Firetrail Australian High Conviction Fund APRIL 2020

PERFORMANCE (AFTER FEES)

6 Fund 3 yrs 5 yrs 7 yrs 10 yrs Strategy Month Quarter 1 yr 2 incept months incept (pa) (pa) (pa) (pa) (pa)4 Fund1 14.73% -19.19% -14.69% -12.86% -5.21% - - - - -

Strategy composite3 14.73% -19.19% -14.69% -12.86% - 1.96% 7.62% 8.78% 7.75% 8.20%

Benchmark 8.78% -20.32% -15.48% -9.06% 0.60% 3.97% 4.36% 6.43% 6.57% 5.79%

Excess Return +5.95% +1.12% +0.78% -3.79% -5.81% -2.01% +3.25% +2.35% +1.18% +2.40%

ABOUT FIRETRAIL FUND DETAILS

Firetrail is an investment management boutique which is Unit prices 30 April 2020 majority owned by the Firetrail investment team. Application price $0.8652 Additionally, the investment team is invested alongside Redemption price $0.8609 clients in the investment strategies. NAV price $0.8631 AUSTRALIAN HIGH CONVICTION FUND Fund Details The Australian High Conviction Fund (“Fund”) is a APIR Code WHT3810AU concentrated portfolio (approx. 25 companies) of our most S&P/ASX 200 compelling equity ideas. The strategy is built on Benchmark Accumulation Index fundamental, deep dive research guided by the philosophy Inception date 14 March 2018 that ‘every company has a price’. Number of Holdings 28 INVESTMENT OBJECTIVE Fund size $325mil Management fee* 0.95% p.a. The Fund aims to outperform the ASX200 Accumulation Index over the medium to long term. Performance fee* 15% of outperformance *Please read the Product Disclosure Statement for more details PORTFOLIO POSITIONING 30 APRIL 2020 THEMATIC POSITIONING 30 APRIL 2020 Top 3 Overweight Holdings (Alphabetical) Relative to the Benchmark Ltd Airways Ltd 15.00% Ltd 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% China Global Yield

Past performance is not a reliable indicator of future performance. 1. Firetrail Australian High Conviction Fund (‘Fund’). Net Fund returns are calculated based on exit price with distributions reinvested, after ongoing fees and expenses but excluding taxation. 2. Fund inception is 14 March 2018. 3. The Fund has been operating since 14 March 2018. To give a longer-term view of our performance for this asset class, we have also shown returns for the Firetrail Australian High Conviction Strategy Composite (‘Strategy’) which has been operating since 29 November 2005. Strategy performance has been calculated using the monthly returns (after fees) of the Fund from 14 March 2018 to current date, as well as the monthly returns of the Macquarie High Conviction Fund (after fees) between 29 November 2005 to 23 November 2017. The Fund employs the same strategy as was used by the same investment team that managed the Macquarie High Conviction Fund as at 23 November 2017. Firetrail has records that document and support the performance achieved as the Macquarie High Conviction Fund. The composite returns for the Strategy and the S&P/ASX 200 Accumulation Index (Benchmark) exclude returns between 24 November 2017 and 13 March 2018. During this period the investment team did not manage the Strategy. As such, the annualised performance periods stated are inclusive of the combined composite monthly returns, and do not include the period when the team were not managing the Strategy. For example, the annualised return over 3 years for the Strategy and benchmark are inclusive of 36 monthly performance periods available in the composite return period, excluding the period between 23 November 2017 and 13 March 2018. For additional information regarding the performance please contact us through the link on our website. Net Fund returns are in AUD terms. Net Fund returns are calculated based on exit price with distributions reinvested, after ongoing fees and expenses but excluding taxation. Past performance is for illustrative purposes only and is not indicative of future performance. 4. Strategy inception 29 November 2005.

PORTFOLIO COMMENTARY

The Fund returned 14.73%% for the month ending 30 April 2020, outperforming the ASX200 Accumulation index by 5.95%.

Returns were contributed from Worley, Evolution and Virgin Money UK. Detractors included more defensive business including and .

April was very busy month with a lot going on in markets and in the companies that we invest in.

On the markets front, we saw a few things:

1. The market rose strongly (almost 9% during April after falling 21% in March) 2. Continued large equity raisings, now up to almost $20bn. The GFC saw over $100bn raised and there is a real possibility we get close to that number. 3. Cyclicals materially outperformed defensives after underperforming in the prior month. The rally in cyclicals reflected improvement in COVID-19 cases, stabilisation, and slight improvement in high frequency economic data, as well as what we saw as deeply oversold conditions.

$18.5bn of equity raised so far – some obvious names (NAB, Lend Lease and ) while others were surprising (QBE and )

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Source: FT

NEWS FOR COMPANIES IN THE HIGH CONVICTION PORTFOLIO:

Lendlease

Lendlease raised $1bn of capital during the month. The funding will go towards de-gearing the balance sheet ahead of an expected ramp up in growth.

Our simple investment thesis in Lendlease was that the business has a very large development pipeline ahead of it. Normally, a large and diversified growth runway would be rewarded in the market with a higher earnings multiple. We believe that Lendlease hasn’t achieved the valuation it deserves because of troubles within its non-core engineering division that has resulted in some material losses in recent history. Lendlease has chosen to exit their engineering division, and while most projects will be gone by the middle of this year, they still have the troubled Metro project on the book. It is worth noting they also have a provision against the engineering division which is unchanged for the past 18 months.

The bottom line is that the business is becoming more focused and that is a good thing. Remember back to and their foray into the UK home improvement market… At the time, the market was myopically focused on the loss-making UK division, while Bunnings continued to grow strongly. Today, with Bunnings UK in the rear-view mirror, Wesfarmers is seen as a strong business. The point here is not that Lendlease and Wesfarmers are the same business. The point is that the market has a track record of changing its mind on the value of businesses when they become more focused.

The core business is impacted by COVID-19, but it is also in better shape than ever. The company has added a lot of future value by securing a large pipeline of development opportunities over the past three years. Using current development run rates, you are looking at over twenty years’ worth of earnings. Here is a chart of the development pipeline:

Source: FT

The development pipeline is diversified across key gateway cities like , , and San Francisco ().

Source: FT

The balance sheet will now likely end 30 June 2020 at the bottom end of their target range. With the exit of engineering close, we are looking for Lendlease to add value for shareholders through the development pipeline and working with capital partners on potential distressed opportunities in some segments of the market.

Newcrest

Gold miner Newcrest raised $1bn at the end of the month of April. The purchase looked to us to be driven by strategic motives. 70% of the proceeds were allocated to purchasing a right to gold revenues from the Fruta del Norte mine in Ecuador.

Prior to the transaction, Newcrest held a 30% interest in the asset by owning 30% of Canadian listed miner Lundin Gold.

At spot gold, the investment makes an 11% IRR and the investment is protected at lower gold prices. We would describe that as reasonable. But the strategic importance must be underlined. The owner of the asset Newcrest purchased has ‘negative control rights’, which means basically they have a say in the mine plan. If the asset was bought by someone else, Newcrest could have problems down the track

The balance of the proceeds went to the balance sheet for future growth. In our view, the raising was prudent after the company paid cash for Red Chris in 2019.

Alongside the raising came news that Newcrest was having even more success in step out drilling in recently acquired Canadian asset, Red Chris. There looks to be material upside from the asset including a very high-grade pod of gold.

We own Newcrest for:

1. large-long life assets with growth options which we believe are undervalued 2. a lagging share price vs majors (while global majors Barrick and Newmont have doubled in the past year, Newcrest is flat) 3. gold continues to look attractive for risk purposes (trade wars, currency devaluation, portfolio hedge for a fully invested portfolio)

Source: Factset

Worley

Worley renewed existing and established new facilities to a combined $945m over the past month. To put it in context, Worley had total net debt of $2bn at the end of Dec 19. The ability to refinance in periods of stress is what is setting COVID-19 apart from the GFC. For now, the banks are still open for business.

Operationally, Worley informed investors that they have reduced their headcount by 5% since the beginning of the year. It is likely to become tougher as certain projects come to an end, but at the same time, oil needs investment and Worley is one of the absolute market leaders.

Qantas

Domestic competitor Virgin Australia went into administration. It is very tough in the airline sector right now and Virgin was in a vulnerable position coming in. The base case is that there is a competitor to Qantas. But there will be material market share shifts towards Qantas over the next few months. The market share shifts will be particularly pronounced in corporate as procurement teams seek to minimise their risk.

Our most likely scenario right now is that domestic flying returns well before international. If you want to capitalise that kind of situation, we believe Qantas is on a 5x PE. Below is the split of EBIT in that situation.

Source: FT Estimates

Oil

Oil equities performed well, up 25% during the month despite oil prices going negative for the first time in history. One interesting chart was just how much the US supply is set to be impacted by current low prices. Below is a chart of oil rigs in operation in the US, a key lead indicator of oil production.

From the chart, you can see rigs were actually falling through 2019, even when oil prices were ranging from $50-$60 / bbl.

Source: Baker Hughes Rig Count

PORTFOLIO POSITIONING

The portfolio continues to be very stock specific, with large deviations from benchmark weights. At a high level the portfolio remains:

• Tilted to value over growth stocks • Owns select cyclical leaders such as Qantas, Worley and Seek • Overweight defensive leaders like and Medibank • Overweight tier-1 oil, resources and gold producers including Newcrest and • Underweight the Australian banking sector

There are big opportunities in the market for unconstrained fundamental investors right now. Our head of risk, Justin Gray, has pulled the cross-sectional volatility and you can see it is elevated at around 2x average. That means asset prices are moving around a lot more and there are more opportunities for active managers who can identify value and act on it.

ONE INTERESTING THING THAT HAPPENED THIS MONTH…

Given China seems likely to emerge from the virus outbreak first, it could be an indicator as to how Western world consumption patterns play out over time…

We undertook a virtual tour of China! Our consumer guru, Tom Kierath, took a virtual trip to China speaking with industry bodies, consultants, distributors, and business operators. Here are some of the interesting take-outs from the trip:

1. Online data and sales trends show categories relatively unaffected by COVID (Electronics, Health, Household goods, Food & Bev), those that are recovering quickly (Appliances, Babies/Kids, Beauty) and those that haven’t recovered yet (apparel, bags/wallets, Books/Movies/Music, Electronic Vouchers) 2. Surveys suggest that Chinese consumers will spend the same this year as last year (i.e.. expect to see demand surge / catch-up spend…) 3. Tier 1+2 cities are opening up, whilst Tier 3 will take longer. Schools are starting to re-open and there is increasingly more advertising telling consumers it is safe to go out to the mall etc. 4. To date, Govt policies have been directed at keeping SME’s in business i.e. reducing lending standards, cutting electricity and other costs 5. Restaurants have begun opening but numbers are restricted. As a result, prices have increased to compensate, and people are willing to pay-up for experiences outside of their homes. 6. Bars generally are not open. And most cities are limiting gatherings at homes to 4 people. 7. Some categories have yet to see improvement - such as international travel, seasonal clothes, and luxury items

Supplementing the tour, here is our take on the trajectory of China employment data from Seek owned recruiting platform, Zhaopin.

This document is prepared by Firetrail Investments Pty Limited (‘Firetrail’) ABN 98 622 377 913 AFSL 516821. The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of Firetrail and its investment activities; its use is restricted accordingly. All such information should be maintained in a strictly confidential manner. The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. This communication is for general information only. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Past performance is for illustrative purposes only and is not indicative of future performance.

Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238371 ('PFSL') is the product issuer of the Firetrail Australian High Conviction Fund ARSN 624 136 045 (‘the Fund’). PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) ABN 22 100 325 184. The Product Disclosure Statement (‘PDS’) of the Fund is available at https://firetrail.com/products/firetrail-australian-high-conviction-fund. Any potential investor should consider the PDS before deciding whether to acquire, or continue to hold units in, the Fund.

Whilst Firetrail, PFSL and Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Firetrail, PFSL and Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. This disclaimer extends to any entity that may distribute this communication.

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