Firetrail Australian High Conviction Fund DECEMBER 2019

PERFORMANCE (AFTER FEES)

Fund 3 yrs 5 yrs 10 yrs Strategy Month Quarter 6 mnths 1 yr 2 incept incept (pa) (pa) (pa) (pa)4 Fund1 -1.44% 4.36% 5.33% 20.22% 4.80% - - - -

Strategy composite3 -1.44% 4.36% 5.33% 20.22% - 10.63% 13.36% 9.70% 9.97%

Benchmark -2.17% 0.68% 3.06% 23.40% 11.21% 11.93% 9.52% 8.16% 7.31%

Out/Underperformance 0.72% 3.68% 2.27% -3.18% -6.41% -1.30% 3.84% 1.54% 2.66%

ABOUT FIRETRAIL FUND DETAILS

Firetrail is an investment management boutique which is Unit prices 31 December 2019 majority owned by the Firetrail investment team. Application price $1.0699 Additionally, the investment team is invested alongside Redemption price $1.0645 clients in the investment strategies. NAV price $1.0672 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 27 INVESTMENT OBJECTIVE Fund size $413m 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 31 DECEMBER 2019 THEMATIC POSITIONING 31 DECEMBER 2019 Relative to the Benchmark Top 3 Overweight Holdings (Alphabetical) Qantas Airways Ltd 15.00% Rio Tinto Ltd 10.00% Worley Ltd 5.00% 0.00% -5.00% -10.00% -15.00% Australia 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 -1.44% for the month ending 31 December 2019, outperforming the ASX200 Accumulation index by 0.72%.

Positive contributors included Nufarm, Virgin Money and Worley. Detractors included Telstra, Lend Lease and Orica.

Nufarm rose on no specific news, but rather rebounded from last month’s oversold levels. During the month, Nufarm further advanced their interests in growing their seeds business through the acquisition of Carinata. Carinata is a non-food grade mustard seed that is harvested to grow biofuels, notably jet fuel for airlines. Initially, our view was that airlines were the key addressable market, given that Qantas has used the biofuel successfully in a flight from Los Angeles to Melbourne in January 2018. The results show an 80% reduction in carbon emissions for Carinata based fuel vs regular jet fuel. Our further research suggests the key economics of Carinata are driven by their carbon neutral supply chain. Some of the benefits of Carinata include drought resistance, combined with tolerance heat, as well as growing off cycle so it doesn’t compete with food crops. It is early in the piece, but highlights Nufarm’s growth agenda in the seed technology space.

Worley contributed positively to returns. The correlation between the Worley share price and the oil price is high. To some extent it is fair, as Worley does a lot of work in the hydrocarbon space. We believe the best way to think about Worley is through two dimensions:

1. Cyclical – when oil prices are low, there is less capital allocated to the sector and vice versa. Cyclically, the oil industry capex cycle has stabilised and is steadily growing from the capex collapse that occurred between 2014 to 2016.

2. Structural – there is a very large and material energy transition going on. It is a structural theme that happening globally, and it will be enduring. The world is shifting to lower carbon intensity. High emission coal fired power stations are being replaced with lower emissions renewables, gas and nuclear technology. Refineries are being converted to take alternative fuel sources. And electric vehicles will eventually internal combustion engine vehicles.

One of the lowest risk winners of the structural global energy transition is Worley. They are technology agnostic. Worley is one of the global leaders in nuclear. An expert in offshore wind. They are one of the largest builders of Chinese LNG import terminals. And they are one of few who can credibly consult on the construction of copper smelters (a critical input to Electric Vehicles).

Worley also benefits from diversity by both customers, type of work and geography. Below is a snapshot of contract wins by Worley in the past six months. The wins span from the US oil fields, German chemicals, Egyptian nuclear and South African synthetic crude.

Date Customer Services Use Region

Hook up and commissioning Hook up and commission Mad Dog 2 project in GoM ($9bn 31-Jul-19 BP contract capex) US

MJ Feidl deep water gas / condensate. EPC of subsea and 19-Aug-19 Reliance Industries Project management consultancy FPSO India

20-Aug-19 Var Energi Life extension services North Sea mid-life extension of FPSO and Balder field Norway

Services to 20 chemical sites in Europe. Plus 50 staff 4-Nov-19 Nouryon EPCM transferred to WOR Europe

Support services incl maintenance, mods and drilling for BP 6-Nov-19 BP Well support services Alaska wells. Extension of contract initially awarded in 2012. Alaska

19-Nov-19 Covestro EPCM EPCM for medium & large investment projects. Germany

Agreement to allow Exxon to contract at their Texas and 27-Nov-19 Exxon Maintenance Louisiana sites US

9-Dec-19 Sasol EPCM Contract partner to the Sasol Secunda Synfuels facility South Africa

Uzbekistan Project mgmt. to help build 2.4GW of nuclear 9-Dec-19 Uzatom Engineering & Project Management power Uzbekistan

Convert the Dickinson refinery in North Dakota to a 100% renewable diesel refinery. Contract serviced through the US 20-Dec-19 Marathon Detailed engineering services and supported globally by Worley. US

Servicing since 2001, contract is an extension of engineering Imperial and and procurement services for an additional term of five 20-Dec-19 Syncrude Engineering and procurement years. Canada

Consultation to build first Egyptian Nuclear power plant 30-Dec-19 NPPA (Egypt) Consultation services (4800MW) plus ongoing services Egypt

Source: Worley, Firetrail analysis If history is any guide, the Worley share price will continue to track the daily oil price moves. However, the structural growth in the global energy transition, the low point in the energy capex cycle and the diversity of the business is being heavily discounted in the Worley valuation. It remains a top position.

Orica detracted from returns. In November, explosives manufacturer Orica delivered the least exciting Orica result we’ve seen for 5yrs. And that is a good thing. The delayed WA explosive plant Burrup is now “slightly” ahead of expectations in terms of rectification works, with production expected in the 2H of FY20.

One of the biggest earnings drivers for a company like Orica is how much material is moved at a mine site. We expect to see continued growth in material moved. See the example below in WA iron ore. While commodity production is set to grow at around just 1%, material moved is set to grow at twice the rate. Our research suggests much of this is a bit of overhang from the decision to high grade years ago as well as moving to higher strip ratio areas.

Source: Orica FY19 presentation

There was nothing to change the thesis. Orica is on an FY20 PE 21.5x, offering c.10%p.a. average EPSg over FY21-23.

PORTFOLIO POSITIONING 2020

In terms of big picture portfolio positioning to begin the 2020 year, the portfolio can be summarised as follows:

• Large underweight Australian banks. While the revenue looks ok driven by stabilising credit growth, margin pressure from competition and cost pressure from conduct will continue to pressure earnings growth • Mild overweight to gold. Portfolio insurance given we are in fairly unchartered territory with rates, asset prices and global political leadership. • Neutral rate sensitive – overweight infrastructure and underweight REITs • Overweight cyclical value stocks including energy, resources and select industrials. We believe the price being paid for cyclical earnings is too low in many cases.

Some of the key stock calls remain fairly similar, but there are some names that were exited and added in the 2nd half of the year. The team remains laser focused on ‘What Matters’ and monitoring the investment case.

Largest active positions in the strategy with one liner overviews:

Qantas – the domestic market continues to improve in rationality as new management at Virgin aim to grow earnings through aircraft capacity management

Worley – as discussed above

Amcor – our largest defensive position is transitioning from plastic pariah to an essential player in sustainable packaging. Our view is that Amcor is set to be a big winner from the sustainability push as stakeholders realise that the answer to plastic pollution is not to ban plastics but a holistic solution including recycled resins, recyclable plastics and better waste collection and recycling infrastructure.

Nufarm – expect the seeds business to continue to grow in focus with key milestones around Omega 3 commercialisation to be reached. The management team need to deliver in Europe.

Virgin Money – the stock has performed well in recent months, after a tough period. FY20 NIM guidance implies stabilisation which will allow earnings growth from market share and cost reductions. Brexit remains a swing factor but is more than in the price.

The stock with the most potential upside in the portfolio is a recent addition, Karoon Energy. It is also one of our smallest active positions due to the risk (single asset, single country). Karoon undertook a company changing acquisition of a Brazilian oil field, Bauna. The vendor, Petrobras, was effectively a forced seller given they have a stretched balance sheet. When large companies sell assets to smaller, more nimble players, material value can be unlocked.

During the year, we made some errors and moved on. Sims Metal was a bad call. The company was buffeted by a number of issues including trade wars and China sword. Our investment thesis was that China steel rationality would bolster Sims’ earnings. While China exports stayed muted, there were too many other factors at play, and we made a clean exit in Q4 2019. Tabcorp was another company where the investment thesis wasn’t playing out in its entirety, particularly in executing strategies to stabilise market share in wagering. There are better opportunities in our view.

New positions we entered during 2H 2019 included Medibank Private and Lend Lease. For Medibank, the recent underperformance following an earnings downgrade presented the opportunity to buy a strong defensive business at a good valuation. In the case of Lend Lease, as the company looks to exit engineering, we believe the market focus will be on one of the best regarded urban regeneration businesses. They have something special, and while the exit from engineering wasn’t as clean as we (and the market) would have liked, Lend Lease looks interesting. We will write more on both stocks in the coming months.

ONE INTERESTING THING THAT HAPPENED THIS MONTH…

Brickworks (not held) CEO said “if (housing trends continue), the current downturn is likely to be the shortest I have experienced in the past 30 years.”

In fact, comparing Christmas 2018 to Christmas 2019 was like chalk and cheese. In late 2018,

• Markets were falling

• Rates were rising

• Australian house prices were falling

• Trade conflicts were intensifying

In 2019, the opposite was true. 2020 will no doubt be interesting!

Firetrail Investments Pty Limited (ABN 98 622 377 913) (‘Firetrail’) is an Authorised Representative No. (1261372) of Pinnacle Investment Management Limited (ABN 66 109 659 109 AFSL 322140). Interests in the Firetrail Australian High Conviction Fund ARSN 624 136 045 (the ‘Fund’) are issued by Pinnacle Fund Services Limited (ABN 29 082 494 362 AFSL 238371), the Responsible Entity. The Responsible Entity is not licensed to provide financial product advice. You should consider the Product Disclosure Statement (‘PDS’) in its entirety before making an investment decision. The current PDS of the Fund can be found at https://firetrail.com/products/firetrail-australian-high-conviction-fund. Firetrail is the investment manager of the Fund. Firetrail and Pinnacle Fund Services Limited believe the information contained in this communication is reliable, however its accuracy, reliability or completeness is not guaranteed. To the extent permitted by law, Firetrail and Pinnacle Fund Services Limited disclaim all liability to any person relying on the information in respect of any loss or damage however caused, which may be suffered or arise directly or indirectly in respect of such information contained in this communication. Any opinions or forecasts reflect the judgment and assumptions of Firetrail and its representatives based on information at the date of publication and may later change without notice. 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 not a reliable indicator of future performance.

MORE INFORMATION

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