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

So today's presentation, Don will actually do both. He, as a company director, will run through, with his Company Director hat on, the financials, and then, with his Portfolio Manager hat on, will give you a market update and portfolio update. And then as I said, we will wrap up with some Q&A. So Don, over to you.

Thank you, Chris, and Good morning, fellow shareholders. So if we move through to the results, the big headline thing, and it is Plato Income Maximiser the dividends were not only restored but in fact, increased to a record level in the June quarter. But at the headline level, the company did record a $12.9 million loss. This is really due to unrealized losses in the portfolio as we saw markets come off quite heavily in -- particularly in June, although have largely rebounded. So in fact, probably if we had that rebound in the last -- just finished financial year, we would even had the loss, but it's just due to that market fall in the month of June. And the portfolio did have a negative return. So the actual investment portfolio returned minus 3.2%, but that was actually nearly 2% better than the benchmark. The benchmark is actually the S&P 200 index return, including fracking credits, a franking credit adjusted index. So the market actually fell around 5% last financial year. We fell around or our investments of PL8 fell around 3.2%. And total dividends paid was $6.55. And when we look at those dividends, we started the year paying $0.045 a share in the September quarter. We increased that to $0.05 a share in the October quarter. And then further increased that $0.055 share in the June quarter, which is the highest monthly dividends that PL8 has paid since listing. And we also, on top of that, directors declared a special birthday dividend in May. PL8 actually listed or Plato Income Maximiser are listed in May 2017. So it went through its fifth birthday in May, and directors felt given particularly the income generated in the year because it was actually a record year for income despite that headline loss, we actually earned far more income in the current year than in previous years. Directors declared that special dividend. So that was another little burst for shareholders. In terms of distributed income, essentially that $6.55 a share reflects about a 7.5% yield, which is about 2.1% better than the index. And since inception, we've actually distributed about 2.3% more than the index in terms of yield. In addition, it was in the first half of the year. In November last year, we raised -- or the company raised nearly $140 million through a very successful wholesale placement and share purchase plan, which was well received by shareholders. So whilst the headline number is a loss and markets did fall, we have seen them bounce back subsequently. And from an income level, it was actually a record year for the company. Just again, focusing on that portfolio performance, whilst the market did fall quite heavily in the second half of the year, financial year actually fell 9.3% or 5.1% for the total year. The portfolio actually only fell 6.9% in the second half of the year. So that was 2.4% better than the index. And as I already mentioned, 1.9% better than index over the whole 12 months. Since inception, our portfolio has returned 7.7% of total return, which is about 0.2% better than the market, which is one of our -- we have 2 objectives in this fund. One is to beat the market in total return space, which we have done and the other one is to deliver more income, which we have also done. So I'm very happy to say that we have met our objectives in the first 5 years of PL8. Just in terms of the realized yield from the market over the last 12 months, the cash dividends were around 4%, and there was another 1.4% on top of that if you invested in the S&P 200 index. PL8 actually distributed 5.2% cash in dividends and then the further 2.2% on top of that in terms of franking. So you can see we've delivered more income in the last 12 months. And this is a slide that goes right back to the start of the underlying investments of PL8. So PL8 actually invests into the Plato Australian Shares Income Fund. And that fund has now been running since September 2011. So it's coming up almost for 11 years. And this -- both the income and the total return are plotted on this slide that lines at the top, the dark blue line is the total return of that Plato Australian Shares Income Fund, including franking credits. And the gray line below it is the total return of the S&P 200, including franked credits. And you can see that Plato Australian Shares Income Fund, and this is actually after fee number has actually outperformed the market over -- since inception. And at the bottom of the slide, we've got the jagged lines. This represents the distributed income from the Plato Australian's Income Fund versus the market. And again, you can see that there's an increasing gap there between what has been paid out by the fund versus the market. So those 2 slides encapsulate that the underlying fund that PL8 invests in has actually both outperformed the market and total returns at the top and delivered more income along the way, which is its objectives, which are exactly the same as the objective of PL8 which is why invest in one reason why it does invest in it. Moving on, we now have the slide for dividends paid, and you can see here over the last 12 months that dividends were increased, they actually increased in the September quarter from last year, last financial year. They further increase in the October -- or December quarter. And then there was a further increase to a new record high of $0.055 share per month in the June quarter. So a good dividend position. This slide does not include special dividends. So there was -- it excludes the May special dividend that was paid the birthday special dividend. Now, if you look at the NTA performance during the year, the NTA had did actually fall over the year. It fell for 2 reasons. One, the market fell or portfolio performance. I mean, the market did actually fall during the year as we've mentioned. And that's what happens with markets, but it's subsequently rebounded. There were some company expenses, but they are very minor actually in the scope of things. And then there's the dividends that were paid out by the investors or to investors to shareholders. So actually, our NTA did fall from $1.13 to $0.984 a share on a pretax basis. That doesn't include framing credits, but I'm happy to say that by 12th of August, it actually rebounded to $1.04. So you can see the difference. One difference a few months makes, given markets do go up and down. And there was quite a lot which we'll talk about in the market update later on. So obviously, a lot of things happening in the world at the moment. Here, we have another slide looking at how the share price has traded versus its NTA. And I'm happy to say that the dark blue line there, which is the share price of PL8 has continued to trade at a premium to the gray line, which is the grayish line, which is the pretax NTA. And indeed, and the premium has actually increased over the course of the year. We did see a fall in the premium when the new shares were issued when we did the placement and the share purchase plan, there was a fall in the premium to NTA, but it still remains at a premium, but it subsequently moved back up. And I think that's just what happens when you issue shares, you increase the number of shares on issue that it can tend to be as an increase in supply, and so the share price will temporarily fall but it's great to see that share price increasing relative to the underlying NTA. And I think that's just reflecting the shareholders are pretty happy with the income that's coming out of PL8. And another pleasing thing over the course of the year because we did the share issue, but we've actually now done 2 share issues. If we look at the 5 or just over 5 years now since listing of PL8, we basically doubled the number of shareholders from the initial raise and not quite because the market falls, but we've virtually doubled the growth in assets of the company. And I think that's good for shareholders. If you have more shareholders and a bigger company that provides increased liquidity. And I think it means that PL8 is likely to trade better given it's of larger size. It certainly a view that larger LICs are more liquid and tend to trade at a tad better relative to their NTA if the bigger, the betting, so to speak. And I think that's another pleasing thing that PL8 has been almost able to double itself since listing. Okay. I will now move on to the market update. And yes, as I mentioned, there's been quite a few things happening in the last 12 months. One of the first things is that we have, over the last couple of years, had a record low level of interest rates. And in fact, it's interesting that even in February this year, below the governor of the RBA, we're still expecting interest rates to stay at the record low of 0.1% out until next year. And of course, that was February, and this is now, is a longer-term chart of the actual RBA cash rate in black. So that's the current cash rate is now approaching 2%. And the Westpac forecast, and I think Bill Evans and his team at Westpac have called the interest rate cycle over the last 10 years pretty well. They're actually now calling for interest rates to rise to around peak at around 3.6% in February, March next year. Now, that is a forecast. That's a gray line at the end there, but the black line is what we -- the actual RBA cash rate over time. I think what you've -- what we find now is this longer-term chart shows a couple of things. First one, it clearly shows that we are in a cycle. We see interest rates are rising. They have risen before in 1994, we saw a significant rise in interest rates after we came out of the recession that we had to have. Interest rates fell as we went through that recession, and then they've risen sharply in '94. And in fact, I think the current economic environment looks very similar to 1994. For those you can remember, in 1994, we saw interest rates rising around the world, wasn't just in Australia, bond yields rose significantly and equity markets fell. Now when bond yields rise on prices fall. So you saw negative returns on bonds and negative returns on equity. And that's precisely what we've seen this year, particularly in the first half of this calendar year. We've seen interest rates rise. We've seen bond yields rise from very low levels, which means bond returns are negative, and we've also seen markets fall off sell-off as I mentioned before. So it's a very similar environment, I think, to 1994. But we've also got some other things thrown in. We've got rising inflation and we have a war in the Ukraine, which is impact was one of the reasons for the rising inflation because it's impacted energy prices and other flow-on factors. So we are back to a cycle, but this is nothing new. It's just perhaps people who haven't been in the market or haven't opted markets all that much. If you've only been in financial markets for the last 10 years or 11 years, up until a few months ago, you would have never seen interest rates or official cash rates rise in Australia because they've only been going one way, which is falling for the last 11 years, but we're now back to a cycle. So I think that is the big change. The cycle is back. I also mentioned that inflation is rising. Well, I'm not showing -- I'm showing the opposite here. Here, I'm employing the real earnings on $1 million if you put in $1 million either in term deposit or in government bonds, what would be the real interest rate that you would get. Now, what is the interest rate? The real interest rate is the rate after you deduct rate of inflation. I just mentioned inflation has actually risen. In fact, inflation hit about a 30-year high in June of this year at 6.1%, and it's likely to go a little further. Now if you take 6.1% of the actual interest rate you're getting on a term deposit, you are actually losing nearly $60,000 because term deposits were virtually yielding nothing. Bond yields have risen. In fact, bond yields have risen this year, as I mentioned before, but there's still only around the 3% mark. So if you take off 6% inflation from 3%, you actually get about a negative 3% return. If you have $1 million and you lose 3%, you're actually losing around $30,000. So you're losing nearly $60,000 if you're investing in term deposits currently, and you're losing nearly $30,000 if you take account of inflation. And so even though interest rates are rising, they're not keeping up with inflation at the moment. So I think investors are still scratching their head where they can get decent income at the moment. Just summing up, and going back and this is a bit of history, but I did mention before in the company update that actually it was a record year for PL8 in terms of receiving dividends from companies where it actually receives distributions from the underlying investments, which is in the Plato Australia's Income Fund, but it was actually a record year for dividends since the listing of PL8 in terms of the amount of distributions that PL8 got for 2 reasons. One is the PL8 got bigger, we get after that, obviously, the raising capital, the company is bigger. But secondly, we had a record period of dividends. In fact, $40 billion dividends were declared in the February reporting season. That was $7 billion more than the previous year. It was actually greater than the pre-COVID level and led by the likes of BHP and some of the energy spots, Woodside, Santos and Ampol. So whilst on the negative side for inflation, energy prices are going up, it's actually good for the earnings of energy companies, and it's good for the earnings materials company. And BHP continues that run. Obviously, it doesn't affect last year's results, but BHP declared another large dividend in this month. And indeed, for BHP's financial year ending 30th of June 2022. It recorded -- paid out the largest dividend ever in its history, which is $3.25 fully franked plus USD 3.25. So huge dividends from those resource companies, et cetera. There were some negatives in terms of stocks like enlist and AGL and Fortescue, which has lower quality iron ore cuts dividends. I mean one of the benefits of BHP is a diversified player and it benefited largely from increased coal prices. So it has been actually a pretty good last financial year, the one just gone was a very good year for dividends. The other thing which is a highlight of the last 12 months was things like tax-effective just got one here. We participated in the Plato Australian Shares Income Fund and so essentially PL8 in the Westpac buyback for tax-exempt investors, retirees, et cetera, that buyback is worth about 12.4%, and we participated in that. So that was -- but it was one of many buybacks in the last 12 months. So it's actually been a record year for buybacks across the market. And we've anticipated in many of those. I think it's still the case, though, that if you actually look at the Australian market, it's still highly concentrated. So we need to book out there because the top 7 stocks represented around 2/3 or top of the dividends of the whole market in their 4 banks and their 3 iron ore miners, although the BHP and real diversified miners there. They still represented most of the income. So we still have a very concentrated market with 60% of the dividend is coming from just the top 7 dividend payers. And again, this is a bit of history, but how did we get a lot higher income than the market in the last 12 months? Well, it's because we've got more dividends from some of those stocks. So we did participate in record some great dividends from the likes of Fortescue BHP in the last 12 months. Even Telstra, which just recently increased its dividend in the latest reporting period had a pretty strong dividend, and we're overweight Telstra when it went ex-dividend in Woolworths and some of the banks. So you can see it's a broad contribution even stocks like JB Hi-Fi, which is continuing to deliver very strong results. But one of the bottom is the biggest actually, there were a large number of these buybacks and also a special dividend from or spin-off dividend from BHP, which I think we've included in the buyback period as well because when BHP spun off its Woodside is actually treated as a fully franked dividend. So that was another little fill-up for shareholders in terms of franking credits. So overall, a very strong year for dividends. But I would say there's always a few dividend tracks and Kogan has continued to deliver that. It cut us dividend by 100%. I dropped it out 12 months ago and had another poor result this year actually. So it's run into losses, Lend Lease has been struggling. I think some of the problems we are starting to see an emerging with inflation is that costs are going up, and it's certainly getting building companies and developers such as Lend Lease, and there are a couple of others. But that's part of our process is to avoid dividend trap. So we put -- we actually try and avoid the stocks like [indiscernible] and the Lend Lease. So we're out of them before the announced poor results as much as we can. Now, just looking at the market and it has been a bit of a tough time, but we've been showing this chart for a number of years now. And if you've listened to some of these results, the PL8 presentations, you've probably seen this chart before. But the way we avoid dividends is we actually go try and predict the likelihood that individual companies may actually cut their dividend. But then we can aggregate that up at the market level, and that's what this chart is here. We look at the individual probabilities of companies cutting their dividends, and then we average that essentially across the market or actually weighted average based on the size of the company. And this chart was very helpful for us because it -- well, that process is very helpful because when the pandemic hit 2.5 years ago, we very, very quickly determined that dividends would be massively cut across the market, and they were. But this model also quickly showed that things improved a lot. And in fact, we had a period where dividend cuts were much below expectations. Now, it has ticked up a little bit. We obviously got the uncertainty of inflation, which is increasing company costs. We've got Ukraine war which is a negative for some companies, but it's actually a positive for many Australian companies such as the energy stocks and even at GrainCorp, which can benefit from higher grain prices due to the Ukrainian war. And it's this probability has ticked just above the long-term average, but it's nothing like the GFC and nothing like the pandemic. So I don't think there's anything to worry about at the moment. But it's -- clearly, there are a few dark plays on the horizon from the Ukrainian war. But we are very -- and forever vigil. And in fact, we're relying on this predicting the dividend track to try and avoid stocks that may disappoint. So I probably said enough for me, but what's the sort of summary at the moment? Obviously, I should say, interest rates were at historic levels in 2022, but they now have risen. The reason drive dramatically in the last 4 months. Term deposits are rising, but they're not and interest rates are rising and that's challenging all asset prices. So we're seeing housing prices come off here in Sydney and Melbourne. And certainly, it's affecting the prices of shares. I think the good news was we saw record dividends in 2022, and we're still seeing some pretty good dividends even in the current reporting season. The Plato dividend cut model has risen but it's within the normal range, so just above average. We're still seeing some very good dividends out of the energy iron ore miners and banks. Commonwealth Bank has just reported an increase in dividend. And we're forever looking for those tax-effective buybacks, which are at a record level last year. So it's -- there's a lot of uncertainty, but we're still probably relatively positive for the outlook for income over the next 12 months. But happy now to take some questions. Should there be any questions?

Great. Awesome. Thanks, Don, for that. First question actually follows on a little bit from what you've just said. Sally asks, thanks for the run-through of the February dividend season, but we're now nearly through the June reporting season. Any notable observations from this reporting season? And what does it mean for the income in the portfolio?

Yes. Well, I mentioned a couple of -- already of stocks that have done well, which is a BHP and a record full-year dividend from BHP record. And almost depending on how you cut it a record profit for BHP. BHP actually spun off its oil and gas assets. So it's actually half the company -- not half of the company, but it's less of a company than it was 12 months ago. And yes, profit was only just shy. It's total profit for the year was just a whisker lower than its peak in the last cycle. So that was a pretty good result, I think, from BHP. Given the come-back result was good, we think rising interest rates are positive for banks. I know some people are worried about bad debts and recessions and other things, but I think there's a bit of scheme in there. I mean the reality is, if you look back through previous cycles when interest rates have right risen, banks are generally able to increase the net interest margin. So they're slower to raise the rates on like term deposits and deposits they pay shareholder -- they pay depositors. But they pretty much straight away increased their mortgage rates. So you tend to find a rising net interest margins when interest rates go up. There is some, -- I think, some -- so I actually think we're still going to do the analysis on it, but I think the August numbers were still look very good. I think we'll have a good dividend period when we finish up in the next week or so. I think the real issue is water companies talking about looking forward, and that's where the storm clouds are. We certainly are seeing -- starting to see the impact of inflation. Some companies are concerned about rising interest rates, whether that will dampen say consumer discretionary respending, which quite likely will. Having said that, that so far, the results have been pretty good. So there's an area of caution, but I think I'm still fairly optimistic looking forward. I think the RBA will move rates up a few more times, but then I think it will stop and some people are predicting that interest rates will be going down by this time next year.

Great. Just to remind, if you do have a question, just drop it into the Q&A box there. Don, there's a couple here. I'll group them together, Steven Nathan, both ask, are there any plans to do a further capital raising this year or this financial year FY '23?

Well, that's something that the directors may have discussions about, but they can't really signal the market about anything that happens. So I mean we -- directors are always looking about what they may or may not do, but it's not something that we can flag the market. So I think I'll have to pass on that one, Chris. I mean, you're a director as well, you can maybe say as well, but I mean, the reality is we can't talk about what we may or may not do.

Look, I think it probably is fair to say, Don, that we are conscious that shareholders are keen to potentially put more money into the company and that the premium to NTA can sometimes be an impediment to that. So the Board is well aware of that. Keith asks, what is the dividend reserve on? And if you don't know the numbers, I'm happy to take that. Always, I think the franking balance is probably the most important constraint, if you like, on dividends. And last I checked on it was the franking reserves of PL8 to enable us to pay a fully franked dividend of just over $0.06 a share. So I think the way I think about it is almost like a year's worth of dividend cover from the franking reserve. But obviously, that balance is building all the time as dividends come into the portfolio. I don't know if you have any...

Yes. Well, I think you answered it. We did have a record year for distributions or income coming into the fund last year, and we didn't pay it all out. So we actually have built up excess reserves which, as you said, can virtually payout for a fracking point of view, virtually a year's worth of dividends. And directors are keen to have that kitty in there because that gives us some --- if things get worse than we expect and some companies cut their dividends, we'll be able to maintain it. But of course, when Chris says there's a year's worth of dividends, but we will be receiving more dividends throughout the year. So it's not like we're going to run out in new year's time because we will be keep replenishing from the dividends we receive and it's been pretty good reporting season so far. So there is a substantial -- I mean you can go to the annual results and look at our retained earnings and the [ franking credit ] that Chris has mentioned. So we have built up a fairly substantial reserves but that's good because we don't really want to have to cut the dividends. Directors would like to pay a continued a constant stream of dividends and certainly want to maintain paying a regular monthly dividend. We are the only listed investment company, to my knowledge, in Australia that pays a regular monthly dividend. And indeed, we'd be the only company in the world that pays a regular monthly fully franked dividend.