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

My name is Jamie Mimis, and I'm part of the listed funds team here at Pinnacle Investment Management and excited to be the host today. Pinnacle for those who don't know us, is a shareholder in the Plato Investment Management business, where is the investment manager of [indiscernible] and Pinnacle, we also manage the Investor Relations for the company. Today, we're joined by Dr. Don Hamson, who is the Founder and Managing Director of Plato as well as the Director of PL8 as well as Peter Gardner, who is Co-Founder of Plato and Portfolio Manager. Welcome, Don and Pete, thank you guys for coming today. Now before I hand it over to Don, who will speak to the company -- company update. For those who want to ask questions along the way, please type your question into the Q&A box on the dashboard, and we'll look to answer it at the end of the session. A final reminder is the webinar slides are lodged on the ASX and this session is also recorded and will be distributed to PL8 shareholders. With that, I'll hand it over to you, Don, to take us through the company update.

Thanks, Jamie, and welcome fellow shareholders to the FY '26 financial results for PL8, the all important disclaimer. Today, we're going to talk about a company update and market update and then take questions. So let's move on to the company update. And for the fiscal year, we paid $0.066 per share or dividends paid equally over a 12 monthly dividends. PL8 was the first listed investment company to actually pay monthly fully franked dividends, and I know shareholders love that regular income. Our portfolio performance was pretty much did in line with benchmark this year. And our net profit, which includes market valuations, was about $41.8 million. That was lower than last year, but that was purely because of the market was much stronger last year, and it does include valuations uplift in the portfolio. But in terms of income and dividends, it was the same as last year. And that was significantly higher than the market. If we turn to the next sort of slide. This is sort of the sky chart of the valuations. You can see the NTA increased due to portfolio performance, there was just 0.1% costs in the fund, and we paid out about $0.066 a share in dividends. So the actual NTA fell slightly over the course of the year. This is largely due to the fact that the Australian market was pretty much went sideways for much of the year. And the main income -- main return was actually income generated, including franking credits. If we move to the next slide, you can see that, yes, our total return was 7.2%. As I said, it did in line with our benchmark. Our income was 6.7% that's 2.5% higher than what the market generated. These are all after fees. And our ASX franking, we basically doubled the index, franking. The index generated about 1% franking, and we generated excess franking, essentially 1%. Since inception, the fund has -- or the company has returned 10% after fees, 0.1% above benchmark and generated income of 7.5% with excess franking of about 0.9%. So you can see that we are meeting -- clearly meeting our income objective. And over -- since the inception, we're also outperforming the market. We move to the next slide, just to compare our income with that of the market. And this is -- the market yield has actually fallen significantly in the last 12 months. The cash yield on the market was 3.2%. The cash yield of PL8 was 4.7%. And as I mentioned before, we generated twice tracking level of the market, 2% compared to 1% of the market. So the market gross yield of 4.2% is quite low. It's generally over the last sort of 15 to 20 years, been closer to 6% than last 12 months, only 4.2% but Plato or PL8 is continuing to generate higher income than the market. In the longer-term performance of the underlying portfolio of PL8, this is Actually, PL8 invests into the Plato Australian Shares Income Fund, and this is the long-term performance of the Plato Australian Shares Income Fund after fees. That's the dark blue line on the top compared to the market in gray, both of them include franking credits. So you see that we're slowly but surely pulling away from the market return. The bottom 2 lines are sort of accumulated income that has been distributed by the Plato Australian Shares Income Fund, and you can see that, that again has sort of continues to outperform the income that you would get if you were just in an index fund without fees. And if you look at the consistency of the dividend since we started paying dividends in October 2017. So coming up for 9 years now. We have continuously paid a monthly dividend. This slide does not include the 2 special dividends that we paid. And you can see we've held the dividend constant over the last 4 or so years, and that's something I want to come back to because in the market update actually. But I'll talk about that when we get there. But the reality is Plato, our PL8 has maintained constant dividends. And just in terms of where we're trading versus NTA, pleased to say that PL8 has continued to trade very strongly versus its NTA at the last sort of number there on the slide is around 25% premium to its underlying NTA. The NTA is lower gray bar and the dark blue line is the PL8 share price and the light blue line is the premium and the premium is now around 25%. So it's -- we're happy to see it's held up. I know -- some shareholders would like to see the price falling so they can get -- put more money into it, but it's a nice problem to have, we'd certainly rather be trading in a premium than trading at a discount. But I think -- the fact that we're trading at such a high premium just highlights the demand for income and particularly franked income in the Australian marketplace, especially when it's paid regularly like the monthly plateau or PL8 dividend. Move to the market update. And before I really get stuck in the market. I just want to note that this strategy has ideally been targeted towards retirees. We expect that bulk or a large proportion of the investees are likely retirees who want regular income, although it is also very good for charities and foundations, and I know -- some of the investors in this fund are actually charities or foundations. They too get a full refund franking credits and also charities generally have an income requirement. So it's good to match that income received with the income they have to pay out. I think the good news from the budget for retirees is there was no change to superannuation rules. Franking credits are fully refundable. And the transfer balance cap actually rose to $2.1 million from the first of July this year. So you can see from this slide now, looking at the after-tax value of different types of returns, the dark blue bar. And the first column there is the value of a fully franked dividend from the perspective of a tax-exempt investors such as pension phase superannuation or charity and if you receive 1 more fully franked dividend, it's actually worth about $1.43. So it's about a $0.43 franking credit that is attached to $1 fully franked dividend. That hasn't changed. And pension phase superannuation and charities still get an Australian resident charity still get a full refund. So that's the good news. I'm not going to focus too much on the bad news, which is changes to capital gains tax, but I think the reality is the budget is quite in a relative sense, friendly to income strategies such as PL8, and that's probably good news for investors in PL8. We now sort of turn to just the headline on the report -- the recent reporting season because we're always trying to keep people up to date. It was actually a pretty good reporting season. For the first time in 4 years, and this is harking back to my comment before, we've maintained the level of dividends in PL8 constant levels for the last 4 years. 4 years ago was the peak dividend period for the ASX 200 basically, dividends have fallen for the last 3 financial years or 2024 and '25. And it's only now in the last financial year FY '26 that we are finally seeing a turnaround in the dividend environment. And if you look at those numbers on the chart, the average dividend increase for the large-cap companies that we follow 25% increase in dividends. Now we've got on paper or that a simple average, and that's what that number is can be skewed by a few large numbers. And in fact, there were some very, very big dividends by some of the gold stocks and also by a couple of those petrol stocks, Viva Energy and Ampol. Ampol had a 370-odd percent or 63% dividend increase that skews the numbers. So I actually often prefer to look at the median number, which is the blue bar in the chart. And that was a healthy 9.2% increase in dividends. So way ahead of the inflation rate. Remember, the median is if you sort of rank stocks from the biggest increase to the worst increase to take the 1 in the middle. That is the median. So the typical company, if you like, 1 in the middle, in Australia increased dividends by 9.2%. But the other good news about the result is the last column, which is the dollar value of dividends paid. And that bar value for the first financial year since 2022 has actually increased and it increased by 13% in August compared to August last year. And that is very good for PL8 because we had been running down our franking balance and not really in our earnings, but certainly our frank balance a bit because dividends have been rather lean for 3 years. But resources came through a big time. I've already mentioned gold and big increases there. But the big Australian and Rio had some reasonable increases. And generally speaking, it was a pretty good reporting season. Some of the commentary, particularly around consumer-focused stocks, consumer secretionary stocks was a little weak, and so a few of them sold off in the reporting season. But generally speaking, particularly from a dividend point of view, we felt it was very good. I'm now going to hand over to the other doctor, Dr. Peter Gardner to go into more detail on some of the company results for FY '26.

All right. Thanks, Don. So I might start with CBA. We're the second largest stock in the Australian market at the moment. And so yes, as you're all very aware of, the budget has caused a big change in the property market from May onwards. Property market already had started falling a little bit as a result of the interest rate changes that the RBA put in. But now that's been kind of accelerated. But despite that, it was actually quite a strong result from CBA. Their profit increased by 7%. And on the previous financial year, which was kind of 1% to 2% above expectations. They increased their dividend by 4%, which equates to a 4.1% annual gross yield, so almost as much as the market which is kind of a little bit surprising for a bank. Generally, the banks are producing high yields in the market. But given the price of CBA, its yield is slightly below the market at the moment. It's paying out 77% of its earnings, which is at the upper end of its target. Now that it can't do special dividends. I mean, sorry, now I can't do off-market buybacks. It's basically paying out as many dividends as it can in order to pay out those franking credits to investors. They did decide to discontinue the buyback. So I guess they have thrown in the towel on that 1 that they think their shares are a bit too expensive to justify them buying them back. But overall, it was a good result from CBA. Their margin was up slightly at a good capital ratio. But I guess the most important chart on this 1 that impacted all the bank's returns over a reporting season was the bottom right chart that you can see there. And that's looking at the application volumes for new home loans. And you can see that since the budget on the 12th of May, the new volumes are down 15% since May and 17% since the PCP period. And so yes, and the banks, when they all announced their results, they were anywhere from 12% to 20% reductions in their application volumes. So you see -- and those reductions are basically coming from the investor segment. And so the impact of kind of getting rid of negative gearing on all but new properties has meant that there's a lot less investors in the market since the budget. And so those application volumes have fallen. Now it won't immediately impact CBA's profits, as you can see by this result because they have a large back book of loans, but it potentially will reduce the amount they can grow that will grow going forward and that's likely to impact all the banks. And so you saw them underperform quite a bit during the reporting season. The other big stock -- larger stock in the Australian market was BHP. And as Don mentioned, they had a very strong result. Their profit was up 30% above last year and 4% of earnings expectations. They were able to increase their dividends by 51% in U.S. dollars or 49% in Australian dollars, which equates to annual gross yield of 5.6%. They were able to do that, increase their dividends by more than their profits, given they increased their payout ratio, which shows they're a bit more confident about earnings going forward as well, being able to pay the CapEx that they need to fund future development programs whilst increasing their dividends as well. And the big thing that's worth noting out of BHP now, which we've noted in the last results as well is that copper now makes up 54% of the group earnings and the copper price has gone up pretty significantly over the last year. When you look at the iron ore, which is obviously what BHP has primarily been known for, the iron ore price fell back over the last year. And so you saw a dividend cut coming out of Fortescue of around 23% from last year. But because BHP has those copper earnings behind it, which are on a margin of 70%, then they are able to actually increase their dividends and their earnings quite significantly and we'll expect that to continue going forward as BHP concentrates on that copper part of their portfolio. If we look at the consumer, which Don mentioned as well, that was a lot more challenged. Now JB Hi-Fi's result was actually pretty decent for FY '26. Sales were up 5%, earnings up 6%, which is marginally above expectations. They're able to increase their dividends in terms of their nonspecial like their normal dividends were up 21%, albeit they didn't pay a special dividend, which they did last year. And so dividends are down 38% when you include the special dividend they paid last year. But that's still on a good yield. But 1 of the reasons why they fell during the reporting season was that their sales when you look across the whole group, we're actually down on last year, which I think is the first time -- their sales have fallen during this period since around some of 2013, 2015. And they put that down to consumer sentiment falling, people wanting to shop only during sales periods, that's a common occurrence now in retail land and also the fact that their suppliers of their technology products such as Apple, raised their prices quite significantly. As we've seen, this AI boom, that's causing the prices of both computer chips and memory to go up significantly. And so that's causing an increase in price of those consumer products as well. Ampol had a really good dividend. As Don said, it was up 363% and profits up 376%, which equates to an 8.4% annual gross yield and they payout ratio is just 50%. So if they -- if they were increasing their payout ratio, they could obviously increase their dividends a fair amount, and they're obviously benefiting from what's happening with the Strait of Hormuz being closed, what's happening in Russia because Ukraine is hitting the Russian refineries with their drones and the fact that China is deciding not to export as much refined products, whether it's petrol or diesel or jet fuel because they're keeping it more for domestic use, given the current environment. And so all of those are putting pressure on refining margins, which are going out, which isn't good for us at the [indiscernible], but it's obviously good for Ampol's profits. I'll also talk about Coles and Woolies. So whereas we saw consumer spending dropped significantly in some of those more discretionary items and particularly those related to property market. We actually saw spending in supermarkets quite strong during this period. So their sales were up about 3% or 4% for Coles and Woolies, respectively, but both of them are able to increase their profits by kind of mid-double digits, 13.7% in the case of Coles or 15.5% in the case of Woolies. And that allowed them both to increase their dividends by 16%. So that was actually a really good results. And 1 of the notable things that came out of the result was that the Yoshi's campaign that Woolworths have done kind of July, August period actually caused their food sales to go up 7.6%. So they won significantly during that period, a lot of parents such as myself who are being told by our kids to shop at Woolies. And so that helped Woolies and Coles actually didn't announce what their sales were because they didn't want the market to read too much into that. They did say that their sales have gone back to normal at the end of the [indiscernible] campaign, but you can see the impact that, that actually has on sales going forward. Now it wasn't all positive. Obviously, there's always some results. Some stocks cutting their dividends, and here were 3 dividend traps that we'd identified and didn't hold in our portfolio. So Endeavor Group, which sells well, has hotels but also sells a lot of alcohol through Dan Murphy's. They have to cut their dividends by 81%. So they were on a historical dividend yield of 7.5%, but also dividend yield going forward dropped significantly after that 81% cut. People are consuming a lot less alcohol at the moment, especially the younger age groups, and that's putting pressure on all the kind of alchohol-related stocks on the Australian market. Beach Energy, even though it should be pretty positive in this kind of environment, and they had some production issues, and so they actually cut their dividends by 2/3. And Aurora, which is a packaging company, despite being on a yield of 7.2% cut its dividend, 20% so we just, again, want investors to not trust historical yields. You can look at the yield that a company paid last year. But if it's share price has fallen significantly during that time, the market is usually telling you something that they're likely to cut the dividends going forward because the earnings are under pressure. That's what we pick up in our model. And when we aggregate that model at the market level, which is what this chart does, calculates the kind of average chance of the dividend cut across the all the Australian market. You can see when this number is high, there's actually more stocks cutting their dividend or likely to cut their dividends according to our model. You can see the big spike during COVID and then the reduction post COVID as government spending came out. And over the last few years, since 2022, when Don mentioned, we've been forecasting kind of more stocks cutting their dividends than the average line through the middle there. And so you can see over the last few years, it's generally that dividend cut model has been above average, and we've seen a slight reduction in dividends over the last few years. But you can see over the last year, as commodity prices have risen, even though there's more pressure on the consumer at the moment, that chance of the dividend cut has actually come down. And we've seen that flowing through the results with a lot of companies increasing their dividends in this current reporting season. So overall, how are we seeing it? Well, we kind of -- we're terming ourselves as cautiously optimistic. Obviously, there is pressure on the consumer. Interest rates are rising again. There may be 1 more rise. The market is now forecasting in Australia. And along with the falls in property prices, that's going to pressure the Australian consumer, particularly in the discretionary items, albeit most people to have a home loan to actually have a fair buffer in their offset accounts and the banks report that. So that should keep spending intact a little bit, but we do see that as being under pressure. But then on the other side, we've seen commodity prices rising significantly, which is helping the mining companies, the mining service companies to increase the dividends. So in this kind of environment, we think it's pretty critical to have active management in order to sort of move around the market to the places where the dividends are increasing going forward. That's the end of my presentation. I think we're moving on to questions after this, if that's right, Jamie. So if there are any questions?

Perfect. Thank you, Don, and thank you, Peter, for the update. And also thank you to the PL8 shareholders for the questions. So I'll kick it off for you, Don. There's been a few questions about your thoughts on a share purchase plan. So I know a lot of people are wondering if PL8 is going to do another one, but I'll leave that to you to answer.

Yes. Thanks, Jamie. It's a common question that we get asked actually. Look, even though the stock price is trading at a significant premium, we -- and normally, you'd say, well, if it's trading at a significant premium, maybe we should increase supply of capital and do you raise or a share purchase plan. The reality is that the Plato income -- domestic income strategy is over $3 billion now. It is quite an intensive. We trade around dividend events, so that's quite a high turnover strategy. And we think we're fairly close to capacity. So we're not looking to, unfortunately, do a share raise into the marketplace. We know some of our competitors are, et cetera, but they are much smaller. And I think -- the reality is it's easy for fund managers to take more capital and do these raises, et cetera, and growth's sake. But if you get too big for your boots, then it's going to make us hard to actually continue to deliver the high levels of income that we have. So we feel at the moment that it's best that we don't do a capital raise. And we've been saying this for the last couple of years hasn't changed really that story.

Perfect. Thank you, Don. And a question for you, Pete. We covered quite a few sectors in the market, but is there any areas you're avoiding or more cautious or more broadly?

So probably the areas that are exposed to the Australian property market and the ones where we our biggest kind of underweight in our portfolio to areas like the banks with their earnings potentially not growing as strong as they have been. -- consumer discretionary are also underweight and then also underway properties. So those rate stocks. So I'd say that's probably the area that we're avoiding the most.

And Don, a question for you. To your point, you mentioned that dividends have been so consistent and so stable in the history of PL8. Does PL8 pay out any capital or is that purely from the income generated in the strategy?

No, it's purely income generated from the strategy. So we don't believe we should be paying out capital.

Okay. Perfect. Thank you. Don in a few more minutes. We'll do a bit of a rapid fire. Pete, you talked about the dividend cut model and Sally asked, does that only work and what has already happened? Or does that predict the future dividends of the companies as well?