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

Right. Good morning, fellow shareholders. It's just gone 10 o'clock here on the East Coast. So, I think we should get going. Welcome to the Plato Income Maximiser Full-Year Results and Portfolio Update Webinar. My name is Chris Meyer. I'm with Pinnacle. I'm also a Director of PL8. I'll be your host today. For those of you that don't know Pinnacle, we are a minority equity investor in the manager, Plato Asset Management, and we also do the Investor Relations for PL8. Joining me today is Don Hamson. If you remember, last time we did one of these in February, I think Don was seeing shareholders up on the Gold Coast, but we're lucky enough to have Dr. Don back with us today. And so we look forward to his presentation. The format of today's presentation will be about 15 to 20 minutes of presentation and about 10 minutes of Q&A at the end. So if you do have questions, please feel free to type them into your Q&A box. The slides for today are available on screen. If you see there's a download link there, you can download them on screen. You can also go to the ASX under ticker PL8 and you'll find them there. We put them up on the exchange this morning. But obviously, if you are following with the visuals today, Don will be sharing his screen and will present the slides to you today. So that's really it in terms of housekeeping. Don, I think if you have your slides, maybe if you just quickly flip to the disclaimer slide just so that the audience knows, we are not yet to give personal financial advice. We don't know your personal situation. So please, this is general advice and information only. And then, I think Don has an agenda slide. If you flick to that, pretty much covered it. But we'll run through the company or you'll run through the company results, market update and portfolio update, and then we'll go to Q&A. So with that, Don, let me hand over to you to take us away. Thanks very much.

Thank you, Chris, and good morning, fellow shareholders. So we'll start with the update, the formal update for financial year 2023, which finished in 30th of June. If we look at the financial results, PL8 had a -- I'll talk about PL8 rather than Plato Income Maximiser because it's easier, but our PL8 generated $57.4 million worth of profits. That was a little less than last year, but we have seen sort of markets moving around quite a bit. The portfolio performance was 15.8%, which is very pleasing, although it was a touch behind benchmark. We actually had a strong calendar 2022. And then in the last 6 months of fiscal year '23, so that's January to June, we actually saw a big bounce back in retracement in growth stocks and particularly anything that's AI associated. So many tech stocks, which often pay no dividends or very small dividends, rebounded strongly. I would say we've actually performed quite well -- performing quite well this month in reporting season. And for the last financial year, we paid a total of $0.066 of dividends. That's $0.055 a share per month, fully franked compared to ordinary dividends of $0.06 paid in the previous financial year. So, that was an uplift on the ordinary dividend. And that equates to a gross yield, if you include the franking credits of approximately 7.8% on PL8. The yields are a little lower than the underlying investments because PL8 is actually trading at a substantial premium to NTA close to 20%. And it's pleasing to note that in terms of performance since inception, we are even after fees and all costs, so 0.1% above benchmark. So, that is very pleasing. And we've certainly satisfied our other objective, which is paying out more income than the market, approximately 1.7% more income than the market since we inception, even though we didn't pay any dividends for the first sort of half a dozen months. And we raised nearly $86 million in a share purchase plan in December last year. That was very pleasing. We had more than 40% of shareholders participate. So it was very well supported. And I think that just highlights why it is trading at a premium highlights that there are still many more shareholders that would like to get more of PL8. They'd probably just like to get it cheaper than 20% above NTA. In terms of NTA performance for the year, there is a breakdown on this slide here. We started the year at $0.984. This is a pre-tax NTA. Net investment portfolio performance that's after fees, added $0.12 a share. Other costs, so company expenses such as directors fees and listing fees took away [ 0.001 ]. And we paid out, as I mentioned, $0.066 worth of dividends. There was a slight contribution from the fact that we did the SPP at a slight premium to the NTA, and that added $0.03 to NTA living and ending pre-tax NTA of $1.04 at the 30th of June. So it's quite pleasing that we've seen a rebound in markets. I mentioned the performance before. Yes, we're 0.8% behind when compared to an index that includes Franking, S&P 200 Tax Exempt Index. All of that has come in the last 6 months of the year because we did outperform in calendar 2022 in both halves. We are ahead of benchmark since inception on an after-fee basis. And yes, we've generated, as I mentioned already, higher yield in the market. So last year, 12 months yield for the S&P 200 was a 4.5% cash yield and 1.6% franking credit yield. So, you add that together and the gross yield of the market last year was 6.1%, whilst gross yield of PL8 was 7.8% when you gross up for franking. So, we had a higher income -- distributed income in the market. And from a longer-term perspective, so this is -- goes back right to the very start of the underlying investments of PL8 because PL8 does, in fact, invest into Plato Australian Shares Income Fund. That income fund was started in September 2011. So, we're approaching a 12-year track record on that. And this is a longer-term. Total accumulated performance of that underlying investments after fees is in blue and the gray line would be the similar investment if you were invested into that tax exempt or franking credit, which includes franking credits index over that same time period, remembering there are no fees in the index, but there are fees that are taken out of the underlying fund. And here is the pattern of monthly dividends. Remember, one of the objectives of PL8 is to pay monthly fully franked dividends. And so -- sorry, someone's just sticking gesticulating at me through the window. I should have a curtain on this screen, this room. But here is the pattern of monthly dividends since we started paying dividends in October 2017. And you can see that over the last 12 months, we have kept the dividend constant at $0.0055 a share, after lifting it twice in the previous financial year. Directors feel that this is the appropriate level of dividends given the current outlook. But we certainly met our objective. It doesn't include the special dividend that we have paid. We've paid a couple of special dividends along the way, but we're just looking at the ordinary dividend pattern here. And lastly, this is the PL8's share price compared to the underlying pre-tax NTA. And you can see that for most of the period that PL8 has been, since inception, it has traded at a premium. It was a period of time, 5 or so years ago when there were some question marks over the franking credit refunds where we traded at a small discount to NTA. But subsequent to that, we've traded at a premium. And even in the period of market dislocation in the pandemic in 2020, it seems a long time ago now, we traded at around -- basically the share price of PL8 traded down with the NTA. It didn't really trade at a discount for any particular length of time. But subsequent to the bounce, we've often been around that 15% to 20% premium to NTA, which suggests there's still significant ongoing demand for a company like PL8 that pays monthly regular income. And I think pleasingly as well, when we listed, we had a touch over $300 million of assets. We've done some subsequent raises, SPPs and placements and the asset base has now more than doubled since we listed. And if you actually look at the market cap because we are trading at a 20% premium, it is well over $750 million now. So, I think that's very pleasing because in the LIC land, big is better and LICs that are larger have a tendency, not always the case, but a tendency to trade stronger given liquidity and other factors. And with that really comes to the end of my presentation. I mean, one of the -- but if we go back to one of the foundations of why PL8 is around is that it was really designed largely in the underlying fund for retirees who want regular income and it's no more regular than getting paid a monthly fully franked dividend. The other thing is the retirees, certainly, if you're under that $1.9 million pension phase cap or transition balance, then your earnings are tax free and you get a refund -- a full refund of franking credits. And that is something, I think, that retirees certainly love those franking credits and those refunds. And that was one of the reasons [ veterans ] of the Plato Australian Income Fund and indeed, PL8 was a vehicle for retirees who want regular income, although other investors who want regular income. I think also like that, particularly charities and foundations. And the reason is that tax rates are different. We've shown this chart before. If you are in that pension or tax-exempt phase, you don't pay tax, but you do get a refund of franking. So in this chart, we're looking at the after-tax value of $1 of pre-tax income. And so an investor who -- if you're a either pension fund or super funding pension phase or you are a charity or foundation of someone that doesn't pay income tax, your tax rate is 0. When you receive the franking credit refund, you're getting more than $0.40 back for every $1 of fully franked dividend that you receive. So it's the most tax efficient form of income. It's actually still very good for super accumulation, although you do pay some tax on the franking credit. And indeed, should, and this is an estimate from Plato, but should the government's proposal to tax super balances over $3 million or 30% effectively, a fully franked dividend has a $0.30 or 30% tax credit. So it will still be worth $1, and it will still be the most tax efficient form of income for superannuation funds. So that's just a bit of a feeler. We have written a paper on the potential impact of those potential tax changes or move to tax changes, and they're on our website if people wish to look at that. But that's one of the changes that's happened this year. In terms of the market itself and turning to that, clearly, interest rates have been rising now for over 12 months. We've seen interest rates now move up to sort of 4% and bond yields as well, which means that if you're investing $1 million, whether it's in term deposits or you're putting it into government bonds, you're getting approximately $40,000 on $1 million compared to virtually nothing 18 months ago. So that's sort of, I think, for retirees and other people living off the income, that sounds very good. It's better than what it was. However, Inflation is still pretty strong, although we did see the monthly inflation numbers come below 5% for the first time yesterday. I still prefer to use the quarterly inflation numbers. They're much more accurate. We have a long-term history of those. And the June quarter inflation was still at 6%, but it is going down. It peaked at 7.8% in December 2022. But the problem is, if you're earning 4% on your term deposit, but prices and inflation, the cost of living is going up 6%, you're actually going backwards 2%. Or if you put $1 million in the bank, really earning a negative real rate of return of minus 2% negative, or you're going back about $20,000. So yes, interest rates are rising, but they so far are not rising as fast as inflation. Hopefully, inflation will tick down further. But at the moment, you're actually locking in a negative real rate of return. Turning to -- well, this is an update really on the market outlook now, and this is very up-to-date. If we look at the results season, it hasn't quite finished. It's the last day of reporting today. We are on the last day of August. Dividends declared, which is our focus so far, have been over $29 billion. Now that is a big number, but it's actually 21% less than last year, although we still have the rats and mice reporting today. There were -- and that headline -- or that headline number of 21% decline is largely driven by 2 stocks, 2 very big stocks in the market. BHP and Rio cut their dividend significantly because iron ore prices and coal prices of BHP have gone down compared to last year. That's the main drivers for the reductions of the market and the reasons why BHP and Rio have cut their dividends. There were cost increases as well, but really, it was the commodity prices, and we expected those cuts for BHP and Rio and some of the other miners. But apart from that, actually, if you look at the graph on the right-hand side there, the average dividend increase was actually 24%. So whilst at a dollar level, the dividends are down, if you look at company by company, most companies actually increased their dividends. Indeed, more than 57% of companies increased dividends. 13% had flat dividends compared to same time last year, and only 29% of companies have so far cut their dividends. But as I said, a couple of those 29% of companies are very large companies, so they pull the dollar value down. Probably -- I mean, the problem with an average, which weighs each company the same is a small company might increase or even a medium-sized company like IAG might increase its dividend by 80%. BHP cuts it by sort of 50%. The net-net, that means that the number is positive. But the reality is BHP is a lot bigger than IAG. If we can sort of try and adjust that by looking at the median and median was still up, because with more than 57% of companies increasing dividends and median rise was still 4%, which is pretty close, but a little bit less than the inflation rate, which is now down to 6%. So overall, we actually thought it was not a bad reporting season given there was so much negativity factored into the market going into the results. And some of the stronger areas were like the insurers, IAG, QBE and Suncorp and Medibank Private, that all increased their dividends. And we actually prefer a slightly overweight of the insurers. CommBank had a fairly good result and increased its dividends by 14%. So, we actually think given expectations, it wasn't a bad reporting season. And if we dig down into a couple of these results, first, the bad news is BHP. Well, depending on whether you adjust for currency because it declares dividends in US dollars, was down over 50%, but that was really driven by commodity prices. And so there was an expectation. These things are very volatile. We still think, though, the outlook is not bad. And whilst there are a lot of concerns about China, India is growing strongly. And if you look at over the next 10 years in India, will have a higher population than China and will be significantly increasing its demand for steel and iron ore. CommBank, as I mentioned, increased its dividend by 14%, is an interesting result. Their profit was actually only up 6%, but it's still -- when I say only up 6%, it's now -- the cash NPAT was more than $10 billion, which is a very large number. The increase there -- sorry, this should be final dividend, not interim dividend from $2.10 last year to $2.40. That's a 14% increase compared to the increase in profits of 6%. And so one of the things that we expected from companies like CommBank was they were likely to increase their dividend payout ratios. The reason I say this is November last year and the budget that Jim Chalmers brought down, he basically stopped off-market buybacks from happening. And Commonwealth Bank and Ampol and a few other companies have -- indeed, BHP is one of them, have a history of paying out or doing undertaking off-market buybacks to pay out excess franking credits for their shareholders. If off-market buybacks are no longer allowed, although it hasn't been passed by the Parliament yet, but it's been announced, we expect it to go through. Then the only way that companies like Commonwealth Bank can pay franking credits out to investors is to pay more dividends, whether they be ordinary dividends, and CommBank did increase its ordinary dividends. And it has increased them by more than its increase in profit. So it's actually paying out a higher proportion of its earnings as dividends. And I think it's doing that because that is the only way it can release those franking credits to shareholders. That was -- we expected this when they announced those changes. We also expected that some companies would pay special dividends. And earlier this year, we saw Ampol pay one of those. So, that was actually a pretty good result. There's a lot of doom and gloom around their interest -- net interest margin was fairly stable. Their bad debts are still very low. Most people in Australia still have jobs. If you've got a job, you pay your mortgage. So, we're still relatively bullish that we're not going to go into a recession. And if you don't have a recession and you don't lose your jobs, you will pay your mortgages. So bad debts will remain low. And the final number, I think, is quite important. CommBank funds, 75% of its funding comes from its term deposits and general deposits. So it is largely self-funding, doesn't have a lot of call on the market to finance its lending. JB Hi-Fi was certainly moved it as one of potentially the poorer results. And yes, the numbers were down and its dividends were down compared to last year. But the results were actually better than expected. The market thought they'd be worse. Their margins have fallen. And if you look, their sales were up 4% over the year, but that was less than inflation. So their actual volume of sales are sort of slowing. Their EPS was up only 0.1%. So, their margins are contracting. But if you look at it from a longer-term perspective, and I know it's sort of 4 years, but JB Hi-Fi, its profit this year compared to its pre-COVID profit is up 120%. So it's done really, really well over the last 3 years or 4 years. Yes, we are having a slowing in sales, but they're not slowing as much, in fact, as much as the market thought. And yes, it did cut us a dividend, but it's still trading on a yield of nearly 10%, 9.6% gross yield and only a 65% payout ratio. So, we still like that stock, particularly to grab those dividends because that's a pretty chunky yield. And lastly, I've probably said enough. But just from an outlook point of view, part of our process is to estimate likelihood of dividend traps and certainly avoid stocks where there are massive cuts and dividends or they might cut the dividends completely and pay nothing. So, we have a bottom-up model that forecasts the likelihood that individual companies will cut their dividends. We can then aggregate -- this comes out as a percentage. And if you think about the likelihood of cutting their dividends or the probability that the company will cut its dividends, a high probability is bad and a low probability is good. If you look at this chart, this is a chart not on individual stocks, but on all the stocks aggregated up, so it's a market level chart of the likelihood of dividend cuts. And there were very big cuts in 2020, and our model very quickly picked up the fact that there will be big cuts in dividends in the pandemic year of 2020. And in this slide, you can see that at market-wide level, it hit an all-time peak of over 45% on our model in 2020, but very rapidly fell. But what's happened in the last 18 months, as we've seen interest rate rises come through, as inflationary expectations have come through, we are seeing a slowdown in the economy. You've just seen that probability of dividend cuts ticking up from a below average level to a slightly higher than average level. But what I would say, it's only a slightly higher average than level. So yes, there's increased uncertainty, but it's not -- it's not slit your wrists and go to cash and what have you. It's not a GFC type number, which is 40%. It's not a pandemic number, which is over 45%. It's actually on our numbers ticked up just a bit above 25%. So things have deteriorated over the last 12 months to 18 months, but they're still just a little bit worse than normal, which is not a bad outcome when you compare to, you turn the television on, it's all doom and gloom interest rates and can't afford to pay your mortgage, can't afford to pay rent, can't afford to put food on the table. The reality is at the company level, Australia is doing reasonably well, and we're still seeing some pretty good dividends out of the market. And that's pretty much why summary interest rates are rising, they are, to some extent, challenging valuations. Safe assets are still generating negative real returns. But we still -- dividends are still pretty strong at the market level, ex-sort of resource stocks. If we include commodity prices, that can go down, but they can also bounce back up. Generally speaking, most balance sheets are strong. But we still think, as it is a bit more uncertain that it's critical to have a manager that's looking to avoid the bumps on the horizon. But I've probably said enough. So. I might hand back to Chris and see if there's any questions that shareholders might want to ask.

Good. Thanks, Don. And well done for that. And I see you've got the tech all sorted there. You've unshared your screen. So thanks for that. Don, we do have a few questions coming in. So I'll get to those. But just a reminder for everyone on the line, if you do have something on your mind, please feel free to put it in the chat and we'll get to it. So in chronological order of how the questions came in, Don, the first one from John is -- and I'll take it if you don't want to take it is, is the share purchase plan being considered for this year?

Yes. Happy for you to take, Chris?

Yes. Look, I mean I think we're a listed company, PL8. So obviously, once we know -- if we know anything like that is likely to happen, we would inform the market. I think in general, what we would say as a Board of PL8 is that we're aware that a lot of shareholders would like to get set in PL8 to invest more in PL8, but are, to some extent, put off by the premium. It trades relative to its NTA, and would like to invest more at a price that's closer to NTA. So, that's one consideration, obviously, and it's an important consideration, and I'm sure that's the genesis of the question. We're also mindful of the fact that, as Don said, growing a company, even though this is not an operating company, growing a company and having larger market cap, larger liquidity is also good for shareholders. But it's a balance between that and making sure that, I guess, to some extent, PL8 remains a fairly unique investment vehicle. It's not a limitless capacity that Don has in its strategy, and we want to make sure that we don't put the company at risk in terms of trading at a discount to its NTA. So it's sort of that supply and demand balance that the Board is always considering. So it's a fairly long-winded way of saying it's always a consideration. Capital management is always a consideration of the Board, dividends, raising new capital, all those kind of considerations. And so you should take comfort with the fact that the Board pretty much at every Board Meeting has a conversation about things like share purchase plans. [ Brian ], hopefully, that answers your question. There's a second one here from [ Gatano ], which is, what is your consideration in regards to a DRP? Don, do you want to?

Yes. Look, I'm happy to take that one because I did some work -- we did some work on this a number of years ago. PL8 is pretty unusual because it does pay a monthly dividend. And so in terms compared to a company that might pay semiannual dividends, which is more the norm, the monthly dividend is quite small. And when you look at doing an DRP, DRP has some costs and there are costs in terms of administration and there are also costs in terms of -- the ASX, every time you list, you issue new shares, it wants to charge you for that. So when we looked at the costs of implementing a DRP, it just didn't stack up from shareholders or from the company's perspective to do that. So, I think maybe that's something that the directors will take into account if and when we decide to do an SPP that you can't have a DRP. So maybe that's another way of doing it. But it just isn't cost efficient to really do a DRP when you have monthly dividends.

That's right. And I think, it's fair to say, Don, that most shareholders at least -- we haven't done a specific survey on this, but certainly, the feedback we get is that shareholders quite like the cash and mostly want the cash. So, I guess we've always also felt that the DRP wouldn't have a high participation rate given the desire for cash.

Yes. Because I think the target audience is really retirees who want that regular income.

Yes. Don, maybe this is another one for you, I'm happy to add to it, if you would like. But Nathan asks, at the end of June, he's obviously been through our financials. You've got $93 million of profit reserve, which is 26 months worth of dividend cover. And you've also got about 9 months worth of franking cover. How many months coverage do you consider appropriate to weather a global financial problem or sustain the current dividend? Yes.

Yes. So I think, first, the appropriate one to look at is probably the franking account because we want to fully frank the dividend. So it's 9 months rather than the 26 months. Look, I don't think there's any hard and fast. We don't have like a fixed number in the mind of directors as how much we need. But we monitor this very -- yes, every time we announce dividends, et cetera, that is a key factor that we look at. But look, we are clear that we are in a slightly deteriorating environment. I would think at the moment, the probability is vastly in the side that we're not -- we're going to avoid a recession. But who knows what may happen. So directors want to -- certainly want to, I think, are on the side of being conservative and would prefer not to have to cut dividends. I'm not -- I don't know whether you can add any more, Chris, to that?

Yes. I think maybe one slight correction, Nathan, in that. I'm just looking at the accounts now. We did disclose that we had an equivalent of $0.063 of dividends we could pay that would be fully franked based on the current franking balance. And given we're paying out $0.0055 a month, that's about $0.065 a year. It's actually more like 12 months' worth of dividend cover with the current franking balance. And Don, from memory, that's more or less what we've had almost through the life of the company. So it sort of held itself at that level more or less since I can remember. And so you think about franking coming in and franking going out through dividends, we're paying, it's more or less staying at that kind of consistent 12-month cover kind of level.

Yes. Well, it's certainly been consistent since you've come on Board as a Director, Chris. But obviously, in the initial days, we started with none and built up that balance. And then when companies pay down a lot of special dividends and buybacks, we built that up to that sort of 9 months to 12 months type mark. And I think directors are pretty comfortable having that bit of kitty there, because we would like to retain the dividends. And yes, things are a little more uncertain, but not too uncertain. I think feedback we have from investors is they like to have a stable dividend, and they don't really want to have it cut again. But we have a history, we did it once, but we prefer not to have to cut dividends in the future.

Yes. And certainly, as you said, Don, there's nothing you're seeing that would suggest that that's a risk at the moment. Okay. I think that's all we have from shareholders in terms of questions unless anyone's got any last-minute questions. We did say we would try and get you out of here in half an hour. So, we're pretty much on that half hour. So if there are no more questions, Don, I'll just -- thank you for your time and obviously, Plato, for doing such a good job in managing the portfolio. And shareholders, thank you for your time and attention on today's call and for your continued support. There will be a replay of this in your inboxes probably by the end of the day. And as I said, if you do want the slides from today, probably your best bet is either to wait for that replay or just go onto the ASX, and you'll find the slides there. _

Thanks, Chris. _

Thank you very much.