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

Good morning, and welcome to the Temple Bar Investment Trust PLC Investor Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Neil Winward. Good morning, sir.

Good morning to you. Good morning, ladies and gentlemen. Good morning, Nick. Thank you all for joining us today. It's Tuesday, the 13th of October. We're here for an update on Temple Bar Investment Trust. As Lily said, my name is Neil Winward, part of the Investor Relations team at Frostrow Capital. And we have Nick Purves, Co-Portfolio Manager of the Trust to provide an update. And as we know, it resides in the U.K. equity income sector with a market capitalization of approaching GBP 1.3 billion today. The Redwheel team headed up by Nick, together with Ian Lance, have been managing the assets for a little over 5 years now, albeit the company is also just moving through its centenary year. In the last 3 and 5 years, Nick and Ian are the top performers over the period in the peer group in NAV total return terms. On the day that the IMF has increased its growth forecast for the U.K. from 1% to 1.3% in 2026, U.K. equity market looks pretty resilient and clearly remains attractive, particularly to private equity with a number of companies taken private in recent months. I'm going to hand over to Nick now just to note that we're looking at a formal presentation of around about 30 minutes. We're going to allow time for Q&A in the second half of the time allocated. And we're going to aim, if we can, to be done by midday. Nick, if I can hand over to you at this stage.

Great. Thank you. Thank you, Neil. Thanks for the introduction, and welcome, everybody. And obviously, to those of you who are shareholders, thank you for your -- on behalf of the Board, thank you for your ongoing support. Yes, I mean here we are October 2026, actually we've almost been running the Trust now for 6 years come 1st of November. Three quarters of the year has now gone. And so far, you would say, if you're looking at stock markets generally, you say so far, so good. Stock markets in most geographies have given some pretty decent returns so far in 2026. The U.K. market is up around 10% for the first 9 months of the year, which is roughly in line with the return on the S&P 500, which is about 12%, I believe, and then which, again, roughly in line with the European market as well. We showed the 1-year and 5-year numbers and since inception numbers on this slide. Actually, for the 12 months, both the market and the Trust have delivered around 20% returns. So obviously, the fourth quarter of last year was a strong one. And I think we could all be forgiven perhaps of looking at ever rising, what seem to be ever rising bond yields and being somewhat surprised that stock markets generally have given the sorts of returns that they have because as we all know, rising interest rates, all other things being equal, should reduce the valuation that is attached to equities. But I suppose we're living in a world where not everything else is equal. And what rising interest rates have been accompanied by is continuing strong corporate profits growth. And at the current time, the stock market is choosing to focus on the strong corporate profit growth rather than the discount rate or the rate of interest as reflected in long bond yields. Over the 1 year, you can see from here, the Trust is marginally ahead of the market, around 2 percentage points. As ever, of course, there are pluses and minuses. In the 12 months, the pluses have most definitely come from financials and energy stocks. Companies held in the portfolio such as Standard Chartered, up more than 60% on a 12-month view. NatWest Group, obviously, more of a U.K.-focused bank, up around 40% and even companies like NN Group, which is a Dutch insurance company, again, up around 40% over that period. The energy stocks, you won't be surprised that they've done well on a 12-month view because obviously, energy prices have been very strong on the back of the war with Iran. And as a result, obviously, that rising energy prices feed through into rising share prices in the energy sector. So again, on a 12-month view, portfolio holdings, Shell, up 40%; BP, up 40% and Total Energies now disposed of from the Trust, but that was up 50%. And so those -- the Trust holding in financials and energy accounted, if you add that lot together, they accounted for about 10% of the 21% return the Trust was able to enjoy on a 12-month view. As ever, of course, there are negatives. There are things that -- there are stocks in the portfolio that don't work out as we would have hoped. And we probably highlight there Smith & Nephew, which is down 20% on a 12-month view. Again, that's on profit downgrades. The rate of growth that the company is generating at the current time is not what we would have hoped for. Stellantis, the car producer has been a very poor investment for the Trust. That was down another 50% in the 12 months. Conditions continue to be extremely tough for the auto producers on the back of a downturn in auto demand, continuing regulatory changes in their marketplaces. And as we are all probably familiar with an ever-increasing level of competition coming out of China. And then finally, Comcast, which we'll talk more about that in a minute. But Comcast was a relatively recent purchase for the Trust, that is down around 25% over the 12 months. But as I say, overall, of course, there are always puts and takes. But overall, it's been a relatively favorable backdrop. And of course, the returns, the favorable returns over the last 12 months build on the investment returns that the Trust enjoyed on a 3, 5 and now even coming up to 6-year view. The strong corporate profit growth that we've seen over the last few years, really coming out of COVID in 2020 have enabled the Trust to generate and pay a healthy growth in the Trust dividend over those 3 or 4 years. And you can see that the Trust dividend has gone from 8p per share roughly in 2021 to 15p last year and then an expected 15.6p for calendar -- in respect of calendar 2026. That would represent a dividend yield of just under 4% on today's share price. I should -- it's important to remind you that in 2025, starting in 2025, the Board took quite innovative decision, which was to basically to supplement the revenue dividend of the Trust with a small dividend paid out of the capital of the Trust, which broadly equal about 1% of the starting NAV at the beginning of 2025. So last year, that capital distribution was around -- was 3p per share, meaning that the revenue distribution was 12p per share. And it is the Board's expectations. The Board hoped to be able to continue with that capital distribution, obviously, subject to conditions in the stock market. Again, the trust's dividend, as you would expect, the discount has moved around over time. If you go back a few years, the dividend -- the discount on the Trust was sitting between 5% and 10%. And again, I've made this point before, but I'm going to make it again. The -- at that time, the Board demonstrated a commitment to shareholder value by being prepared to buy back discounted shares as and when the discount on the Trust overall blew out to a 5% to 10% level. And during that period of buybacks, the Trust bought back around 10% of its shares in issue. I think a combination of probably a relatively strong performance from the Trust and I think an improvement in confidence generally has meant that discount at the beginning of this year actually became a small premium. Earlier this year, the Trust was issuing shares today, although it hasn't issued shares for a month or so as today, the premium is not significant enough. The transactions in the last 12 months, I think I won't -- it's important to be clear for those that perhaps don't know us so well, but we are not thematic investors. So we don't invest in individual companies because they align with a particular theme in the stock market that we think will do well. Every investment that the Trust makes is in an individual company that has the criteria that we look for. And those criteria are -- it has to be a -- what we view as a reasonable business and one which is capable, therefore, of growing its earnings over time. It doesn't have to be able to grow its earnings necessarily in each and every year because obviously, in pretty much whatever industry you're operating, you get good years in that industry and bad years. But the company has to be able to demonstrate it can grow its profits over time. And therefore, the company can pay a rising stream of dividend to its shareholders. But where that company, for one reason or another, the market is skeptical about the prospects of the business, and therefore, the company is available at a discounted valuation. So every -- and I certainly won't go through all the stocks on this slide clearly. But every company on this slide obviously satisfies -- we believe satisfies the criteria that we're looking for. And if we are successful, and of course, we won't get everything right, but if we are successful and we can invest the Trust assets in fundamentally sound businesses which can grow profits and dividends over time, but which are available at a discounted valuation, then overall, over the long term, the Trust should enjoy an excess return, although clearly not in all time periods. What seems -- if we look at the new position, there are a couple of themes -- there are a couple of -- not -- I would use that word. There are a couple of -- there are some similarities between the companies that we've been buying. So if you think -- if you look at Diageo, J.M. Smucker quoted in the U.S. market, Kraft Heinz and even Sanofi Aventis, the pharmaceuticals company, these are all companies where the share prices have been relatively poor in recent years, where in all cases, they operate in an industry which is absolutely facing change and challenge. But where we feel that the valuations have got to a level where the shares are materially underpriced and where the level of expectation in the stock market is effectively unrealistically low, providing the potential for positive surprise in the future. So you'll probably be most familiar with Diageo. Diageo to expand on Diageo a little bit, Diageo was priced at around 25x earnings in 2022, 2023. And Diageo is a perfectly decent business. Yes, it's got challenges, but we would argue that at 25x earnings, its prospects are effectively overpriced by the stock market. Today, the shares trade at around 12 to 13x, and that is a much more reasonable valuation. So an earnings yield of, let's say, 8% with some growth over time and an ability, as I say, to grow the dividend. We have a new CEO who set about resetting the business, trying to correct some of the mistakes of the past. And we think that, that adds together to create a solid investment case. And therefore, we are happy to allocate, obviously, Trust money to the company. J. Smucker, Kraft Heinz, Sanofi Ventures will be a very similar story. You'll notice down the bottom, Accenture and Capgemini. I will probably talk more about WPP later as well. Those 3 companies are all what we would categorize as so-called and emphasize the word so-called, so-called AI losers. These are companies that the market is concerned or worried that the rapid technological developments in AI are going to somehow in the future, undermine these companies' ability to grow. And as a result, the share prices of these companies have been pushed down very aggressively in the stock market. So in the case of a company like Accenture has fallen by more than 70% from its high. And in many cases, these companies are now trading on single-digit PEs. As far as their operating performance is concerned, the companies themselves would argue that they are certainly not suffering from AI disintermediation at the current time. Accenture you probably would have seen had reported results last week, where it said that it achieved mid-single-digit sales growth, continues to report strong margins and expect a similar outcome for the current year. You may have seen the shares were up very strongly on the day. WPP. It's not on this list here, but it's a relatively recent addition to the portfolio. You may have not seen in the summer that WPP rose by around 30% on the day of its result, again, because expectations in the stock market had reached unrealistically low levels and the company was saying that actually, right now, they don't see that AI is acting as a threat to their business. So that's just some of the stocks where we've been adding money. I'll talk a bit more about Comcast and Landsec in a minute. That has been largely -- these purchases have been largely funded by the sales or reduction of stocks, which have done well for the Trust over time and where valuations have improved or they've risen, and we no longer see that the shares are significantly underpriced in the way that they were 2 or 3 years ago. And the obvious examples here would be material stocks. And you see on the page here, Valterra Platinum and Anglo American, both those share prices doubled in relatively short order. And we're not saying that we think they're overpriced. We're simply saying that the opportunity in these companies from a valuation perspective is not what it was. Unsurprisingly, perhaps we've also been cycling or recycling a significant amount of money out of financials. So that's the banks and insurance companies that the Trust has held, a number of which have tripled in value over the last 3 years or so. So I think we're trying to bring out here is this idea that we're not committed to a certain sector or a certain industry. We're simply continually trying to rotate the trust's capital around the stock market to capture the area of undervaluation at that point in time. 3 years ago, the undervaluation we felt was in financials. They were standing on single-digit -- mid-single-digit PEs at the time. That is no longer the case. We think today that the undervaluation is in some of the consumer stocks, so the Diageo and the Smuckers of this world. And as I've already described, the so-called AI. This is a bit more on WPP. We're absolutely be relieved here. I want to go through this page in detail, except to say just to give you some numbers. So WPP rose sharply during the 3 months to the end of September and say, as I said earlier, around the time of its interim results. But even today, we think that the valuation continues to be very modest. I mean, to give you some numbers, the share price today in WPP is around GBP 3.80. The company is expected to report just over 50p of earnings for this year, calendar 2026 at a price earnings ratio of under 8x and earnings yield of 12% to 13%. And this year is expected to be the worst year of WPP's operational performance. In calendar '25, again, which was, again, a poor year for the company, the company reported 60p of earnings. In 2024, again, not a particularly good year, the company reported 80p of earnings. You can probably see where I'm going with it. If the company can get back to anything like the performance it has achieved in the past, then it is possible that the shares today still trade on a price earnings ratio of less than 5x. So that is why we continue to be optimistic on the company's prospects. Okay. I've been thrown a bit of a curveball because actually this is the wrong presentation. Okay. Okay. So I'm going to move on to this. So this is the 2025 transaction, obviously, that's somewhat out of date now. Okay. So I'm going to move forward and talk about the current positioning of the portfolio. And although this slide is dated end of July, it continues to be -- the shape of the portfolio today continues to be broadly similar. So as of today, the financial -- the financial position Okay. So actually, this slide is up to date at the end of September. Okay. So Okay. This is the correct presentation. This is a correct presentation. Okay. So the change here, you can see we would say that the change here has been the increase in the weight in consumer staples, that's consumer stocks I was talking about, an increase in the weight of communication services. So communication services includes WPP, which I've already remarked upon, Comcast, telecoms companies, British Telecom, again, telecoms companies -- and the reduction has basically come in financials, which it wasn't that long ago where the financials accounted for over 20% of the portfolio and energy, again, which not so long ago is accounting for about 15% of the portfolio. So you can again see the -- how we've been recycling money out of the sectors that have done well, so financials and energy and into those companies where valuations, we think are much more attractive. So that's now the consumer stocks and some of the communication services companies. This is the top 10 of the portfolio, again, at the end of September. Again, you'll be relieved here. I'm certainly not going to go through all of these, but please just chip in at the end of the presentation with any questions that you have on any of these companies. I'll do my best to answer your questions. I suppose the general point we would make is that we have a collection here, we would say, of reasonable businesses and the ability to grow their profits over time. Yes, the companies have their fair share of challenges, but they have an ability to grow their profits over time available at what we would say were some pretty reasonable valuations. And I draw your attention to the price earnings ratios in the middle column and the dividend yields that those companies are offering in the right-hand column. Again, this slide hasn't come up particularly clear. I think what we're trying to show here is the valuation discount to value stocks, if that makes sense. It's always like the second derivative. Companies -- lowly valued companies tend to operate in the stock market. They tend to operate in more cyclical, capital-intensive industries. They tend to offer lower growth rates in profits over time. And sometimes they face secular challenges from structural changes that are happening in their particular sectors. And I suppose where I'm going with that is what I'm trying to say is that you should expect a basket of value stocks to trade at a discount to the market generally and also to growth stocks where returns on capital tend to be higher and growth rates and profits tend also to be higher. And so the thing that we monitor, of course, is the value of value, if you like. How big is that valuation discount today of value stocks versus growth stocks? And how has that premium shifted or that discount shifted over time. You can see that the long-run average is about a 40% discount. And that discount has blown out really around -- in the late in 2017, '18, '19 and into COVID to around a 60% discount. And of course, what that means is that the opportunity set for value investors is becoming more attractive. Now what's happened recently, and perhaps, again, this shouldn't surprise this is a result of the strong performance of some of the value stocks have delivered, that value discount has started to narrow again. So that would mean that conditions are becoming more challenging for value investors. Having said that, of course, we're not buying the value index. The Trust is investing in a handful of value stocks that sit within that value index. And you can see that even today, post the strong share price performance that the Trust has enjoyed over the last few years, you can see that the price earnings ratio, the weighted average price earnings ratio of the stocks in the portfolio is standing at around 10x today. And that is, again, a reasonably meaningful discount to the index. So the index is standing between 12 and 13x. And of course, remind yourself that the U.K. index itself is standing at a meaningful discount to the global index, which is around 20x. So we would still say that despite the strong performance from the Trust, we're buying discounted shares in what is in a discounted market. And the fact that the PE on the portfolio continues to be so low is testament to the fact that we have been able to rotate around the market to where we see the value today. The dividend yield on the strategy you can see there is knocking in at around 4%, again, a premium to the index of around 3% at the current time. This is in contrast, if you think about the valuation of the U.K. index, this is in contrast to the valuation that is being attached to U.S. equities, U.S. equities on a number of different valuation measures. are standing at -- valuation of U.S. equity is standing at record levels. And I'm just going to repeat what I always say, which is the starting valuation has absolutely 0 predictive power on short-term share price movements. But it does have a very strong predictive power on long-term share price movements. So you almost certainly need me to say, if you buy lowly valued shares, you should expect over the long term to enjoy higher investment returns. If you buy highly valued shares, a basket of highly valued shares, you should expect over the long term to receive a much lower return. And therefore, again, all other things being equal, you should expect from the trust's portfolio today over time, over the long term to achieve a much higher level of return that is available today on the U.S. index, for example. And worth bearing in mind, the U.S. index accounts for around 70% of the global index. And so not only should the Trust be able to exceed the return on the U.S. index, it should also be able to exceed the return on the global index over the long term. This is the valuation premium valuation discount of MSCI U.K. versus MSCI World versus the global index, as I've already said, standing at around a 40% discount. And of course, it's this discount on the U.K. index, discounted valuation, which is attracting overseas bidders -- and an ongoing theme, you're probably familiar with this, an ongoing theme in the U.K. market has been the fact that overseas corporates have been making bids for U.K. listed companies, trying to take advantage of that -- those discounted valuations. We saw a significant level of bids in 2024, 2025, and that has continued so far into 2026. And here are some of the more high-profile bids for companies listed in the U.K. that we've seen so far this year. Now of course, this raises all sorts of questions about the long-term health of the market. And those questions are very real because obviously, if companies are effectively being taken over in the U.K. market and thereby delisted, and we're not seeing a reasonable pipeline of IPOs coming in the other side or new offerings onto the market, then obviously, the market becomes narrower and more limited over time and is likely also liquidity within the market will reduce. So these are very real questions for the future. But of course, in the short term, we would say that actually shareholders are likely to benefit from this trend because obviously, as and when companies within the Trust portfolio do get taken over, they tend to get taken over at a significant premium, normally around 50% -- so I'm going to leave that's the half hour mark. I'm going to leave it there and hand back to Neil for questions.

That's great. Thank you very much for your presentation. [Operator Instructions] Just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboard. As you can see, we have received a number of questions throughout today's presentation. Neil, could I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Indeed. Thank you. Yes. So we -- as Lily said, we've got some questions here, which range from the more strategic to the company-specific to the corporate. And just to confirm, apologies for the confusion in regards to the deck. As Nick said, we've got the up-to-date deck now on the screen. There's a little bit of a last-minute scramble, but please rest assured that via the Investor Meet Company platform, that deck is up to date for your ability to review post the presentation. So let's kick off with these questions, if I may, Nick. So the first one, the majority of new holdings recently purchased are listed overseas. Given the much wider opportunity set and your proven ability to identify such opportunities, would it not be in shareholders' interest to widen the Trust mandate to a global one? This may be particularly applicable now given the wide valuation dispersion across global stocks.

Yes. Okay. Thanks for the question. I think the way I'd answer that is you will obviously understand that it is the Board that takes responsibility for the investment strategy of the Trust, and there's nothing that I can say that would beyond what the Board has already said publicly through the accounts. I suppose all we would say at this stage is that we -- the Trust has the 30% latitude to invest its capital in overseas markets. We welcome that flexibility because as the question suggests, it allows us to access returns that aren't available in the U.K. today. So we welcome that 30% flexibility, and we use it to its full.

Understood. Moving on to the next question. You recently noted strong global profits growth in no small part driven by large government deficits and AI-related CapEx. What do you think the end game for this is given that neither are sustainable indefinitely? How can you shield the fund from the risk of these factors reversing or if we experience a global liquidity crunch?

Okay. Well, it's a great question because I think what the question has identified is that the -- we live in a world where the deficits of one sector are the surfaces of another. So when governments are the governments are driving significant deficits in the FT today talked about the IMF concerns about this. So the budget deficit in the U.S. is, I think, well, it is 6% plus at the current time, I think -- and obviously, in the U.K. and parts of Europe is clocking in at around 4% to 5% when governments are overspending or let's say, spending beyond their means and when companies are undertaking massive investment in AI, which, of course, they are, and the numbers here are just mind-blowing. The run rate at the moment is about $1 trillion per annum from the large U.S. technology companies investing in new capital in AI. And it has to be -- you have to say that this investment has a very uncertain investment outcome. The companies themselves cannot know the returns that they are going to achieve or not on the capital that they are spending. But whilst they're spending the money, whilst the government is running these deficits, then that is, of course, stimulating profit growth in the other parts of the economy. And we, therefore, shouldn't be surprised that corporate profit growth has been so strong. Again, we don't want to come over the U.S. focused, but the U.S. -- the S&P 500, the largest companies in the U.S. are growing their profits at the current time on a rolling 12-month basis by around 35% to 40% per annum. And those are the sorts of profit growth rates that really only you normally see when the economy comes out of recession. And so the question is correct to say that anything that causes either governments to rein in their spending and reduce their deficits, and that could be, let's say, unruly bond markets, a big pickup in yield even from today's levels or a downturn in AI investment spend could cause a significant slowdown in profits growth and maybe even a contraction if conditions got really bad. And I suppose none of us -- none of us knows what's around the corner and none of us can really know how likely that outcome is, although I think we can recognize it as a risk. As far as the management of the trust's money is concerned and how do we deal with this? So we're constantly trying -- we're constantly on the lookout for companies that are we see -- where we think we see conditions that are unsustainably favorable and where the company could be over earning as a result. Because if the company is over earning, it is likely that at some point, earnings will decline back down to a more normal level and share prices and share prices decline also. So we're trying to stay out of companies which are over earning. And also obviously, as value investors, we're staying out -- we're trying to stay out of highly rated companies where expectations in the stock market, we think are unrealistically high because you basically if you can stay in lowly valued companies, you reduce the scope for stock market disappointment, yes, and you reduce -- by staying out of companies which are directly benefiting from the AI spending splurge and government deficits, you reduce the risk that you get an earnings shortfall in the future. And I think that's really as far as it can go. You can never -- it doesn't -- almost doesn't matter what you hold. You can never insulate yourself entirely from stock market volatility, but you can do your best to reduce it and provide long-term downside protection.

Great. And I guess to sort of take us to the next step from that question, where have you seen the largest changes to your intrinsic value estimates in the last 6 to 12 months?

Yes. So the changes in intrinsic value estimates. I mean, I think I suppose I'm not -- as I said, I'm not quite sure how to ask that question. As I said earlier, the area where we think the intrinsic value -- the upside intrinsic value has narrowed the most has been financials, and that explains the rotation out of financials over the last -- let's say, over the last 12 months or so. As far as a changing view of intrinsic value, yes, I mean that probably is it. I can't -- nothing else.

That's fine. So we've got a question on portfolio construction actually. With approximately 40 holdings and the 10 largest representing over 40% of the portfolio at the half year, how do you assess concentration risk? And what determines the maximum exposure you're prepared to take in an individual company or sector?

Okay. Both of those good questions. As far as portfolio construction is concerned, basically we're driven by the need to ensure as best we can sufficient portfolio diversification. And that is as a question, identifies those both at the stock level and also the sector level. At the stock level, we always recognize however strongly you feel about a particular company, however favorable you think that the investment proposition is, there's always a risk that you're wrong. And therefore, it's important to make sure that no one stock becomes a too large portion of the portfolio. Now we place the cap at around 5%. And so once the stock -- you can -- it's no coincidence that on this page here, the large in the portfolio is WPP at 4.9%. We will allow a position to get above 5%. But once it gets to 6%, we're certainly cutting back the position size. And that's something we've had to do quite aggressively within the financial sector over the last couple of years because as a value investor, you always face the perhaps nice challenge that if you start with 4% of the Trust money invested in a particular stock and it goes up by 50%, and all other things being equal, is 6% of the portfolio. You're constantly having to manage position sizes down in those stocks, which have done well for you. And that's something that we do with that's an area where we're very active. As far as sector positions are concerned, there's no magic answer to this. We will cap sector exposures at 25%. And again, it's basically -- it's really based on the sort of common sense view that we don't think it's sensible. Again, whatever sector you're invested in, there's a risk that you're wrong, we don't think it's sensible to have more than 1/4 of the trust's money invested in one sector. So we will cap out at around 25%. It's interesting today, and it gives us some comfort today that the biggest -- the no one sector today accounts for more than 17% of the Trust. But 25% is the number that we -- is the cap we put on the sector position.

Perfect, Nick. Moving on to the next question. If stocks are selected on a long-term basis return, how do you assess an underperforming stock over the last 12 months?