Spheria Emerging Companies Limited (SEC) Earnings Call Transcript & Summary

Okay. Good morning, everybody, and a very warm welcome to this virtual annual general meeting for the Spheria Emerging Companies Limited 2020 Annual General Meeting. Thank you very much for joining us today and for your continuing support of the company in what I think we'd all agree has been a very challenging and unprecedented year. My name is Jonathan Trollip, and I'm Chair of the company. I'd like to thank upfront the team of Automic and Clinicals organizing this virtual AGM. And I'm being told I'm to speak directly forward to the camera so you can hear me. Hopefully, everybody online can hear me clearly. If you can't, raise your hand to notify us. Before we begin the agenda, I'd just like to introduce my fellow Board members who've joined me here today in person and via video conference. On my right, I have Lorraine Berends, who should be on the left on the screen. And then on the screen, we have Adrian Whittingham. Adrian, are you there? I can't see you. And Alternate Director, Alex Ihlenfeldt, from Brisbane. Calvin Kwok, the Company Secretary, is here on my left. And next to him is the company's auditor, Scott Whiddett, from Pitcher Partners. And as usual, the auditors are here to answer any questions you may have on the financials when we come to that part of the meeting. Calvin, can you confirm we have a quorum?

Yes, sir.

We have a quorum so I declare the meeting open. And am I correct that we have no apologies for the meeting. I'll turn to the agenda now for the meeting. And I will commence with an address, which will cover -- the Chairman's address will cover the overview of the company, its objectives and dividend update, a review of performance to date, the initiatives we've been taking to narrow the NTA discounts and what we've been doing to seek -- to increase our communications with the shareholders. Following the formal part of the meeting, which we'll go to next, which has 3 items to be considered, 2 resolutions to be passed, we will hand over to Marcus Burns, who's here on my right, who is the co-founder and portfolio manager of Spheria Asset Management, which is on shareholders' word is the investment manager of the company. I've been informed that the Notice of Annual General Meeting has been sent to all registered shareholders within the notice period required, and I will take that notice as read. Moving now to the Chairman's address. I'll provide a brief overview of the company, as both a reminder to long-standing shareholders, but importantly, a welcome to our new shareholders. So Spheria Emerging Companies Limited, with the ASX ticker SEC, was established to provide shareholders with exposure to actively managed Australian and New Zealand small-cap equities portfolio. The company was established with assets of $132 million at the IPO date, which was November 2017. As at 31 October 2020, had $120 million of net assets. The difference being the on-market buyback, which was conducted; and the dividends, which are being paid out at the period in which it offset the growth in the portfolio of the company. And obviously, Marcus will deal with that in more detail. As mentioned earlier, the company investment portfolio is managed by Spheria Asset Management Limited. Marcus will speak later today in the investment presentation. In summary, the manager believes cash flow to rise valuations in the medium to long term with risk assessment is a critical overlay. So the manager seeks to identify smaller companies where the future values of cash flows can be reasonably ascertained and the companies are trading at what is assessed to be a discount to their intrinsic value. Moving on to the company's investment objectives. They are, firstly, to outperform the benchmark, which is the ASX -- which is the S&P/ASX Small Ordinaries Accumulation Index, over each full investment cycle, which the manager considers to be a period of typically 3 to 5 years, and to provide capital growth over each investment cycle and income to shareholders. And the company aims to maximize total shareholder return by a combination of capital growth and income, with the aim of regularly paying fully franked dividends to shareholders. We'll come to dividends in more detail later. In terms of the company itself, I've already introduced the Board of Directors who are here and joining via video conference. The table on the right-hand side of the slide, which you hopefully have on your screen in front of you, shows the NTA as at 31 October 2020. And there are probably 2 points worth noting in relation to the company's NTA. And that's the post-tax NTA of $1.02 (sic) [ $2.02 ] as at 31 October 2020 was higher than the pretax NTA at the same time, which was $1.965. And this was due to the estimated deferred tax assets which resulted from unrealized losses caused by the decline in the portfolio's value earlier in February and March of this year. And as the market rises, so the gap between pretax and post-tax NTA should also close. And the other thing that the NTA figures do not show is the balance of franking credits available to the company for payments of dividends. And as at 31 October 2020, that figure was $0.082 per share. So that's the franking credits which are available to shareholders, which is probably the relevant time to move on to the dividend update for shareholders. The company has paid an interim and final dividend in each of the last 2 years and continues to pay a fully franked dividend from the portfolio income twice a year, subject, obviously, to the usual caveats of available profits, cash flow and franking credits. The financial year 2020 total dividend was $0.055, and that is equivalent to a 3.3% yield based on the 31 October 2020 share price of $1.68, and that is equivalent to a 4.7% yield grossed up as to 100% by franking. And relevantly from shareholders' perspective, as at 31 October 2020, the company's profit reserves had a closing balance of approximately $0.357 a share. So a very healthy profit reserve available for shareholders. And that, together with the franking account balance, has enabled the Board to make the commitment, which we announced to the market on 23 November 2020, so on Monday a few days ago, that it is the intention to pay an annual dividend of at least $0.06 a share for financial year 2021 and financial year 2022, and those will be fully franked. And this is the same level of the dividend that we paid for financial year 2019, and it's higher than the $0.055 full year dividend for financial year 2020. And again, this is subject to the usual caveats of no negative movements in markets. And there may be other ways that we want to deploy the company's money, but it's very unlikely. So without committing the company unequivocably, we are very confident that we'll be able to meet at least that dividend intended for the next 2 years. And just to put here in the picture that if we were to pay $0.06 a share, that would give a dividend yield of $0.036, which is $0.051 on 100% fully franked basis. And again, using the 31 October 2020, share price of $1.68. Moving to the NTA of the company since it listed, we'll have a slide which shows how it's progressed from inception to 31 October 2020. So the NTA, the listing price, when we started at IPO, and that was $2. And since then, in a period of a little under 3 years, the portfolio performance has added $0.19. Tax payable provided for the NTA is $0.079; company expenses have had a relatively small impact of just under $0.02, $0.019. The dividends paid have reduced the NTA by $0.155. The buyback that we initiated earlier, and I'll come to that in a minute, has added $0.028 to the NTA per share as we're buying back shares, obviously, at a discount to NTA, so that does increase the NTA. That's added $0.028. And that gives us the closing NTA as at 31 October of $1.965. Moving on to the company performance. Since inception, the overall performance of the portfolio, and this is net of fees, the company expenses was $0.031. Some LICs do show portfolio performance growth without those company expenses and fees. We believe it's appropriate for shareholders to see those figures net of fees and company expenses. The performance to the benchmark over the same period was 3.3%. The company's total shareholder return, or TSR performance, and that measures the change in share price adjusted for any dividends paid, for the same period was negative 2.7%. And that reflects the discount at NTA at which the company currently trades. The company's share price is $1.68 compared to the issue price of $2, with dividends of $0.155 paid per during the period. Encouragingly, the closing price -- share price last night was $1.78. So it's certainly trending in the right direction. And as I mentioned, the NTA, based on the 31 October 2020 share price, the discount to NTA was 14.5%. Marcus will provide more information on the performance of the portfolio, but I now would like to turn to the company's NTA discount. As I just mentioned, the discount as at 31 October was 14.5%. And the Board does consider this unsatisfactory and remains very committed to doing what we can to address this. We do acknowledge that it's -- we're not unique among the LIC sector at the moment. Certainly, most small-cap LICs are trading discount, and some are much wider than Spheria's discount. But nevertheless, we're not complacent on this front, and we've initiated several -- undertaken several initiatives here. At the start of the 2020 financial year commencing 1 July 2019, we instituted an on-market share buyback for an initial amount of $5 million. Once that was used up, we increased the buyback by a further $2.5 million on 31 March 2020, to bring the total buyback authority to $7.5 million. The buyback authority was then increased the second time on 31 August 2020, at the time of the company's annual results, to take the total buyback capacity to 10% of the company's shares on issue, including the shares which it has purchased. Since 1 July 2019, the company has bought back 7.7 million of shares via the on-market buyback. And that leaves 1.5 million shares remaining as part of the current buyback authority. And the company will remain opportunistic in the market to buy back shares when we are trading at a wide discount to NTA. And as I mentioned, the buyback, so far, has added $0.028 per share to the NTA. We are hopeful that the initiative that we announced on 23 November of confirming the annual dividend for the next years of $0.06 also assist in narrowing the discount. We're aware that one of the great benefits to shareholders of investing in an LIC is a regular stream of fully franked dividends, and that's what we have delivered on, and that's what we intend to deliver on going forward. We've also moved from monthly to weekly and not daily NTAs, and that provides full transparency on the value of the company's portfolio, which we hope shareholders find useful during the volatile markets, which we've been experiencing recently. We've also been improving shareholder communication and investor road shows, and I'll touch on that next. Earlier in the year, we announced and we looked at acquisitions to scale up the company. But having been through the process, we determined that none of those that we look at would be in the best interest of our company's shareholders. And we'll continue to monitor best practice initiatives from other global LIC markets to seek to do what we can to address this discount. I mentioned that we've focused also on shareholder engagement and increasing transparency, and that slide shows the various initiatives that have been undertaken. Regular e-mails with investment videos and insights, daily NTA announcements, full and half year results, media articles and attending at a number of investor and shareholder conferences. And we do encourage shareholders, this is a sort of a regular plea on my part, but please, if you can't provide your email addresses, it's environmentally friendly, it's more efficient and importantly, it will ensure that you're able to receive the latest updates and invitations electronically, so I do encourage you to provide those details to our share registry service, Automic. That concludes the Chairman's address, and I will now proceed to the formal business of the meeting. And I'll deal with it in the order in which it appears in the meeting. There are 3 items to attend to. The formal tabling of the 2020 financial statements, that doesn't require a vote; the adoption of the remuneration report; and the reelection of a director. And those 2 items do require a report. In terms of questions, you may ask questions prior to each resolution being put by using the Q&A box displayed at the bottom of your Zoom screen. And hopefully, you've got that on the screen in front of you. I would ask shareholders to limit themselves to 2 questions and that you asked questions in relation to matters relevant to the item of business being considered. And as I said, Marcus will be providing an update after the formal business of the meeting, and there will be a further opportunity then for shareholders to ask general questions on Marcus for -- any of the Board member at that time. In terms of voting, persons entitled to vote on these resolutions are shareholders, representatives and attorneys of shareholders and proxy holders. As noted in the Notice of Meeting, all resolutions will be decided by a poll, and I now declare the poll open. To vote, if you've not already done so by proxy, you must be logged in on Automic's investor portal, and detailed instructions of this were contained in the Notice of Meeting. And hopefully, the system has worked satisfactorily for you. In order to cast your vote on each resolution, it's pretty simple. You either select for, against or abstain. And all voting restrictions -- exclusions applicable to 1 of the resolutions, which is detailed in the Notice of Meeting, that's obviously the rem report where key management personnel are not allowed to vote on that. And I confirm that all open proxies directed to me as Chair will be voted in favor of the relevant resolution. However, as I mentioned, any proxies in relation to the rem report, which are appointed by key management purposes, will be excluded from the Chairman's proxy decision. All valid proxies received have been recorded, and these will be reported to the ASX after the meeting. And we'll also display proxy voting on the screen for each resolution. And the results will be tabulated and lodged to the ASX after the meeting. We have a much more efficient system than the years' electronic one, and we will get those results during the course of today. Okay. Moving on to the financial statements. So the first item for business is to consider the financial statements for the year ended 30 June 2020, together with the directors' report and auditor's report. As I said, no vote is required on this. So I now formally table these financial statements, and I'll take them as read. Does anybody have any questions in relation to the financial statements, the contents of this report, audit report, the audit accounting policies or the independence of the auditor. As I mentioned, we have Scott here. So let's see if we have any questions submitted on this. My script says I should wait for 10 seconds. Calvin, how are we going? Do we have any questions so far?

There are no questions.

Okay. All right. I would assume we have no questions, and I'll then move to the adoption of the remuneration report. And that remuneration report is also contained in the 2020 annual report and forms part of the director's report. And obviously, this is information that's required by the Corporations Law Section 300A and sets out the remuneration arrangements for -- primary for the directors on there. Does anybody have any questions in relation to the remuneration report? Okay. I think it's safe to say we probably have no questions on that so we might have put the proxies on the screen. And shareholders can see the proxies on the screen. And obviously, the formal results will be announced later today. The next item is the reelection of Director. And as shareholders who go to these meetings often probably know, 1/3 of Directors are required to retire by rotation each year. That's Section 7 of the company's Constitution. And the Board of Directors has agreed for Lorraine Berends to retire from those and offer herself for reelection. As the explanatory statement contains a lot of details and information in relation to Lorraine, and in my part, I hugely enjoy working with Lorraine. And I might hand over to you to say a few words.

Thank you, Jonathan. Good morning, everyone, and thanks for dialing into this virtual AGM. As Jonathan said, my background is in the Notice of Meeting. I've been in the finance industry for around 40 years so I've got the appropriate expertise and experience for this role. I have been on the Board since the IPO, so just over 3 years. And I really value the opportunity to use my experience for the benefit of shareholders. Jonathan mentioned the persistent discount to NTA, which is absolutely the Board's #1 focus. So again, rest assured that that's where we're putting so much of our attention at the moment, as you've heard in Jonathan's address, and the latest initiative of the forward dividend guidance is part of that. We're very pleased with the recent performance of the portfolio, and I'm really looking forward to Marcus telling us about that shortly. I'm really keen to keep working on this for the shareholders so I'm looking forward to your positive votes. Back to you, Jonathan.

Thank you very much, Lorraine. And I might just get the proxies put on the form. Are there any questions for Lorraine? Calvin?

No questions.