QV Equities: Finding quality companies, at a reasonable price June 2019 DISCLAIMER
Investors Mutual Limited AFSL 229988 (IML) has prepared the information in this presentation, as the Investment manager for, and on behalf of, QV Equities Limited ACN 169 154 858 (QVE) . This presentation has been prepared for the purposes of providing general information only and does not constitute personal financial product or investment advice as it does not take into account your investment objectives, taxation situation, financial situation or needs. An investor must not act on the basis of any matter contained in this presentation in making an investment decision but must make its own assessment of QVE, conduct its own investigations and analysis, and seek independent financial, taxation and legal advice. Past performance is not a reliable indicator of future performance. IML, QVE, their directors, employees and consultants do not warrant the accuracy, reliability or completeness of information contained in the presentation and, to the extent permitted by law, accept no responsibility for any loss or damage arising in any way (whether arising in contract, or tort or negligence or otherwise) from any representation, error or omission in the information or from any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. The information provided within the presentation is not intended to be a complete description of matters described. Usage and linking to the QVE presentation is at the users own risk. QVE will not be liable for any loss or damage from any cause (including negligence) to a users system or presentation, or to people linking to QVE from a users presentation, caused by or in connection with the use of or a link to the QVE presentation. Any such loss or damage is at the responsibility of the user. QVE advises users to take their own precautions in relation to protecting their system or presentation from viruses or malfunction. Copyright in the information contained in this presentation is owned by QVE. Use of this information or reproduction of it in any form is allowed for personal use only. Without limiting the generality of the foregoing, QVE does not permit reproductions of its material in other presentations in conjunction with advertising, trademarks, logos on material of other financial planners or competitors without the express written permission of QVE. All currency references are references to Australian dollars (unless otherwise specified) and any reference to law is to the law of Australia. All estimates are made on a reasonable basis and are not a guarantee of actual outcomes or performance. QV Equities Limited
Listed 22 August 2014
Managed by Investors Mutual
Focused on Ex-20 stocks
Experienced Board with independent majority
Focus on long-term capital growth & income
3 Why focus on an Ex 20 managed portfolio?
More diverse in terms of industry sectors
Less researched opportunities
Investors typically underweight in this segment
Solid yields on offer
IML has a long record of significant value add in this segment
Past performance is not a reliable indicator of future performance. The value of your investment can move up or down 4 Finding quality companies, at a reasonable price Retail investor needs:
The portfolio aims or seeks to provide the following:
Capital preservation
Reasonable capital growth
Income focused Capital is not guaranteed. Capital growth and income objectives are made on a reasonable basis and are not a guarantee of actual outcomes or performance
6 Investment Philosophy: focus on quality and value
We seek to buy and own:
Companies with a competitive advantage,
with recurring earnings,
run by capable management,
that can grow,
...... at a reasonable price.
7 Patience and discipline required as an investor
Market Investor
Short term focus Long term focus
Momentum driven Valuation driven
Upgrade / Downgrade mania Disciplined focus on ‘quality’
Daily information flow In-depth research
8 QVE portfolio lagging over recent periods
Resources sector strong
Industrials sector lagging
Significant gains in momentum/concept stocks
A few disappointing performers in the portfolio
9 Froth and Bubble?
Technology stocks
REITs
Iron ore stocks
High growth ‘concept’ stocks
…time to be selective
10 The IT momentum trade: 2016-19
Market Cap $20,000m Wisetech $7.7bn Appen $3.3bn $15,000m Afterpay $5.7bn
Altium $4.0bn $10,000m Total $20.7bn
$5,000m
$0m
Source: IRESS, FactSet; JPMorgan 11 As at 31 May 2019 Valuations – Reality check
FY19 FY19 Market EV/EBITDA FY19 P/E FY19 Yield EBITDA $m NPAT $m Cap $m EV $m (x) (x) (%) WiseTech Global 105 55 7,479 7,557 72.1x 131.5x 0.1%
Event Hospitality 240 114 2,048 2,180 9.1x 18.2x 4.1% GWA 81 55 871 863 10.6x 15.8x 5.3% Integral Diagnostics 52 23 455 572 10.9x 19.6x 3.4% Nine Entertainment 434 215 3,394 3,550 8.2x 15.8x 5.0% Southern Cross Media 162 83 963 1,242 7.7x 11.6x 6.2% TOTAL 969 490 7731 8407 8.7x 15.8x 4.9%
Source: IML; As at 29 May 2019 12 Mirvac
Source: Evans & Partners 13 As at 30 May 2019 Iron ore price: since 2016
USD 120/t Iron ore (FOB Australia) IML Long term Iron Ore price
USD 100/t
USD 80/t
USD 60/t
USD 40/t 2016 2017 2018 2019
Past performance is not a reliable indicator of future performance Source: IRESS; As at 29 May 2019 14 QVE Portfolio update – Finding quality companies, at a reasonable price IML’s approach to ex 20 stocks
Smalls/mid cap sector more prone to fads/bubbles/hype
Discipline required in particular in this segment
Focus on good quality mid and small cap names
Still some attractive yields on offer
16 QV Equities key stocks
KEY EQUITY INVESTMENTS ASX Code Weight
Crown Resorts CWN 4.5% Aurizon AZJ 4.1%
Sonic Healthcare SHL 3.9%
Spark Infrastructure SKI 3.7%
Amcor AMC 3.5%
Caltex CTX 3.5%
Steadfast SDF 3.5%
GWA GWA 3.1%
Bank of Queensland BOQ 2.8%
Orica ORI 2.7%
17 Source: QVE NTA as at 31 May 2019 QVE Portfolio – 12 month positive contributors
Amcor
Ruralco
Genesis Energy
Aurizon
Spark Infrastructure
Steadfast
Orica Source: QVE as at 31 May 2019 18 Tabcorp
Owns monopoly lotteries and retail wagering licenses in Australia
Recurring earnings, which are resilient through the economic cycle
Strong growth potential from transition to online lotteries sales
Dividend yield of ~5% fully franked
Source: IML estimates & Tabcorp; As at 31 May 2019 19 Tabcorp: Online lotteries growth
Source: Tabcorp strategy day & 1H19 presentation; November 2018 & February 2019 20 Tabcorp: Developments
Levelling of the playing field with Point of Consumption Tax
Powerball changes – 30% price increase – New rules mean higher frequency of large jackpots
Set for Life – New game innovation targeted at Millennials
Synergies with Tatts – $130m - $145m of savings from integration
Source: IML estimates & PaddyPower Annual report; As at 31 May 2019 21 Nine Entertainment FY20F EBITDA split
Fairfax Media merger completed December 2018
Merger synergies of at least $65m p.a.
Revenue synergies from cross-selling
Target of >60% digital earnings by 2022
Source: IML & Nine Entertainment; 22 As at 31 May 2019 Nine Entertainment
Free-to-air TV remains the pre-eminent mass market vehicle for brand advertising
Since 2013, audience CAGR -5% vs TV ad spend down 1% p.a.
Other video properties performing strongly
Stan >1.5m subs, forecasting 1st profit Q4’19
9Now streaming ad revenue +51% in H1’’19
Significant opportunity in cross-promoting Domain
9Now revenues hoh ($m) 35 30 25 20 15 10 5 0 Source: IML & Nine Entertainment; 23 1H17 2H17 1H18 2H18 1H19 As at 31 May 2019 Nine Entertainment
Attractive valuation: FY20 PE 12.7x, yield 5.0%
Current portfolio offers optionality
Asset sales (ACM and Events sold, Stuff NZ process ongoing)
Acquisition of MRN and/or Domain minorities
Potential to add equity partners in Stan
Strong balance sheet (0.3x net debt / EBITDA)
Source: IML & Nine Entertainment IML PE & Yield Estimates 24 As at 31 May 2019 Event Hospitality & Entertainment
Cinema business in Australia & New Zealand
Australian hotel business - QT, Rydges & Atura
Significant and strategic property portfolio
Conservative balance sheet strengthened further by sale of German cinema assets
New management reshaping the company
Source: IML, Events Hospitality & Entertainment website & company data 25 As at February 2019 Event Hospitality & Entertainment : Property portfolio market value: $2bn
Enterprise Value A$m 2,136 Less Property at FV A$m (2,003) Operating EV A$m 133 EBITDA ex-Property A$ 118 Adj EV/EBITDA A$ 1.1x
Existing hotels
Property with potential for further development
Priority Upgrade properties Source: IML, Events Hospitality & 26 Entertainment website & company data As at 31 May 2019 Yields: don’t forget the income
Portfolio Top Holdings Yield
Unibail-Rodamco-Westfield 7.3% Charter Hall Retail 6.4% Southern Cross Media 6.2% Hotel Property Investments 6.1% Genesis Energy 5.9% Shopping Centres Australasia 5.6% Ausnet 5.4% Sydney Airport 5.3% Skycity Entertainment 5.2% Crown Resorts 5.1% Aurizon 5.0%
Genesis Energy dividend includes the supplemental.
Past performance is not a reliable indicator of future performance Source: IML; FY19 estimates as at 31 May 2019 27 Poor performers
Clydesdale Bank
– Brexit issues plus competition impacting NIM
– FY20 PE 7x & P/BV 0.6x with strong capital position & cost out opportunity with Virgin
Pact Group
– Cost pressures from resins & electricity impacted margins
– FY20 PE 8.5x, new CEO with upside from plant restructuring program ($50m cost-out)
Mayne Pharma
– Generic margins hit by continued competition
– FY21 PE 10x; Branded drugs & contract services continue to grow strongly @15%+
Source: IML; FY20 estimates as at 14 June 2019 28 QVE Performance & NTA – May 2019
NET TANGIBLE ASSETS (NTA)* QVE-ASX NTA before tax $1.14 NTA after tax $1.12
PERFORMANCE* QVE’s NTA (pre QVE’s NTA tax) (after tax) BENCHMARK 1 Month -1.5% -1.0% +0.4%
3 Months +2.8% +2.1% +4.4%
6 Months +6.3% +4.6% +14.4%
1 Year +1.0% +0.9% +6.7%
Since Inception Total Return p.a +7.5% +6.3% +10.6%
*The before and after tax NTA numbers relate to the provision for tax on net profit in addition to deferred tax on the un-realised gains in the Company’s investment portfolio. The Company is a long term investor and does not intend disposing of its total portfolio. Under current Accounting standards, the Company is required to provide for tax on any gains that might arise on such a theoretical disposal, after utilisation of brought forward losses. All figures are unaudited and approximate.
The above returns are after fees and assumes all declared dividends are reinvested and excludes tax paid from pre tax NTA. *Performance is calculated to 31 May 2019. Past performance is not indicative of future performance.
Source: QVE NTA as at 31 May 2019 29 Historical Dividends to QVE Shareholders
QVE Dividend Payment (Fully Franked) 3.5 Special Dividend (Fully Franked)
3.0 1.0
2.5 2.2 2.1 2.0 2.0 2.0 1.8 2.1 1.5 1.5 1.5 CENTS PER SHARE PER CENTS 1.0
0.5 0.5
0.0 FY15 Interim FY15 Final FY16 Interim FY16 Final FY17 Interim FY17 Final FY18 Interim FY18 Final FY19 Interim
Past performance is not a reliable indicator of future performance
Source: QVE FY18 Annual Report & HY19 Results report 30 QVE historical NTA
QVE NTA (pre-tax) 1.3
1.25
1.2
1.15
1.1
1.05
1
0.95
0.9
Past performance is not a reliable indicator of future performance Source: QVE; As at 31 May 2019
31 QVE’s share price vs its underlying Net Tangible Assets (NTA)
Past performance is not a reliable indicator of future performance Source: IML; As at 31 May 2019
32 IML’s portfolio focus:
Staying disciplined is key
IML’s portfolios underpinned by quality industrial companies at reasonable valuations
Income will remain important
Selectively deploying cash opportunistically
33 Questions?
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