Temple Bar Investment Trust PLC (TMPL) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the Temple Bar Investment Trust Annual General Meeting 2025. I'm going to talk for 20, 25 minutes or so about the Trust, obviously, how it fared last year, what were the drivers of its performance and then as importantly, perhaps think a bit about the future and how we see the Trust's outlook going forward. 2024 was a successful year for the Trust, further building on the excess returns, which we had achieved since taking on the Trust in the back end of 2020. You can see from this chart that we've been -- at Redwheel, we've been responsible for looking after the Trust for -- looking after Trust investments for just under 5 years now. And that has been a period that generally has coincided with strong stock market returns. You can see the market return since our inception date at Redwheel of just over 70%. And it's very pleasing to be able to say that we've managed to deliver share price and NAV appreciation at a level much greater than that, roughly doubling the level of overall return on the All-Share Index. I mean I would want to say that yes, it has been a very strong period of returns for the Trust. And it's important to emphasize that as you probably -- we as a shareholders probably know, we adopt what's called a value style of investing. And this period overall, since October 2020 has been a strong period for value stocks generally. And therefore, I think it's fair to say that the Trust's returns have enjoyed somewhat of a tailwind. And we think, therefore, it will be unrealistic to expect this continued level of outperformance, if you like, in the future. Having said that, we're very confident that we can continue to add value, add returns over and above those available on the wider index. Looking more specifically at last year, the NAV total return on the Trust for calendar 2024 was just under 20%, 19.9%. The share price return around 19.1%. Those levels of return were roughly double that on the wider index. The FTSE All-Share Index delivered a return of around 9.5% in 2024. The Trust paid a dividend per share of 11.25p. That's an increase of 17% on the 2023 dividend. And using the year-end share price of 272p, that equated to a historic dividend yield of just over 4%. So what is it that drove the strong relative and absolute returns in 2024? I think the standout performers were the performance of the Trust banking shares. The Trust has shares in 4 banks today, Barclays Bank, NatWest Group, Standard Chartered and ABN AMRO, the Dutch Bank. In 2024, it was the U.K. banks, U.K.-based banks, which were the standout performers. Standard Chartered, NatWest, Barclays, each rising by about 80% in absolute terms. It's worth emphasizing the company reported very strong sets of results in February 2024 in respect of calendar year '23. And more than that, the starting valuations that have been attached to the banks were extremely low. So just using the example of Barclays, Barclays started last year, started 2024 on a price earnings ratio of between 4x and 5x. And what that means is that if you simply held the bank -- held shares in the bank for 4 to 5 years, you would have had 100% payback of your initial investment assuming that the earnings or the earnings per share of the bank accruing to the shareholders remained constant throughout. So the bank started with a very, very low valuation, as say, 4 to 5x at Barclays, a little bit higher than that at NatWest and Standard Chartered. And it's therefore not surprising that when they announced at the beginning of last year, strong operating results plus very generous shareholder returns policies and that's through strong dividend growth and through share buybacks, it's not surprising perhaps that the share prices did so well in 2024. Marks & Spencer also performed very well. We continue to be very pleased with the way that the company's recovery is continuing. We have felt for a long period of time that there is a significant unrealized potential in Marks & Spencer. In our view, it's a great brand, but one which has not fulfilled its potential for a number of years. And it's good to see that the new-ish management team are making changes there and continuing to realize the potential that we have always felt exists in the business. The one detractor from performance was Stellantis in 2024. Stellantis is an auto manufacturer. It includes a number of brands that you'll be familiar with, Fiat, Chrysler, Citroën and Peugeot. And you're probably aware that auto manufacturers generally have had a very difficult time of it, definitely in 2024 and even more so at the beginning of 2025. In 2024, we saw quite a significant downturn in the auto cycle. Auto manufacturers generally had seen some strong conditions in the post-COVID period of 2021, 2022 and 2023 as a lot of consumer pent-up demand resulted in increasing car prices. That changed in 2024 when demand weakened and margins came under some pressure. We continue to hold Stellantis in the portfolio today. That was 2024. I want now actually to look forward to 2025 so far and point out that there's been quite a significant regime change so far in 2025 in global stock markets. In 2023 and 2024, it was the U.S. markets that delivered the strongest returns. The S&P 500, which is the main U.S. equity index delivered over 20% returns 2 years running, putting the returns of European market and certainly the U.K. market largely in the shade. It's interesting that in 2025, so far, there's been quite a significant turnaround. The so-called Magnificent 7 stocks, and those are the big technology stocks in the U.S., which, of course, had performed so well in 2024. Those companies at today's date, down around 25% year-to-date. The NASDAQ Index of technology shares down about 20%, the wider S&P 500, down around 15%. Conversely, the FTSE 100 in positive territory and the German index, the DAX, up around 10%. Now obviously, there is a lot of uncertainty and a lot of volatility around at the current time. And these numbers, of course, will change and possibly quite dramatically. But it is nevertheless interesting to see that there has been -- there are signs of some sort of regime change going on in the world's financial markets. In response to this, perhaps, it's interesting that a number of global investors have signaled their intention to cut their holdings in U.S. equities. These numbers here or this graph here is from a regular fund management survey, which asks various fund managers, what their own intentions are going forward, and it's interesting to see the sharp change in sentiment that we have seen in the last few months. And of course, this is all driven perhaps by some of the pronouncements we've seen coming out of the White House, the uncertainty and the flip-flopping we've seen in economic policy. And of course, that creates uncertainty and investors generally don't like uncertainty. But again, interesting and perhaps a harbinger of things to come. And you could say it's not before time. This chart here looks at the performance of U.S. versus global equities over the last 55 years. And you can see just how well U.S. equities have performed for a very long period of time. Now some of this outperformance is absolutely warranted by superior economic and operational performance from the companies within the U.S. index, that is for sure. But also a good part of it is driven -- has been driven by sentiment. And what we mean by that is that it's the rating that has been -- the relative rating that has been attached to U.S. shares has increased quite dramatically. And the position we're at today is that many investors have very, very significant exposures in their portfolios to the U.S. market. The U.S. economy makes up about 25% of the global economy, and yet it makes up a significantly greater portion than that of the average investors portfolio. And so the point we're trying to make is if there is some sort of loss in confidence, should we say, in the U.S. administration and the outlook for U.S. companies generally, there is plenty of scope for some of that money perhaps to leave the U.S. market and head back towards some of the more regional markets, including the U.K. And this chart here shows the relative sizes of the U.K. market versus other markets of the world. And you can see that the effect of money leaving the U.S. could be very profound if indeed it were to happen. The U.S. market is capitalized or was capitalized at the time of right at the end of last year at just over $70 trillion. That's not much smaller than the size of the global economy. You can see that the MAG 7, the largest 7 companies in the U.S. market on their own capitalized at around $16 trillion. That's bigger than the Chinese market, significantly bigger than the Japanese market, more than twice the size and more than 5x the size of the U.K. market, which comes in at around $3.2 trillion. And the point we're trying to make here is that if some of that money does decide to leave the U.S. because the uncertainty has become greater, it could create liquidity issues as that market -- as that money tries to find itself into -- find its way into other areas of the world and could result in some quite significant re-rating of share prices in those other markets. And we would argue that the U.K. market continues to be a good home for some of that money potentially. This chart here looks at the relative valuation of the U.K. market versus the MSCI World Index of equities. Bear in mind that the U.S. market makes up about 70% of MSCI World. So MSCI World is not that much different from the U.S. market. And you can see the valuation discount that today is being accorded to the U.K. market, around 40% to 50%. And of course, that discount is as wide as it's been at any point in the last 50 years or so. And of course, remember that we're not -- when we're selecting stocks for the Temple Bar portfolio, we're not buying the wider market. We're trying to invest the Trust's money in the cheapest or the most lowly valued subsection of the U.K. market. So we're hopeful that the discount to MSCI World on the holdings in the Trust portfolio is even greater than the numbers shown here. You might be aware that the number of takeovers in the U.K. market has increased dramatically over the last few years and today stands at around a record level. And that's interesting because that's basically real money, and that can either be other corporates trying to take over the U.K. counterparts or it can be private equity money getting to work, but that's real money taking the view that assets in the U.K. and the U.K. market are undervalued. And of course, they're trying to take advantage of that. The Trust in 2024 benefited significantly from this high levels of takeover in the U.K. market. There were 4 takeover attempts for companies held in the Trust in 2024. And that alone would have been a significant contributor to the Trust's return last year. The 4 companies were Anglo American, Currys, Direct Line and International Distribution Services, IDS, which is effectively the old Royal Mail. Two of the bids succeeded. Direct Line is yet to go through, IDS has just been declared unconditional, and the Trust will receive the money on that investment -- the cash on that investment shortly. The Anglo American and Currys bids were unsuccessful. But in both cases, the share prices today are significantly higher than where they were pre the launch of the bid. Another indication of the value, the undervaluation that exists within the U.K. market is the number of companies undertaking share buybacks. Generally, operating conditions are quite good at the moment. Most companies are generating significant levels of profits, are generating significant cash flows and they're deploying that cash flow in a shareholder-friendly way by basically buying back or retiring cheap equity. And retiring cheap equity is very value enhancing for the remaining shareholders who choose not to sell because what it does is it reduces the number of shares in issue and therefore, drives up the earnings per share in future years for the investors that don't sell. So basically, what it does is it drives future earnings growth. And of course, and as I said, for a company which is standing on a low valuation, that is extremely value enhancing. And therefore, it's good to see in the U.K. that 40% to 50% of companies are buying back stock at the current time. Now again, this is the market as a whole. For the portfolio, we are specifically -- for the Trust portfolio, we are specifically attracted to companies that buy back cheap stock. And therefore, we think the number of companies in the trust that are buying back stock today is around 60% by number. And what we're hoping is they live up to the example of Next plc, which is the retailer you'll all be familiar with. Next plc is not held on the Trust today. But we're trying to demonstrate here -- by showing the example of Next, we're trying to show how, what we would describe as a solid, well-managed but unspectacular business can deliver spectacular returns over the long term if managed sensibly and the cash flows that the company generates are best used in the interest of shareholders. I just ask you to look at the chart on the left. So this takes a 24-year period. This is from the year 2000 to 2024. And it looks at the levers of value. If you look at the sales growth of the company, the company in that period, 24-year period, enjoyed 5% to 6% annual sales growth. That is a reasonable level of sales growth, but it's not spectacular. It's a little bit more than nominal GDP growth over that period. The company managed its operations well. So costs -- the company's costs went up at a lower rate than its sales, which meant that its operating profit went up at a greater rate than its sales. So its operating profit went up at 7% per annum as did its profit before tax. Again, that's the third bar on the left there. The real kicker, however, for shareholders came from retiring cheap shares over that period of time. The company retired around 50% of its shares in issue over that period. And what that means is that every pound of profit that the company generates today is worth roughly double what it was at the beginning of the period. And therefore, the earnings per share growth was just over 12% per annum. If you add in an annual dividend return of about 3% per annum, you get to a total return of around 15% per annum. And it's amazing. If you compound 15% per annum over 24 years, you get a simply fantastic end return for the company's shareholders. And you can see what's happened to the share price chart because you can see what's happened to the share price on the right there. And quite simply, it's these types of businesses that we're looking to invest in -- looking to investors on behalf of the Trust today. What we describe as solid, unspectacular businesses which are being well run, generate lots of cash, and that cash is being used in the best interest of shareholders to drive exceptional long-term returns. If you put together the dividend yield on -- and again, this is the market overall. You put together the market's dividend yield and you add it to what we call the buyback yield. So that's the value added to shareholders, the value accruing to shareholders every year as a result of share buybacks, reducing the number of shares in issue. In the U.K. market, that's around 2.5% at the current time. If you add it to the dividend yield, you get what we call an overall total shareholder yield, which in the U.K. is around 6% per annum at the current time. As far as we can see, this is the largest total shareholder yield that's available globally at the current time. And again, remember, this is from the market overall. For the Trust portfolio, we aim to do better than that. We're looking for a total return yield of 8% or 9%, that sort of number. And lastly, just bring it back to the Trust portfolio today. Here is the top 10 holdings in the Trust. We would characterize these companies, as I said earlier, solid if unspectacular businesses, trading on low valuations. Look at the middle column there. So the price earnings ratio on these companies range from Marks & Spencer and 12.5x down to Barclays on a PE of just under 7x. The portfolio as a whole is on a weighted average PE price earnings ratio of around 9x. What that means is that, again, if you held the shares for 9 years and the profits were unchanged in that period, and we would hope that actually the profit would increase over that period, you would basically get -- your investment would be paid back. So it's a 9-year payback is the way we think about it. And then you can see some attractive dividend yields on the right. You can see a relatively significant exposure to the banking sector, also the energy companies, insurance, some of the consumer cyclicals and mining, although that's not on this page. And I suppose what I'll leave you would have thought, and that is that with the valuations sitting where they are today, again, a price earnings ratio of 9x or around a 9-year payback, with those companies generating -- turning significant, almost all that profit into cash flow and using that cash flow to pay generous dividends and retire what continues to be cheap equity. We think that, that is a group of companies that can continue to drive some very good returns, long-term returns for the Trust shareholders. Many thanks for your ongoing support.