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

Right. Good morning, fellow shareholders, to the Plato Income Maximiser Company Half Year Results. Welcome to our female shareholders. Happy Women's Day. I hope you have a great day. And for those of you who are up in Queensland, we certainly hope Cyclone Albert is -- sorry, Alfred is not causing too much disruption. My name is Chris Meyer. I'm a fellow shareholder. I'm a Director of PL8. I'm also a Director of Pinnacle Investment Management. We do all Investor Relations for the company. So welcome, everyone. I'd also like to welcome our guests today, who are from Plato, Dr. Don Hamson, many of you will know, Director of PL8 and also Founder of Plato Investment Management, the Manager of the portfolio; and Dr. Peter Gardner, also with Plato Investment Management. Now you might wonder why we've got 2 doctors in the house today. It's certainly not because PL8 is unhealthy. PL8 is in a very healthy position. But in all seriousness, it's very important, I think, for shareholders to know that while Don is the person most of you have met and hear most often, it's very important, I think that shareholders know that there's a big team behind Don. And it's not just Don managing the money, Don has got a full team of investment portfolio managers managing the PL8 portfolio. And Pete Gardner is the lead portfolio manager in that regard. So Pete, welcome, and it's great to have you on board to the call today. So in terms of what we're going to cover, we'll do a company update. I'll fly through that. It's really the results of the company in the main. And then we'll quickly hand over to Don and Pete, who will run through the market update and the portfolio update, which is really, I think, what most shareholders want to hear about. So in terms of the -- and we'll take some questions at the end from you. So please feel free to type it into the Q&A box on your screens, and we'll get to those at the end. Okay. So in terms of the highlights of the company's results for the period ended December last year, I think the main thing I would just call out is it is very steady. The company is producing very steady returns, both in terms of its capital growth and its income, obviously, the focus being income. So you can see the portfolio return of 7% for the 6 months in that sort of double-digit range for the year, what one would naturally expect to get from Australian equities. And then the dividend for the 6 months, 3.8%. Again, if you sort of had to double that for the year, you sort of get to that 7.6% annualized yield, including franking. So roughly half the return sort of coming from dividends and half coming from capital growth for the period under review. And you can see that graphically in this chart. So the light blue line on the left-hand side is the growth of the portfolio and then the gray line second from the right -- or gray bar, second from the right is the dividend paid. And you can see there so sort of roughly half the return from the portfolio was paid out as a dividend. In terms of the returns of the portfolio, I think really this 3 months is probably not a particularly long period, but you can see over 3 months, 1 year and since inception, which is now well over 5 years, more or less, the company is doing what it's intended to do, which is outperform the index and outperform the income from the index by a meaningful amount. And so, you can see it's sort of held steady with the returns of the index, if you look in the middle of that table. But certainly, in terms of excess income and excess franking, PL8 portfolio is doing exactly what it has intended to do since IPO. And you can see that graphically on this chart. So if you compare on the left bars, which is the market and the right bars is the PL8 portfolio, you can see in round numbers, if you look at the cash dividend yield, 3.6% for the market, 5.4% for PL8, that's for the 12 months to the end of January. PL8 beating the market by approximately 2% in terms of its cash yield. And then if you include franking, market at 1.2%, PL8 at 2.3%, you could add sort of another 1% in terms of additional franking coming from PL8 relative to the market. So that's really the magic of PL8, if you like. Again, you can see that visibly here. So the dark blue line is the PL8 portfolio and the gray line is the market and that's it from a total return perspective. And you can see the portfolio has outperformed the market if one includes income and franking over that time period, but very close correlation, as you can see. And the more interesting one, I think, for those of you, who are invested in PL8 for income is the dark gray line at the bottom is stepping up better than the light gray line, the dark gray line being PL8's income yield and the light gray line being the market's income yield. So those are the twin objectives of PL8, the top line being to beat the market and the bottom line being to beat the income of the market. Just on dividends, it's been a long time, I guess, since we've been paying $0.055 a month. You can see that on the right-hand side. I think it's a very satisfactory outcome for shareholders. We know you all like that steady monthly dividend. So we've been able to do that since -- just if my eyes can handle the chart correctly since about the middle of 2022. During COVID, we did have to cut the dividend. Obviously, we were a bit concerned about the outlook for dividends. That ended up being correct. So we protected the balance sheet, if you like, over that period. But as the dividends in the market improved and the outlook for the stock market improved, we raised the dividends, and we've held it pretty much at that level for those 3 years. Just in terms of the share price against its net tangible assets, obviously, that's one feature of an LIC. We're very pleased with the fact that PL8 continues to trade at a premium to its net tangible assets. You can see that in the light blue line. It feels like it's held at a very steady 10% premium at the moment. So it has been there for better part of 12 to 18 months. I think it's a reasonable premium. Obviously, it shows demand for income in the market. We don't like it. I think if the premium is too high. We obviously wouldn't want it to trade at a discount. So I think anywhere between that sort of 5% to 10% premium is a reasonable range for something that's sought after by shareholders. All right. That's it in terms of the company update. Obviously, happy to take some questions at the end. So please feel free to put them in the chat. I'm now going to hand over to the 2 doctors. Dr. Don, I think if we could start with you, maybe a quick reminder on PL8 being designed for retirees. Why does that make it a bit different?

Well, yes, I mean, PL8 and its underlying investments, in fact, you showed the history of the underlying fund that PL8 invests in, which was founded in 2011, predated actually PL8. Both the fund and PL8 are ideally designed for retirees. Retirees no longer get a wage. They want regular income. PL8 is -- has a long track record of being -- paying monthly income fully franked. And the other thing is that retirees, if you're in your pension phase of superannuation, you get a full refund of franking credits. And I think retirees love those franking credits. And in fact, you can see that on the next slide that the value of franking for that -- in the hands of a pension or tax-exempt investor, the dark blue columns are the value of a fully franked dividend in the hands of the investor. So if you've got a $1 fully franked dividend and you are in pension or tax-exempt mode, you get a full refund of franking. So that $1 cash dividend is actually worth over $1.40. And I think retirees love receiving those franking credit refunds and they also love that regular income. And so, PL8 has been designed really bottom-up and the underlying fund for retirees, who want that regular income. I'm not saying bad for others, but certainly, they're the ones, who want to live off that regular income.

Yes, for sure. I'm sure most of our listeners are probably in that bracket. So thanks, Don, for that quick sort of reminder of the PL8 objective for retirees. Just Don, we've -- I'm not sure if we've totally finished earnings season, but certainly, we've had a rise of earnings results of late. Do you want to give us a quick feel for your wrap-up of dividend season?

Yes, certainly, Chris. Well, it's -- reporting season has officially closed. I mean, June year-end companies need to report by the end of February. And the companies that we track paid about $33 billion worth of dividends or declared $33 billion has not been paid. Interestingly, at the top line, we've got a graph there that the average company increased dividends by 20%, which sounds really good. But you would note, and there's a couple of highlights there. South32 paid a tiny, tiny, tiny dividend last year and increased to eightfold this year. So it's up 800%. And that drags that average up. Evolution Mining, which is a gold company, also had a big increase in its dividend, but that's because it's much more profitable and wasn't coming from a tiny, tiny, tiny level, but it's still a big increase. So a couple of those large increases drag up that number. So I think when you look at the typical company, I think the median number, which is the middle number there, the 5.5% to 4% increase is probably not a bad number to look at. So your typical Australian company, not the outliers, increased by 5.4%. But if you want to be a glass half empty person, and we saw some headlines in the financial review yesterday, there was an article saying a shocking dividend season. The dollar value of dividends was actually about 5% lower than last year. And it was dragged down by big cuts in the likes of Fortescue and BHP, which are very big parts of the industry and some fairly large cuts like Ampol and Viva Energy, but they're much smaller. So the dollar value is down, the typical or medium companies up, there were some pretty good results. And we saw, I think, some good news for investors. Qantas came back and paid a dividend and special on top of that. And a2 Milk started paying some dividends as well. So I think there are some good signs and think about it, Qantas 5 years on from the pandemic when it lost billions and billions of dollars is now back to being profitable and making profit and paying dividends to investors. So not a bad result, but I think at the market level, it's a challenge for us is that the total dollar value of dividends was a little lower than a year ago.

Don, speaking of reasons why the dividend yield in the market is a bit lower, it wouldn't be complete without a discussion on the banks. I think you've actually been in print, haven't you saying the banks are -- the CBA is super expensive. Do you want to give us an update on the banks?

Yes. And we can start with CBA. CBA's result was actually a pretty good result. But when you put it in perspective, profits were up, cash NPAT up 2%. It's not fantastic growth, but it's still growing. And the dividend was actually up 4.7%. So they've actually increased their payout ratio because they want to get rid of sorry, get rid of, but they want to actually pass on all the franking credits to their shareholders. And the only way you can really do that now is to pay bigger dividends that are fully franked. And so, it increased its payout ratio and dividends are up 4.7%, which 4.7% or the median number in the previous slide, 5.6% are both now stronger than the inflation rate. So the dividend increased faster than the inflation rate. The problem with CBA is the share price is up like $35, $40 or 25%, 30% over the last 12 months, even though it's fallen off in the last couple of weeks. We thought it was a good result. The challenge, though, for CBA is that it's now trading, in fact, today at a 4.1% gross yield. And so, it's actually a lower yield than the market. So if you look at the frank yield of the market, it's around 4.7%. CBA's yield is now lower than that. So it's no longer a high-yield bank. And that's one reason why it's expensive. It's also trading at over 26x its current earnings. So you're paying really a price that you would for a growth stock for something that's only growing at a couple of percent. So it's a good high-quality bank, but I think the share price has got ahead of itself, and that's why I think it does look a little bit expensive. The other banks look much better. And we saw a big pullback although we saw some poor results from the likes of Bendigo in particular, where it actually grew its business quite well, but it actually -- its profits went down because they had to spend a lot more on IT. And I think one of the reasons why Commonwealth Bank is probably the best bank in Australia is because it's the largest bank. And when it does invest in things like IT, it gets the economies of scale and spreads it across, whereas some of the smaller banks might have to spend a lot on IT, but they're doing it off a smaller base. So it was a good result. I think one of the good things in the result and the CBA has been providing this sort of slide here that the listeners can look at is it highlighted that people are now spending more across all age brackets. For the last couple of years, we've seen younger people in the age under 35-year-olds cutting back on discretionary spending because they really had to pay big money on their rentals for renting or for -- on their mortgages with interest rates rising. In the last 6 months, you've actually seen all groups, old people or young people spending more, although older people are still spending a lot more than younger people. I think because they're doing well, their asset values have gone up, et cetera. But I think this is good news for the economy. If we're seeing all groups, young and old spending more on discretionary items and still spending more on essential items, then that is good for the economy and for retailers. And the other good news, I think, in -- if you look at the spending columns in the middle, they also split up into essentials versus discretionary. And if you look at the spending on essentials, it's generally smaller than it was 6 months ago, and that is highlighting that inflation has come down. And of course, we've seen the first of what I think will be a number of rate cuts, which is also good for the economy. But spending has actually started to grow before those rate cuts have come through, which I think is a good sign for the Australian economy going forward. And that actually -- one of our top picks and stocks we've like for a number of years is actually a beneficiary of this spending, which is JB Hi-Fi.

Okay. Well, that might be a good segue to bring Pete in. Staying on the theme of the consumer in Australia. Pete, what are you seeing from those retailers in the earnings season?

Yes. Thanks, Chris. Yes, so it was definitely a kind of volatile period for some of the consumer discretionary stocks because you did see some disappointment, particularly in the auto space, where people are spending a bit less money on their cars than they did 12 months ago. But one of the stocks that did really well, as Don pointed out, is JB Hi-Fi, and that was one of our kind of key picks. And we kind of consider JB Hi-Fi these days is a bit more of a consumer staple rather than consumer discretionary because people tend to keep on spending on their phones and their electronics at the moment. And you saw that in JB Hi-Fi's results that their sales were up 9.8%, which is very strong over the year. Earnings were up 8%. EPS was up 8%, which is 3% above expectations. Their final dividend increased by 7.6%. So all really good numbers. And even their sales numbers in January, you can see down the bottom, JB Hi-Fi Australia was up 7.4%; JB Hi-Fi New Zealand, as New Zealand's economy is starting to recover after their interest rate cuts as well. That was up 20.4%; and The Good Guys were up 6.4%. So overall, yes, a great result for JB Hi-Fi.

Okay. Well, look, I'm still on the iPhone 12. So my kids would agree it's a staple. So Pete, what about insurance? I mean it's not an obvious sector, I guess, people think about for income, but were there some highlights in the insurance sector you want to call out?

Yes. So the insurance sector did actually really well during the period. They're benefiting from kind of 3 benefits at the moment. The first is that they are able to increase their premiums pretty significantly. So you can see in the kind of QBE, their premium growth in FY '22 was 8% and FY '23 was 10% and that set them up pretty well for good profit results. So this year, the premiums went up quite as strongly, still 5.5%. But given inflation has come back, that was still a very good result. And Suncorp as well is guiding to kind of mid- to high single-digit gross written premium increases. So they're benefiting from high premiums, which is good. They're also benefiting from interest rates rising, which helps their investment income. And then the second -- and the third thing they're benefiting from at the moment, which was highlighted in their results was a pretty benign period for natural hazards. And yes, at this moment, we kind of think of the people in Southeast Queensland and Northern New South Wales, we hope that benign claims environment continues for their sake. But that was a great kind of period for the insurers. And so, Suncorp was able to increase their profits by 73%, which was 10% above expectations, so a very good result. Their dividends were up 21% in their kind of normal dividend and then they also paid a special dividend because they took -- ANZ was able to take over their bank, which allowed them to release $3 of capital return and also pay an extra $0.22 fully franked dividend. So that increased their dividends by 85% when you take that into account. So that puts them on an annual yield of 6% growth, so above kind of what CBA is paying, as Don pointed out. QBE's profit was also up 27%. Their current management look like they're really -- doing a really good job of simplifying the business. And so, they had an improved claims ratio, as they're kind of taking less risk in the business at the moment. And as a result, they are able to increase their dividend by 31% on last year. A lot of their earnings come from overseas, so it's only 20% franked, but it still equates to a 4.3% annual gross yield. So overall, yes, a really good result from the insurers.

Okay. I'm sure we're all glad to see higher premiums every year is helping our dividends on PL8. Don, maybe last but not least, miners. What do you see in the miners that's worth telling shareholders about this reporting season?

Well, it's been a pretty tough one for the iron ore miners. So BHP, Rio and Fortescue all cut their dividends with the biggest cut coming from Fortescue given that it's a pure-play iron ore miner. I think the good news for BHP and Rio was that their other assets such -- particularly for BHP and Rio, their copper assets did very well. They've been expanding production. And now BHP was dominated by iron ore for many years, but with copper prices going up and then production going up, 40% of their EBITDA is now coming from copper. And we see a pretty good outlook for copper because -- the world has got plenty of iron ore, has got plenty of lithium, but it doesn't have a lot of copper. And in terms of electrifying the world, electric cars, electrifying everything, you need copper. And BHP and Rio to that extent are well placed to benefit from that demand for copper. I mean, the disappointing fact for BH -- slight disappointing from my perspective on BHP was not only did they cut the dividend, but they cut it to the absolute bottom of their payout ratio. They've got a sort of payout ratio of somewhere between 50% and 80% returning 50% to 80% of earnings back to shareholders. They went right to the very bottom of that. Now they are investing quite a bit of money in expanding copper production and also in getting their potash project completing that in Canada. The Jansen project there is sucking up a lot of money. I think the jury is still out on that as to how good that investment will be, but they are spending a lot of money on it, but they're definitely investing, I think, good investments into their copper production. I think also probably iron ore prices to me are probably going to stabilize around the current level. So I can't see them going much lower because there's a lot of high cost producers around that USD 90 to USD 100 a tonne. And if prices go below that, they become uneconomic and should stop producing. So hopefully, the worst is over for the iron ore miners, even though there are a bit more supply coming on later in the year.

I suppose just to finish on the miners, I mean, this is a pretty good example, isn't it of a sector, where PL8 will just sort of rotate in and out of based on whether that's good or bad dividend environment for the sector. You're not sort of buy and holding these miners and just riding the cycle.

Yes. And I think it also highlights the benefit of a diversified portfolio because if you're in -- if your main stock for dividend was BHP, you got some great dividends for the last couple of years, but you're down 31% this time. A diversified portfolio is always going to do better, I think, than just owning 1 or 2 stocks. Yes. And we're still in these because if you look at the yields on some of these stocks, they're still actually pretty healthy at 6% to 10%, better than the banks actually. But certainly, we're not as overweight some of these stocks, as we may have been a few years ago. And in other sectors, we're not. But we'll go to where the dividends are, whether it might be small gold miners that are returning such as Evolution that are paying quite good dividends, we'll move to there. And that's the benefit of an active process. I didn't mention it before, but the other benefit from retirees is they don't pay capital gains tax. So turning the portfolio or turning it over to get more fully franked dividends is, I think, beneficial for those retirees.

Okay. Peter, let's bring you back in. One of the ways to lose returns is to lose money on positions. So I guess part of the magic of PL8 is avoiding the losers or the traps, dividend traps. What did you see in the results season from that score?

Yes. So there were a few dividend traps. And the ones we've kind of highlighted here are Viva Energy, Santos and Woolworths. Viva Energy and Santos are both in the kind of energy sector. Viva Energy suffered from big drops in refining margins, which are coming off the highs that they were experiencing in 2022 with the Ukraine war. Santos, similarly, oil and gas prices have fallen over the last 12 months. So they cut their dividend by 39%. And Woolworths was another one that people might consider very low risk and unlikely to cut their dividends. They've actually had quite a lot of problems in the last 6 months with their distribution centers. They had kind of strikes going on and that allowed them in the kind of critical December kind of Christmas period to have issues restocking their shelves. And so yes, Coles is definitely winning the kind of supermarket wars at the moment, and that resulted in Woolworths cutting its dividend by 17%. So yes, it's definitely something that we're very aware of in our portfolio, avoiding the kind of dividend traps and it's a big part of our process.

Okay. Don, maybe just to wrap up before we move to Q&A, let's start looking forward rather than in the rearview mirror on earnings season. What are you -- you guys have now almost famous look ahead at the dividend cut prospects and dividend raise prospects. What do you see? What is your chart showing you now?

Well, if you put the chart up, people can see it. But we actually take our dividend trap model. So look, we try and avoid the stocks have cut their dividends. So we actually have developed a model over time that forecasts the likelihood the company will cut its next dividend. And that helps us to avoid the Viva Energies of the world, et cetera. But we can also aggregate that up at the market level, which is what this chart is doing and highlight where -- what the sort of next -- it's only 3 to 6 months outlook is where do we think dividends are going. And suppose the good news is that the latest point is around the long-term average, right? It was a bit -- quite a bit -- it was a little bit above in the last couple of years as interest rates came up, and it's now basically sitting on the long-term average. So it's sort of an average outlook, which is not bad. It's not great, but it's also not too bad. I will point out on this chart that high is bad, low is good. So you can see that 5 years ago, this hit an all-time high. And 5 years ago, hard to believe it was COVID hit us, and the likes of Qantas were deciding they won't pay a dividend even though they declared it and 5 years later, they're now paying a dividend. So it's now in this much better position. So it's a bad average. I'm not going to say be overexcited for investors, but I think things are largely getting back to normal. We've seen the first of hopefully, what will be a number of interest rate cuts that should be good for the general economy and for retail sales, et cetera. Jury is still out on where iron ore prices are going, but I think they've fallen a long way, and I don't think there's too much more falls there. So the outlook is okay. And that's, I think, relatively good news. And what I would also say to people though is interest rates going down, that's for sure. We've already seen the first cut, that will affect term deposits, et cetera. And the fall in interest rates from -- the first cut in interest rates from 4.35% to 4.1% means that if you've got your money in the bank, you've just had a 5.6% reduction in the amount of income you're going to get, which is actually equal to the fall in dividends. So with more interest rate cuts to come, I think people now have to start thinking about where they're going to get that extra income from because they're not going to get as much from their term deposits going forward.

Okay. Let's -- thanks for that, Don and Pete, that's an excellent overview. I think we should now listen to some questions from the shareholders or answer some questions from the shareholders.

So Don, I don't know if you want to take this first one. We've actually had questions here from Christopher, just trying to see Sally and Ian all saying, look, we want to put more money into PL8, but the premiums may be off putting. What are the chances that you guys are going to do another share purchase plan this year?

Yes. Well, look, I don't want to give people false hope. I mean we -- and discuss this at the Board level, but I mean, we're not looking to do an SPP in the near term. The -- one of the reasons is we have -- we're pretty close to our capacity in this strategy, and we don't want to take too much money and then disappoint investors. I think that's the worst thing that fund manager can do. And also, if we do an SPP, we have retained earnings and we can smooth dividends across the cycle. Every time we do an SPP or a capital raise, we actually dilute those retained earnings and the franking balance of the company. So look, at the moment, I don't foresee us doing an SPP. I'm sorry if that disappoints shareholders. But I think it's in the long-term benefit of shareholders to maintain the strong monthly dividend paying position of PL8.

Yes. I think I would maybe just add on that remember that PL8 is paying about an 8% gross yield. Even if you're paying a 10% premium on the NAV, you're still getting above 7% gross yield. And I think Don was talking about CBA producing a 4% yield. So it's still substantially better than the market even if you're paying that premium, but we totally understand shareholders would obviously love to buy it at NAV rather or NTA rather than a premium, if possible. Don, there's one here, and I'm glad Peter asks this, not, our Peter, but Peter as a shareholder, he is saying, hi, Plato people, do you think the WAM copycat Income Maximiser they are launching will steal many of Plato's investors and impact PL8's share price? I mean maybe I'll start. I think it's -- I don't think they've actually put the material out yet for that fund. But I would say that it's quite different to PL8. It's got some fixed income assets in there. Obviously, PL8 is all equities. That would be the main difference. And I think, Don, it might be worth just hearing from you when we established PL8, almost how difficult it is to develop the balance sheet and the sort of track record and so on to establish the steadiness of the income that we've been able to deliver.

Yes. Well, first, I would say it is different, and I agree with Chris, in that they're talking about investing in a portfolio of equities and some credit. So it's -- if you're not going to get franking credits from credit, although if it's in a company, then you may pay tax and be able to frank the dividend. But with interest rates going lower, the returns on that will be lower. And there is another question about do we have an unlisted fund. We've been doing this for -- well, coming up 14 years this year. So we have a long-term track record of investing for income. There is an unlisted fund that has that 14 -- or coming up a 14-year track record. And we've done it through periods like COVID and other soft dividend periods. So we have a proven track record. And you do have to build up some retained earnings and actually get some franking credits before you can start paying income. So I expect that there'll be -- it will take them a little while to be able to do that. We took about 5, 6 months before we started paying our first 5 months, I think, our first dividend. But good luck to them. I think it's copying in its monthly income, but it is part debt, part equity. So it's a little bit different to Plato or PL8 because Plato Income Maximiser is a full equity income fund. We buy stocks for income. We've developed -- sorry, we have a long-term track record of having -- delivering that great income. And we'll just have to wait and see how successful they are.

As you said, Don, imitation is the biggest form of flattery. I think the one -- the other thing I would just call out is, and this is true with the other income like Whitefield that's come to market is, remember that PL8, as we said at the start, has twin objectives. One is income, which we're spending a lot of time talking about; but the other one is matching or beating the market. And that's not easy, if any of you follow sort of active versus passive debate. It's not that easy to match or beat the stock market, particularly when you are trying to maximize income. And so, a lot of these other income legs have not put down as an objective that they will try and meet or beat the market. And so, remember that, that's also a big part of your return is not just the income, but the ability to generate capital returns, capital growth in line with the market. So okay. I think, Don, it's -- and Pete is 10:35, and so we should at least it is in Sydney, we should let people go, I think I'm just looking at the question line here. I don't see any new ones coming through. So I think we'll call it at that. Don, Pete, thanks very much for your time. Don, as always, for leading us in PL8 and Pete, for your very, very able assistance on managing the portfolio. And for me, I'll just say cheers to all of you. And again, have a Happy Women's Day and those of you in Queensland, hopefully, everything is under control. Take care.