WAM Research Limited (WAM) Earnings Call Transcript & Summary

And thanks to everyone for dialing in to today's call. With me today is portfolio manager, Tobias Yao; Senior Equity Analyst, Shaun Weick and Sam Koch; and Equity Analyst, Will Thompson. Unfortunately, Equity Analyst Cooper Rogers couldn't make it with us today. He's actually in China at the moment, which is probably our first offshore trip to China for a few years, which is good to see. So hope he brings some valuable insights back, which I'm sure he will. So as a reminder, the 6 of us at WAM Capital, WAM Research, WAM Active and WAM Microcap, so over 4,000 companies a year and identify undervalued growth companies predominantly in the small cap industrial sector. As it stands today, we do not own a company within the top ASX 50 companies within the market across any of the portfolios. So turning to Slide 3 and 4 of the presentation, you can see a summary of the small cap funds that we manage. Now firstly, on WAM Capital. We were very happy with how we performed through the 2023 financial year, with the fund outperforming by 3.5%. And this was despite the fact that we had a 5% headwind with small cap companies underperforming the broader market for the second consecutive year. We've had a great start to the 2024 financial year. In fact, our best reporting season we've had really since 2020. And the portfolio is outperforming the market by just over 3% as at the end of August. Because of the strong performance, we've been able to add to the profit reserve. And as it stands today, we have $0.14 in the profit reserve which means we can pay the next dividend in November that's $0.0775 and around 80% of the May 2024 dividend. So we're in a much stronger position than what we were a few months ago. But I think it's worthwhile to remind shareholders that you need to be monitoring the market and obviously, outperformance versus the market in the net tangible announcements -- net tangible asset announcements you see every month. Now turning to WAM Microcap and there's been a number of years where we've outperformed strongly, namely 2020, when we outperformed by 17%; in 2021 by 20%. But I actually think last year was probably our best ever year and we have managed to outperform the Small Ordinaries Index by 8.5%. And the reason why I say this was it was an extremely hard market for micro-cap companies given a lack of liquidity within the market. And the team performed extremely well finding some great ideas. We had a number of companies that doubled and tripled over the year, companies such as Close the Loop, Smartpay also to us and also Mermaid Marine come to mind. Now we've added to the profit reserve again this year, and we've actually increased our dividend to $0.0525 a share, and we have just over 5 years of dividend coverage within WAM Microcap. Now moving on to Slide 4 and WAM Research. Now unfortunately, we just missed out on outperforming this year. We underperformed the Ordinaries Index by 0.7%. And as I said before WAM Capital, we were actually quite happy with that performance given small cap companies underperformed the market by 5%. Now while we've maintained our dividend of $0.05 a share, the Board made the decision to partially frank the dividend at 60% at year-end. And this was due to the low level of franking that we had within the portfolio. Now while dividends can be paid by unrealized and realized profits, franking is a little bit different. It can only really be generated by realized profits or in other words, when we sell companies at a profit and actually pay tax. Now given we've seen 2 negative or bear markets in the last 3.5 years, our ability to realize profits has been reduced, and we've also received less franked dividends from the companies that we received over this period. So the Board made the conservative decision given the level of franking within the portfolio to frank at 60%. And finally, on WAM Active. We had a great 2023 financial year. We outperformed the index by 14% and WAM Active has actually been our best fund to start the year with the portfolio outperforming strongly as at the end of August. We've been able to boost the profit reserve here. We're sitting at around $0.10 a share at the end of August versus the $0.03 interim dividend that we previously announced. So we're actually in a much better position in WAM Active than we were 12 months ago. So look, I'll leave it at that. I'll now pass it on to Tobias and the rest of the team where we're going to talk about themes in reporting season and some key stock ideas.

Thanks, Oscar. Look, the theme we saw continuing during this reporting season is the outperformance of artificial intelligence or AI companies. In fact, it's probably a topic I'm quite passionate about. It's a very polarizing subject. The bulls on these AI companies would say that it's going to be a few years of exponential growth given the demand. On the other hand, the bears will be saying that the valuation of many of these companies have already priced in the best case scenario. So the valuation is getting up there. We are leaning more positively. And I guess, we've taken a more pragmatic approach in terms of looking at AI companies. We are looking for real evidence on the ground from many of these companies that's reported. You can hear it in the teleconference calls on their presentations talking about implementing AI initiatives that's driving real efficiency in the underlying businesses. In fact, if you listen to the CEO of Microsoft, someone with probably the best insight into, I guess, this AI trend, he's quoted saying that AI could be as big as the Internet itself. And as investors, it's very important for us to be able to benefit from the growth in AI over the next few years. So how do we play artificial intelligence in the stock market? The key for us is the fact that we are not the thematic investors. We can't invest just in the theme. It has to marry up with our investment process, which is buying undervalued growth companies with catalysts that could rerate the share price. So the catalyst is very important. The best way to describe how that's helping us the AI thematic and also the catalyst way of investing is coming together is to go through a couple of examples. So 1 of the companies we are bullish on is a company called NEXTDC. Now it's a data center operator, and in February this year, we started buying NEXTDC at around $10. The catalyst we've identified speaking to many industry experts on the matter is that Microsoft is having issues with their self-built data centers. So there was -- they're more likely to outsource some of their excess server capacity. And as a result, we started buying NEXTDC. Over the last 6 to 8 months, they've won 2 large contracts, which are from Microsoft and a few other customers. And the reason we still hold NEXTDC right now is we believe over the next 2 years, there will be more large contracts to come on the back of these AI capacity or the AI demand with data storage. Another company is called Megaport. Now Megaport, the business is effectively enabling data connection between companies and data centers. We started buying stock in Megaport around April or May, around $5. The catalyst that we identified there was a change in management. The Chairman at the time came in to effectively stabilize the business and introduce financial discipline. He employed a CEO from the U.S. who used to run ThousandEyes, a high-growth company to come into Megaport and effectively reintroduce the sales culture to drive growth. And so the catalyst we've identified is effectively for the company to beat our earnings and revenue expectations over the coming years on the back of effectively a renewed strategy and a renewed sales pipeline. So hopefully, that gives you a bit of color on some things we've seen, particularly in the AI space. I would like to pass it down to analyst Sam Koch, for him to talk about his theme. Thank you.

Thanks, Tobias. Another key thing that we saw during the reporting season was the outperformance of the housing sector or companies exposed to the housing sector. We've been progressively increasing our exposure to the housing sector over the last call it, 6 to 9 months, taking a view that, I guess, the market was a little bit too worried about the impact of high interest rates, high inflation and a tougher economic environment on the household sector, especially when you've got long-term drivers of the industry being sort of the underbilled and increasing population here in Australia. There were 2 key companies that really delivered strong results that sort of fit this thing within the portfolio. One of those was Maas Group, the ticker is MGH and the other 1 was Nick Scali, the ticker NCK. It means a high conviction stock picks from us as a team. Maas delivered a solid set of FY '23 results. It was towards the upper end of, I guess, their revised guidance that they provided towards the back end of the financial year. And I guess the key for us -- the key highlight for us and for the rest of the market was that strong free cash flow generation in the business. And when you couple that with over $70 million worth of capital recycling projects that earmarked for FY '24, it really alleviated market concerns around the state of their balance sheet, ascending the stock price 20% higher. Now despite the 20% move, stock is still on 10x price-to-earnings ratio with over 20% earnings growth forecast. We believe there's a number of catalysts to see the stock continue to rerate from here, that's further balance sheet degearing and obviously, improving sentiment towards the property sector. The second high conviction stock that fits this theme for us was Nick Scali. Nick Scali delivered a really strong set of financials in what can be said is a quite tough economic period. If you look at the FY '23 result, obviously, new sales actually came back as we expect. However, the large order banks that they already had and healthy margins really help cushion that blow. Looking at the FY '23 result and the trading update, you can really see why we like to back our management teams like Nick Scali. They're managing to outperform peers through -- not just through trading and through their cost control, but also through the implementation and the integration of the acquisition Plush. It's trading at about 12x price to earnings ratio on depressed earnings growth, earnings growth forecast. From our perspective, we can see the stock continue to rerate from here, and it's really about earnings upgrades and potential M&A that will drive that. I'll now hand over to Shaun.

Thanks, Sammy. Yes, so I guess along a similar theme. I mean in the months leading interpoint season, we felt as like, I guess, the market had become increasingly negative on the consumer retail sector with the consensus native really pivoting towards it being too early to buy these stocks with the trading update expected to be very weak and are supposed to trigger earnings downgrade as a result of some of those macro headwinds that Sam pointed to earlier. So we looked at valuations in many instances that reach 10-, 20-year lows in the retail sector, in particular, relative to the large cap retail and consumer companies. So given that we focus the majority of our analysis on consensus expectations and looking where earnings were expected to be in that second half FY '24 and FY '25 period. And comparing that to what companies had reported in FY '19, which reflected a more normalized earnings base versus the COVID years where the majority of retailers are significantly over [ earn ]. So we focus on building positions in those companies where consensus earnings expectations, book design had been sufficiently rebased and valuations were pricing in, I guess, excessive pessimism. And then I guess to give ourselves a bit of a margin of safety. We really did focus on those companies where you could see or potentially see additional catalysts playing out that could rerate the share price, such as the announcement of cost-out programs, that we saw the likes of [indiscernible] or those are strong balance sheets that could surprise the market with capital management or acquisitions or divestments. So a couple of stocks that perform well for the period, which I guess this theme of Premier Investments. So the trading up that was obviously a strong earnings came in 11% ahead of expectations. The other element was really around balance sheet option that we identified. Premier holds over $1 billion in cash and liquid equity investments in [ Breville and Maya ], which we think gives them significant optionality to undertake capital management potentially with buybacks or special dividends or earnings accretive acquisitions of what we believe is at or approaching the bottom of the cycle. You've got Founder and Chairman, Simon Lou in there as a significant shareholder in the business. And I clearly recognize that the shares are trading well below fundamentals with a strategic review, subsequently in that which potentially could see some restructuring of the group and is ultimately aimed at unlocking value so you could see the diverge of the high-grade businesses such as Smiggle and Peter Alexander. So we think the stock is still cheap on a sum-of-the-parts valuation, we can get north of $33 a share. So there's 30% upside from here. And I guess another 1 that we like is GED Holdings, which faced a lot of scrutiny by the market leading into the FY '23 result. There was a lot of concern around potential earnings downgrades on the APG, 4x4 accessories business, given, I guess, delays in new vehicle supply. And that was really being compounded by higher debt levels. But we've identified some potential catalysts in there around the sale of the Davey water pumps business, which management had talked about for quite a while in terms of being a noncore asset. So they're able to sell that business for $65 million, reduced the debt. And then you had earnings come in sort of 3% ahead of expectations. So from here, we think the APG business is significantly under earning versus the acquisition case. So as that new vehicle supply continues to recover, then you're going to see a strong tailwind for earnings and drive upgrades and the balance sheet is now derisked and it trades at over a 25% discount to history. Yes, we continue to like that one as well. I'll hand it over to Will now who will call out a theme and some of the key ideas.

And yes, the last theme is profitable tech. And it's a talking point because over the last couple of years, we've really seen a lot of unprofitable tech companies, I guess, being topical during reporting seasons. However, this year, it was those previously loss-making companies that have become profitable. So a great example of this was Tyro. We've seen them lose money the last couple of years, and they were able to really control their costs. But I think what was the best part about Tyro is at least they're showing that into 2024, they'll be able to keep that -- those costs under control. That would continue growing the top line, and you will really see the operational leverage and then that would generate profits. 360, Life360. One of those stocks where you saw them big expectations for the first half result. And if you get the read through for what they're going to do for the second half of the year, again, you're going to see them start to make money. And I think the stockpile is really going to start to value those companies. That's generating cash. Back to you, Oscar.

Yes. Thanks, Will, and probably worth also highlight to shareholders. We don't often get everything right. We did have a few misses through reporting season. I mean 1 stock, which was quite disappointing for us was mining services company called Perenti. They actually provided guidance saying that would grow earnings into the 2024 financial year. And we get to the result and they slipped in the fact that they're going to spend a certain amount on a tech investment, which meant they were going to grow earnings next year. So that was certainly a stock that we were disappointed in and we exited our positions at reporting season. So -- but why don't I pass it on to Camilla, and we'll get stuck into the questions-and-answer session.

Great. Thanks, Oscar. As always, we've got a lot of questions coming through from our shareholders, and you actually just answered 1 from our shareholder, Will. To start, we've got another 1 from Mark. His concern is a significant drop in the share price. Can you please explain why the share price has suffered such a drop across WAM Capital, Microcap, Research and Active?

Yes. Look, thanks very much for the question. And I'll spend a bit of time on this one, I think, because it's very important for our shareholders to sort of understand the dynamics that play and certainly this was something that Geoff and I have talked about in our teleconference a few weeks ago. I mean the first thing I'd say is that there's no doubt we're all shareholders, too, and we're very disappointed with how the share price across all the funds really have performed over the last call it, 12 to 18 months. And we're working incredibly hard within the team. And as I said, we had -- first step has been a very good year in 2023. We're hoping that small caps can actually outperform through 2024. But if I put it all together, I think it's fair to say the broader listed investment company sector as a whole, it's not just us but just as a whole, has suffered over the last few years, and that's a product of the fact we've had 2 negative or bear markets over the last 3.5 years, call it COVID in 2020 and a sell-off in 2022 when the Russia-Ukraine war and inflation largely began. And what this means is that the portfolios or the net tangible assets, which is effectively the portfolio we run, has fallen in value over this period. And I think -- coupled with a higher interest rate environment and some economic uncertainty is also meant that the premiums that a lot of these listed investment companies are trading at have shrunk and also the discounts have widened. I mean I think using the best example, looking at WAM Microcap and we've outperformed every year by quite some way since 2020, we've increased the dividend. Yet the premium has shrunk from over 25% at one point in 2020 or 2021 to today being 13%. So -- and we've also seen the net tangible assets fall as well given with the market. But I think, look, if we look at WAM Capital, which I assume a lot of our investors on the call, they would be interested in and probably be asking a similar question. I think it's worthwhile noting that we can only add to the profit reserve effectively if we're making a profit. Now unfortunately, in the last 2 -- in the last -- we've had 2 instances in the last 3.5 years where the portfolio has fallen which means we haven't been able to add to the profit reserve through that period, which means that we -- at this point in time, we only have $0.14 in the profit reserve versus the $0.155 we've consistently paid for some time. But what's more is that the net tangible assets, which is the portfolio we run, has -- when you pay a dividend, it falls by the value of that dividend. And at the same time, the portfolio hasn't risen enough to offset the fall in that dividend. And so what that means is, if you go back to 2020, the net tangible assets of WAM Capital might have been -- I think around $1.95 to $2 a share. Today, they are $1.45. So effectively, the net tangible assets has fallen by, call it, 20% to 25%. And also at the same time, the premium has shrunk. So today, we're at a 14% premium instead of, call it, a 25% premium at that point in time. So if you look at that and put it all together, that's a drop of around 30%, which is effectively where you go from the $2.20 or so share price that we were about 18 months ago or so to about the $1.65 that we are today. Now, while it's important to look at the share price, it's definitely important to look at the share price and that drop there, you can't discount the fact that we paid our dividends along that journey as well. You need to add back the dividends that we've given you to get a total shareholder return. And through that period, we've paid I think around $0.45 of dividends over that, call it, 3-year period and a set to hopefully give you $0.155 in the next 12 months as well. So look, hopefully, that gives you a flavor and answer to the question. The net tangible assets fallen because we've kept paying your dividends through this turbulent time, but it is important to add back the dividends to assess your total shareholder return.

Thanks Oscar for that explanation. Just to drill down a little bit further, our shareholder, Michael, he says his investment in WAM Active and WAM Capital have dropped 30% and 20%, respectively. Do you think you can provide a little more context around why that might be?

Yes. And look, as I said before, look, this is something -- this hurts us when we hear things like that. As we said, we're shareholders as well. We take our jobs incredibly serious. And in terms of our responsibility. I think with a drop that much, we are just focused on WAM Capital. I'm assuming, Michael, you probably bought shares at say, $2.20 to $2.30, something like that. As I explained, the net tangible assets has fallen by around 25% in that period and the premium has also shrunk. We're at a very high premium to its intangible assets there of around 25%. Today, it's around 15%. Put that together, you'd say that it's around a 30% to 35% drop as you said, from around $2.20 to $1.65. But don't discount the fact that you have received dividends over the period. So you need to add that back to fully assess your total shareholder return.

Thanks, Oscar. Next 1 from Tony. Same topic. What do the companies need to do to recover the share price?

Well, we can't -- unfortunately, we can't control the premiums or discounts that our funds trade up. Now as I said, the WAM Capital premium has gone from around 25% to around 15% today. So the market decides what that premium to our net tangible assets are. There's not much we can do about that. However, what we can control is outperforming. And it's -- we are very happy -- I'm -- as the leader of, I guess, the lead portfolio manager of the wider team, we're actually very happy with how we've gone through this period. It's been a very volatile time. Small cap companies have materially underperformed the broader market. It's well over 20%. And we've come through this period, outperforming every year against the Small Ordinaries Index. At some point, we are going to get a tailwind. We've got tailwinds in 2015 and 2016 that had incredible years. So as we look forward, as we said last call, we're very positive on small caps going forward. We think there will be some mean reversion in the next 12 months. We started to see it at the start of the 2024 financial year. And so as a consequence, we're hopeful that we'll start to see the share price go up as the market also goes up as well. But we don't have a crystal ball. And if there's a Russia-Ukraine war that turns up, at any point, it's going to be very difficult for us to keep [ high in that ]. So as I said in my introduction, it is very, very important for all shareholders to be monitoring our net tangible asset announcements when they come out and to monitor the performance of how the market is going. If the market falls 10% or 15% in the next few months, let's call it, it will be very difficult for us to add to the profit reserve and make sure that, that final dividend in May can be fully fulfilled.

Thanks, Oscar. Actually, just on profit reserve from Elizabeth, why do WAM Capital and Active have low profit reserves at the moment?

Because we pay you such a high dividend, that's the reason. And the Boards of both WAM Capital and WAM Active made the decision back in June 2020 when COVID was really bad to continue paying the dividend. Now because we had another negative market 2 years later, right, that has -- and we've kept paying the dividends through that period, the same amount, it has eaten away at our profit reserves, and that's why they're at low levels. Now we had a choice. Other listed investment companies cut the dividend in mid-2020. We chose not to. So that's the reason why we have a low profit reserve. And it's been that way for 4 years. I remember sitting here on a conference call mid-2020 thinking there was a high chance the dividend would get cut, but we ended up having an incredible year in 2021. So look, as it stands today, we're in a good position. We're in a much better position than we have -- when we've been in previous calls. As I said, WAM Active is actually looking pretty good now. It's got a 1.5 years of coverage. WAM Capital has 80% of the May dividend covered. So if the portfolio goes up another couple of percent over the next 6 months, the May 2024 dividend should be covered.

Thanks, Oscar. Tobias, let's go to you. We've got 1 from George and Kathy. Could you please comment on your holding in Capital Health in light of its recent results? Its share price has been fully in recent weeks, and that's been compounded by the selling of a large amount of shares, $17.3 million to be exact by Tribeca. Can you provide some commentary on the holding there?

Yes, sure. Thank you for the questions. Look, we're still very bullish on Capital Health. We do like many of these health care players, we think there's a lot of intrinsic value. Capital Health is a substantial position in our funds. I mean our view is that while the result wasn't good, we're beginning to see green shoots in terms of their outlook statement. When you look at some of our investments in these health care names, typically, there are the sort of longer-term investments, and you might not get the payoff straight away, but we believe the share price will trend towards intrinsic value over time. Some of the large positions we've had in the fund -- in the health care space have recently been acquired by either private equity or trade buyers. So we've had -- some will make healthier, getting acquired by Pacific Equity Partners at 80% premium. We've had [ Steel Blazers ] getting acquired by Wesfarmers. We've had SDA getting acquired by Bain. So we believe it might be sort of not a couple of years, but industry consolidation makes a lot of sense in this industry as well. But we think that the share price is very cheap and a valuation is very attractive at this current price.

Great. Thanks, Tobias. Oscar, this one is from Carl, he's asked why was the WAM Microcap final dividend only increased by $0.25 and the special dividends been discontinued for a second year in a row when the profit reserve has been sitting around $0.50. What's the story behind that?

Yes, sure. And obviously, this is a board decision. I'm not on the board, but I'm sort of speaking on behalf of the Board. But I think when we started the Microcap fund back in 2017, we always wanted to restrict the size and generally, what we feel running the fund is the proper size is probably up to around that $300 million in size. Now in 2017, '18 and '19 and I think that's actually -- I think the first 4 years, I think we paid a special dividend from memory, and that was really a reflection. Microcap's had a tremendous -- they had a really tremendous period over that first 4 years. And the size of the fund actually got over that $300 million threshold. So we made a decision last year in the 2022 financial year. We've increased the dividend slightly and we've done it again this year. It's fair to say if we have big years when maybe the portfolio is up 30% or 40% or 50%, potentially there could be a special dividend. But I think it's worth noting, well, we want to be able to steadily increase that dividend over time. And we don't want the problems that we've currently got effectively in WAM Capital, WAM Active to be in WAM Microcap. So -- yes, we're just ideally from the Board's perspective is slowly increase the dividend. If we have a really big year and the size of the portfolio we feel is probably too big, then we would reward our shareholders with a special dividend.

Thanks, Oscar. We've just had 1 that's come by email from Brad. He has said, would it ever be wise to pay more than the NTA for any WAM company and over time, the price always seems to drop back close to NTA. As paying great dividends and the company can never really grow above NTA?

Okay. Bid in that question. But look, if Geoff was here, he would always say, he wants to buy a dollar of assets at $0.80. And we've consistently said ever since I've been at Wilson Asset Management, effectively WAM Capital is traded at a premium. And certainly, there's been periods in time where we've seen, Geoff, for instance, sell shares in WAM Capital and WAM Research given the premium has been very, very high. So look, if Geoff was here, he'd be saying the most value in terms of the Wilson Asset Management suite of funds that we manage would probably be within WAM -- in the alternatives fund, WMA and also WAM Global, WGB. So yes, when we sort of look to invest and in particularly across our team, we're always looking for companies that are discounted in net tangible assets because inherently, there's value, you can buy the company effectively $1 and get $1.20 of assets if it was to effectively all be liquidated. So that's how we sort of look -- we look at stocks and potentially, there's a number of investors out there that also do that with the list of investment companies as well.

Thanks, Oscar. Let's go to some stocks now from our shareholders. Sam, can I get your thoughts on Smartpay that together as SMP?

Yes, definitely. We have substantial shareholders in Smartpay and really bullish on the outlook for that business. Marty, who's leading the team there is doing an excellent job rolling out the terminals across Australia. And what we're actually really attracted to or it's been a subtle change over the last sort of 3 to 6 months for that. There's an opportunity to aggressively grow the profitability of the New Zealand business and actually shift that business model more closely aligned with Australia. So we're positive on the outlook of Smartpay. Obviously, in the current environment, it's to be expected as a level of sort of consumer weakness, so that might impact transaction volumes across their suite of merchants. We're willing to look through that and look at the opportunity that there's in Australia and New Zealand. So we're positive by it.

Thanks, Sam. And Will, what are your thoughts on Close the Loop Group, ticker CLG.

Yes. CLG, it's had a pretty amazing year. And I think it's still relatively undiscovered in the small cap space and offers great exposure to the ESG Kinetics, both Shaun and I are lucky enough to head up in the U.S. next year and see the recent acquisition of ISP. And for a bit of background, ISP essentially recycle computers. And there's 2 elements to that. One, you want to make sure that their partner, HP, you want to make sure that all the data is wiped off for security reasons. But two, about 30% of their computers get taken back to store after they purchased and they used to throw them out. But they want to make sure that they're really closing the loop within their system so that those computers can be recycled. They need about -- I think it was about $24 million of EBITDA, and they gave guidance to $40 million of EBITDA. So we think it should be another strong year and we still think it's undiscovered within the small-cap market.

One thing I might add just to the comments there from the guys is the first 3 stocks, we've been questioned on our stocks that we are over 5% in terms of a substantial shareholding. I think 1 thing to be mindful of as an investor is when you see us go substantial or over 5% in the company, it doesn't necessarily mean that is the biggest position in our portfolio. I think that's really important. When you have a look at the companies we're most positive on, you really got to look at drill down to the top 20 holdings in each of the funds that you see at the net tangible asset announcements every month.

Thanks, Will, and thanks, Oscar, for that. Oscar, you mentioned this company earlier in regards to results, so we'll stick with you. What are your thoughts on the proposed buyout of DDH Drilling by Perenti and what is your outlook for Perenti in the mining services space?

Well. I don't really like that acquisition. I think it's -- I got to be careful what I say, don't I? I don't know. I just -- look, Perenti was going really, really well, had a great year. It was 1 of our best companies last year. They are doing everything right, and then they bought what I -- we would consider a low-quality business. Drilling services businesses are highly volatile. They're highly cyclical. If there's changes in macroeconomic environments, miners can just stop spending. We've seen that in the past. So for us, we didn't really like the acquisition to be blunt. And then as I said earlier, it's quite lucky I mentioned it actually is 1 of our losses through reporting season. The company decided to spend extra money on a technology investment, which took the -- took us as 1 of their largest shareholders by surprise. So we're a bit sort of puzzled with the strategy of the company at the moment, particularly given that we're doing everything right. So we exited the company through August.

Thanks, Oscar. Now you mentioned this company earlier, but Tobias, maybe you can provide some more context thoughts on Teoh?

Yes, sure. So Teoh, it's the old TPG Singapore. It's mobile telco in Singapore. We love founder-led businesses, particularly when the founder has done it before. So the founder of Teoh is the same founder as TPG in Australia. Obviously, over the last 20 years, significantly disrupted the market and gained market share. We think the similar dynamic is playing out in Singapore. So we're really back into management to grow market share, and they've done an in incredible job in a very short period of time. I think management owns about 30%, 40% of the company. So it's pretty tightly held. It's not the most liquid of stocks. We are substantially in the stock, and we therefore, for the next 3 to 5 years as he continues his market share gains. Our view is they will, at some point, launch a fixed broadband product. That's another product that could potentially disrupt the Singapore market, given where the price point is. And so this is going to have 2 drivers for the business, both mobile and broadband that's going to be driving the earnings growth of Teoh's over the next few years.

Thanks, Tobias. Shaun, would you be able to speak to Nick Scali and Premier in the context of the rising cost of living situation and perhaps the outlook of consumer spending here?

Yes, sure. Thanks. Good question. I mean, over -- actually, what I'd say is this is 1 of the most, I guess, telegraph sort of slowdowns. We've really seen in history. Everyone's talking about not if but when is the recession coming. And what we're increasingly seeing is the market narrative shifting towards I guess, a soft landing. We're in the peak of sort of the fixed to variable rate roles at the moment in terms of interest rates and how that's impacting on consumers. But what we've said and what we saw through reporting season is we think that, in general, the good retail is going to really survive and thrive for this period. I mean balance sheets are very healthy. The listed players, in general, are holding very clean inventory and we think there's opportunities given the slowdown has been expected to be so long, they've done a lot around their cost base to drive efficiencies. So net-net, while there are some cyclical pressures, we think, over the potentially 6 to 12 months, we think the listed space and the companies we are positioning are very well positioned to gain market share and actually thrive and come out as much better businesses on the other side.

Perfect. Thanks, Shaun. Oscar, can I get your thoughts on NEXTDC, ticker NXT. What's the outlook there given legislation changes to [ Visa ]?

It's been a right, Camilla, over the last 3 weeks to say the least. So what this business does, we are a substantial holder in it. It was actually 1 of our best stocks in 2023. So basically, what these guys do is they provide English language teaching schools, for offshore students coming into Australia. And then from those English language teaching schools, these students then go on to vocational courses or undergraduate degrees fectively. Now what happened was there's a Visa in place basically to get as many offshore people into Australia pretty quickly to get out there in the workforce and obviously, to help some of the labor shortages out there, it's called a section 408 Visa. And while this was doing really well for the English language business, what it meant was that all the people doing all these English language courses would just go out into the workforce. And they weren't actually going to the colleges or the vocational courses. So it was actually impacting the business. So they came out at the start of August and dropped us quite a nasty earnings downgrade. However, what happened apparently, so the shares fell a lot, fell about 40% or 50%. And I probably would have mentioned that as 1 of our worst -- I would have mentioned that as our worst stock over August. However, what happened was on the last day of August on the 31, the Visa got changed. And we actually look at the stock very positively now. This could actually be massive for the business. It just effectively means that it goes back to normal, back to what they've always had. The government has also come out and said there's a number of other dodgy operators in the sector that might lose licenses to bring in English language students. So that could actually take market share through this period. So it's actually a very positive development for the company, and we've actually been buying the shares again. So yes, we quite like it. And I think it's -- it will take time for people to understand what's going on, but we think this could be a cracker going into the next 12 months.

Thanks, Oscar. I'll just stay with you. Do you see the sentiment across the board towards listed investment companies lately is due to the rise of ETFs?

Well, it's a good question. I think ETFs have been around for a long time. And I think generally, what we've seen through COVID in the recovery even through that '22. Like if we look at latest, for instance, they've performed incredibly well through that period of time. It shows you the value of active management. But -- so I think that's been around for a long time. I don't necessarily think that's been the reason why it's been weaker now. The big reason I think is effectively that a lot of our shareholders now have a choice. Over the last -- really since the GFC, interest rates have been close to 0. So putting your money in a term deposit versus a listed investment company offering a 5% or 6% fully franked dividend yield. It probably -- people buy may have led towards these investment companies because of that. Now on a term deposit, you're getting a pretty decent interest rate. Yes, you might be getting a better yield on various listed investment companies, but you're taking risk on the market and on potentially the premiums contracting or the discounts widening depending on which listed investment company you chose. So I think it's more that interest rates have risen Camilla, not necessarily the rise of the ETF. Now I think once the interest rates stabilize, though, and there's more certainty, and we're seeing this across a range of sectors. I think demand will return back to listed investment companies because they are a great structure and provide franking and so forth. So Yes. I think that's for me would be the reason. When we speak to a lot of shareholders, they're very confused as to what sort of happened clearly since COVID and we probably are true to be doing fair. It's been all over the place. But there is some normality returning to the market at the moment, famous last words, but it certainly at the last reporting season we saw was really a return to reporting seasons evolved which is very positive. So as I said, we're in the call with Geoff, we're very positive on the outlook if you have cohort of stocks that we look at.

Thanks, Oscar. Great insight. We've just heard that the RBA held. So a timely response. We'll stay with you, WAM Capital. Why were there negative results in 2022 and 2020? And then how has this not impacted dividends?

Okay. So put really simply, we generate profit when the portfolio goes up. We generate a loss when the portfolio goes down in a financial year. Now in COVID in 2020 and in 2022, the portfolio went down. So we generated a loss. And that was really over a period of about 1.5 years. And the last -- effectively, it's been 3.5 years, let's call it, since COVID began. So let's -- so around 40% of that period in that 3.5-year period, we have not been generating profit, and we need to generate profit to be able to pay a dividend. So what that meant was, was that all the stored up profit we had before COVID with all the good years that we had before COVID, if the portfolio falls, we keep paying dividend. And because we're not generating profit in that tough period, we're not adding to the profit reserve. In fact, it's declining. And that's where we're at now because we've eaten away at that profit reserve because of the tough markets that we've had, there's only $0.14 a share left there versus the $0.155 in WAM that we pay for the full year. So look, this can change. It only takes a very positive market, and we saw that in 2021 and that we won't have any questions on this anymore. And as I said previously, this has been pretty consistent over the last 4 years. And we're actually sitting today in a much better position than we were, say, 12 months ago, especially feeling more confident around the dividends. But yes, I think trying think of it really simply. When the portfolio goes up, market goes up, we generate a profit. We use that profits to pay dividend. When the market falls and our portfolio falls, even if we outperform the market, which is what happened in COVID, the market fell, I think, 7%, and we were down 3%, which is a great outcome for us, but we -- because we generate a loss still, we can't put any profit away in the profit reserve. Yet, we've kept paying dividends, so the profit reserve goes down. So I think that's -- hopefully, I tried to do as simply as possible. Hopefully, that makes sense. But happy to follow up with the call if it doesn't.

Thanks, Oscar. Very helpful. Tobias, I believe you look after this one, Flights Antarctica, FLT. What are your thoughts on that company?

Yes. So we're still bullish. Last year, we have quite a few names in the travel space, Flight Centre, Webjet, SiteMinder and Circle, just to name a few. Most of you would be familiar with the leisure part of Flight Centre, which you expect to be obviously going to the Flight Centre stores and booking your overseas trips. That business actually went through a pretty intense structure change during COVID. Management took effectively the chance during COVID to rightsize or optimize that business. And it's benefiting from, I guess, this wave of revenge travel, the normalization of travel. What we are more bullish about is the other 50% of the business, which is -- it's the Flight Centre's corporate travel management business. It's a global business where they manage travel on behalf of small, medium and very large enterprises. They've won a lot of market share over the last 2 years. A lot of domestic players offshore are struggling with bad balance sheets. So someone like Flight Centre, which is very well capitalized, have been able to pick up many of these large contracts. And many of these contracts will be contributing very material profits over the next few years. So we are bullish of Flight Centre particularly in the corporate travel part of the business. And we think capital management, which they've talked about is another catalyst that could come up over the next 6 to 12 months, that should also support the Flight Centre's share price.

Thanks, Tobias. Oscar, what is your view on Harvey Norman?

Yes. We told this 1 up and thankfully, it came through in reporting season. There was a nervous sleep the night before Camilla. But no, we really like this one. I mean this is a classic Wilson Asset Management stock really. Harvey Norman has been around for a very, very long time, known very well by the market. I'd say generally, it's not liked in the market. And what people forget on Harvey Norman is it has a substantial property portfolio. And we first bought shares in June when the shares were trading at about $3.30 a share. And at that point in time, the share price was trading lower than the property value. And we've only seen that happen on 2 other occasions in the last 15 years. That was in COVID in 2020. And then I think in 2012, when Internet shopping or e-commerce started at pace. So effectively, yes, May 2023, share price is trading lower than the property values. Straight away, that's a good investment for us because we are getting the retail business for free. Now what was interesting in the reporting season, we did a bit of work, and this is not only for Harvey Norman, but for a number of other companies where we sort of -- we took where analyst earnings were in 2025. Now 2025 is a long way away. And the reason why we chose 2025 was because we're assuming a recession in 2024 in a really tough environment for retail. So hopefully, 2025 is call it relatively normal. So in Harvey Norman's -- in example of Harvey Norman, all the analysts are so negative on retail and so negative on the economy that their earnings forecast for Harvey Norman in 2025 are actually lower than what they were back in 2019. Now -- we don't think the current environment right now is worse than what it was in 2019. So it was interesting in reporting season. All the analysts hate Harvey Norman. They're all sells on Harvey Norman and they hate it, but they all upgraded their earnings numbers by about 10% or 15%. So again, that's a really good catalyst for us. And we really like Harvey Norman. We think analysts are way too negative. I'll work it out over the next 6 to 12 months and upgrade the earnings and potentially the analyst recommendations. We think stock is worth well north of $5.50.

Thanks, Oscar. Shaun will go to you. Can you share your view on the [indiscernible], please?

Sure. Thanks, Camilla. Yes. So the [indiscernible] is another stock that we're bullish on. I mean, if you look at the FY '23 result itself, it came in about 10% ahead of market expectations. And the other key feature was really the company announcing a special dividend and then also reinitiating additional $10 million buyback. So the balance sheet is very strong. They've got $77 million of cash and no debt. And we think the business itself is reaching an inflection point. They've got the business back to strong positive same-store sales through the second half of FY '23. And we think that continuing into this year as the company benefits from both the trade down from consumers who are looking for more value but also much improved merchandising, some of the changes they've made 12 months ago and really starting to come through the business and resonate with customers. So going forward, we think the top line can grow high single digits to potentially low double digit. The company is continuing to roll out more stores. And then if we look at the cost base, I mean the freight headwind, this was 1 business that was smashed during COVID because consumers weren't going into shopping centers and then freight went from USD 3 million to USD 25 million. So -- as that freight headwind unwinds this year as well, we think there's a gross margin benefit. And given the size of the sales base is almost $900 million, I mean this currently got massive operating leverage if they get the sales right. So yes, we think there's upside to analyst earnings expectations. And the stock trades on 7.5x cash adjusted PE, so yes, again, a classic Wilson Asset Management type stock and we think this can double over the next couple of years.

Great. Thanks, Shaun. Oscar, back to you. This is from Suzanne. As the investments in WAM Research are more or less the same as those in the research-driven part of WAM Capital. Are there plans to WAM Capital to merge with WAM Research?

Yes. Thanks, Suzanne, for the question. So clearly, investors have a choice. If they like the research-driven process only, they can buy WAM Research. So there's value there in just owning WAM Research is probably more longer term than WAM Capital, which is broadly speaking, 50% research, long-term ideas and 50% market driven, which is effectively the WAM Active side of Wilson Asset Management, which is shorter-term ideas. There is no plans to merge WAM Research and WAM Capital. Look, never say never, but I'd say definitely not something we've talked about. And the reason is as a WAM Research shareholder, if WAM Capital was to acquire you, you would be disadvantaged because your profit reserve is actually quite large relative to WAM Capital. So if we were to acquire WAM Research, effectively your profit reserve would shrink within WAM Capital. So look, there's definitely no plans at this stage at all.

All right. Thanks, Oscar. We've got 1 from Jim who says, with the typical shareholding size within the WAM Microcap fund at 2% or less than weighting, what is the value proposition long term over and above an index fund equivalent? As the market capitalization refines increase, is there any intention to reduce the fees as a percentage?

Okay. So with WAM Microcap, I think we've averaged since the June 2017 IPO think just over -- I think it's about 10% of outperformance a year to the end of 30th of June. So look, it's going to be hard to maintain that going forward, but we're obviously very happy with how the fund has performed. And clearly, that has been better than just buying the Small Ordinaries Index over that period of time. In terms of the stocks we hold within the Microcap, effectively, none of those stocks are in the Small Ordinaries Index. These are very, very small companies. And a lot of them, they're high risk and often, we see them before a lot of other funds see them. And the companies I mentioned earlier, like Mermaid Marine, Smartpay, NextED, these are undiscovered companies that have done very well. Don't get me wrong, we get a lot of things wrong, too. So these are very risky part of the market. But broadly speaking, really I don't -- I think almost what, 5%, maybe 5% of the portfolio is -- would have an index weight of some description in the Small Ordinaries Index, but it would be incredibly low. In terms of all the funds that we manage, the Microcap portfolio would have the lowest correlation with the index. So yes, you really -- if you're buying WAM Microcap, you're really backing our stock picking ability. And I think there was another question on fees. Look, speaking to Geoff, I heard him say this many times. The answer is no. We're constantly investing within Wilson Asset Management. You got the call today, you've got a lot of the road shows. How many people do we add in corporate affairs. We're always adding Camilla, look I think -- how many is in the team?

There's 8 of us now.

8 of us. So 8 in the team, 55 within the whole organization. It's doubled in the past 3 or 4 years. So it's not something -- and as someone who's in the, I guess, the leadership team and talking about strategy, we want to attract the best highest quality people to the organization. So certainly, cutting fees, given the size is increasing, is certainly not something we're doing because we're consistently investing in the business.

Great. Thank you, Oscar. This 1 is from Brian off the back of our recent results announcement. Can you please clarify reasons for WAM Research's partial franking and whether this will apply for future payments?

Yes. Thanks, Brian. Look, I guess this is, again, a board decision. Franking is different from the dividend. Look, they're pretty similar, but there's quirks. And I think as I explained before, with dividends around 70% of the dividends that we paid come from unrealized gains and realized gains within the portfolio. The other 30% comes from the dividends we received from companies. Franking is very, very similar to that. The only difference is, is that with franking, it has to be realized gains because you pay tax of those realized gains, right? So it's not unrealized gains, it's realized gains. Now because we've had 2 very negative markets in the space of 3.5 years, our portfolio has dropped. So at various points in time, a lot of the stocks that we own were losing money. Let's call it when we first bought them. So we bought them at a dollar. They might have gone to $1.20, but they fell to $0.80. So we're down 20% on our holding. Now we didn't -- in terms of how we add value for investors, we don't run our portfolio to get franking. And we weren't force sellers at that point because we were looking at the franking balance and say, "Oh, we need some franking. So we'll sell the companies," if that makes sense. So -- because of how that's played out, we've had less realized gains. We've paid less tax, which means we can't pass on as much franking to the shareholder. Now, as it stood, we were -- we could have done -- and I'm speaking for the Board here not because I'm not on the board, but I'm speaking on behalf of the Board here. We could have paid 100% franking for this dividend, but it could have been very tight for the next dividend at WAM Research, it could have been 0. So the Board took the conservative stance. For future dividends, what you need to really monitor is effectively the market. If the market goes up a lot and we crystallize some of our gains by selling shares like we did with SCA Health, which is effectively 6% of the portfolio. And we sold out of that company, it's a highly successful, is our largest position we sold out from the takeover in August. If we sell turnover increases, we sell more shares some of the companies that we're invested in pay more franking out, pay more dividends that we can pass on to the shareholders that our franking balance will increase. And hopefully, in time, we can get that franking back to 100%. But that was the decision the Board took at that point in time after the 60%. And certainly, as it stands, we'll have to keep monitoring it like we'll have to keep monitoring the profit reserve with WAM Capital and our ability to keep paying dividends.

Thanks, Oscar. This next 1 is from Joy Lynn. WAM Capital has an investment in HHY Fund of $1.5 million. Is this an unlisted investment fund?

Certainly, stock, I haven't been asked a question I think ever. Look, our understanding -- look, this is certainly before my time with HHY. It used to be a listed investment company. It's very, very small and it converted to an unlisted trust. I think it is -- or I reckon it be 0.01% of the fund. It's tiny. That -- yes, as I said, it converted to a trust. Fair to say, it's a very illiquid position, and we probably can't get out. And if we could, we probably would. But it's certainly not something I even think about on a day to day basis, to be fair, it's very, very small.

Thanks, Oscar. And then Simon asked what would be the upside for them investing $10,000 now given the share price being low? Maybe you can touch on the premium and discount here?

Okay. So not giving you advise. But look, the upside -- rather than I just -- rather talking about the premium discounts, I think it's just more of your view on what small cap companies are going to do. We've had a huge headwind over the last 4 years. The headwind is just over 20%. And that is the fact the market has effectively outperformed small cap companies by over 20%. At some point in the future, that will reverse. We don't know when, but it will reverse. And we've seen it happen many times before over the years. So I guess when putting -- thinking about where to invest in your $10,000, and looking at the 4 funds we manage specifically, I think you need to look at your own characteristics, the risk you're willing to take. And whether you think small cap companies look cheap at the moment and we are the best fund to effectively choose right stocks and outperform the market when it comes back. And it has been a tough period over the last -- that 2022 financial year was incredibly challenging for the team. I mean, thinking about how we've gone through this period, we've actually outperformed every year our small cap benchmarks which given we don't really own resources, it's been a tremendous effort and sets us up well when we start to see that mean reversion occur. So yes, I think you've got to ask yourself, are you bullish small-cap companies versus large cap companies? Are you bullish of the market? And are we the right fund manager to outperform? And then I think I should touch on the premiums and discounts, but WAM's at a 14% premium. I think WAM Research is at, I would say, 16%, 17%, Camilla, WAM Microcap is at 14% and WAM Active is trading at about net tangible assets. So the cheapest fund at the moment is WAM Active, and the most expensive 1 would be WAM Research.

Great. Thanks, Oscar, and thanks to Tobias, Will, Shaun and Sam. That's all we have for today. So Oscar, I'll just pass back to you for any closing remarks.

Yes. Thanks, Camilla. Thanks to all the shareholders and everyone being on the call today. Look, we're always available. So please feel free to call in, and we'll get back to you with any questions that you have. But I really appreciate your support and for everyone dialing in today.