose, is there. But we don't have an overall number. But it's a bit more reverse. If the dividend cuts are coming down, then by sort of reverse logic, it means that the likelihood is that dividends will increase. But no, we don't have that model, Amelia -- or Sam.

And just time for one last question as we are getting asked sort of a similar theme. Just lastly, Don, given your bullish outlook on dividends, this is again from a Sam, another Sam on the call. Given your bullish outlook on dividends going forward and strong reporting season that's just happened, when can investors expect the dividend from PL8 to increase? Obviously, you've touched on the fact you meet with the Board regularly on a quarterly basis. But do you have any outlook on the dividend?

Well, I think that -- I'm a Director, so I'm going to be careful what I say. It's -- all I can say is really what I said before, which is directors will continue to look at that when they address the dividends. We need to weigh things up. We're very positive on what the dividend outlook is. But they haven't all come in. The banks -- we haven't actually -- we had some good results from those, particularly the quarterlies. We won't know what they'll actually do with the dividends until April, but we expect that they will be increased. And the important dividend is probably the final dividends in the second half of the year. So yes, we are bullish, but we need to see. Directors will want to see expectations realized before they're able to increase dividends. So -- but that is something they look at every quarter when they make their dividend announcements. But beyond that, we can't give a forecast about when -- what dividends may be because it will be based on what actually happens. If our expectations are true, then we think that things are getting better then, hopefully, it's sooner than later that we can think about dividend changes. But -- and the next move I would expect would be up, that's all I'm going to say.

Thank you, Don. Look, we are out time today, and quite a few questions have come in recently. So as I mentioned, we will get back to all shareholders on the call with answers to your questions. Please also note that a replay of today's presentation will be made available on the company's website. So thank you to Don for your time today and for all shareholders dialing in. Thank you.

Thanks.