Discussion with Simon Conn and Marc Whittaker

Portfolio Managers, Simon Conn and Marc Whittaker, discusses the market’s performance during March and the performance of the QVE portfolio and key stocks.

Subtitles for QVE investment update March 2023.

Marc: Another volatile month for markets in March Simon. Clearly on the back of what we saw with the dislocation in the banking system. Whether that was a number of banks falling over in the US, the forced merger of Credit Suisse and UBS in Europe, a lot of volatility. On the back of that we did we did say global markets are relatively buoyant, however, and particularly the world MSCI up 2.5%. A little bit surprising given the dislocation and the volatility as I said, that we saw across markets and the economy in March.

Simon: Yes, the domestic market here under performed global peers, it was down slightly. The EX20 index was down about 0.8%, actually supported by resource stocks which were actually quite strong. So strength in the gold price and the bid by Abermarle for Liontown saw strength across the lithium sector and EV-based metal stocks, which supported the index. But, quite a soft month here domestically.

Marc: It was. But we saw that the number of good performers within QVE, despite the fact that markets are a little bit softer locally.

Simon: So in continuing the theme of M&A, we saw a bid for United Malt a company we have owned for some time, really attracted to the global portfolio that it’s built in the malting sector. A bid from a company called Malteries Soufflet, it’s a European based malt company, and they’ve been quite vocal about their ambitions to grow outside of Europe. So the bid at $5 is a good premium to the unadjusted price of about 45% premium. So really reflecting how mispriced that stock had been previously and I think it’s a good outcome for shareholders.

Marc: You know, markets in North America, gives them Australia, gives them Asia, so it’s very much what they were looking for.

Simon: You can get exposure to the faster growing craft market.

Marc: That’s right.

Simon: We also saw ongoing take over activity and discussions between Newcrest and Newmont. And obviously Newcrest was helped by the strength in the gold price, but also that take over activity in discussions, saw it strengthen over the month. Then also Origin, which has been in ongoing discussions with their bidding consortium, finally signed their scheme document, which will see each shareholder’s get a mixture of Australian dollar and US dollar proceeds. Equating to about $8.90, which is still a reasonable premium to their current price.

Marc: So, another good performer was A2B

Simon: Yep.

Marc: What used to be known as Cabcharge, had a very good performance in February, was a very good performer and has carried that on in March. And particularly given the fact that they were able to sell their signature property in Alexandria, which is an inner city suburb in Sydney. The $78 million is a very good price. Particularly given where we think property markets are at the moment. The fact that they got that particular property away was a very good outcome. On the back of that, we should see a special dividend paid to shareholders by end of this calendar year, something like 60 to 70 cents per share. That’s a very good outcome fully franked. So that’s that’s quite exciting, actually.

Simon: Yes it’s pleasing, particularly given all the effort we put in to agitating for change, at that particular company. And the new management are really putting their stamp on the business and transforming it.

Marc: Absolutely.

Simon: So, a really good outcome. In terms of activity in the company for the month, we trimmed some Origin and Sonic, as they’d strengthened over the month. And redeploy the process into APA, which is yielding over 5%, and Bega, which has been out of favor. But I think with the global dairy price weakening, we’ll see, you know, potentially lower farm gate prices in June, which should help margins going into FY24. Also, in corporate activity, further activity, HomeCo raised capital at $3.50, which we participated in, topped up our holding and then added in holding in HealthCo REIT, which is a portfolio of health care based assets, long dated leases, to good quality tenants. And they bought a portfolio of hospitals, leased to Healthscope, one of the leading private hospital operators in the country. Long dated leases, triple net and yielding close to 6%. And at that price, that yield is trading at discount to it’s peers. So we think it seems to be a good upside in that portfolio. We added that one in the month of March as well.

Marc: So I think that brings us to the outlook, where I think its fair to say, we remain cautious. Growth is certainly slowing, we’re getting a lot of leading indicators globally, that growth is slowing, inflation still hasn’t gone away, still quite prevalent. The market’s mind has turned to when rate increases come to an end. And that’s probably still a little bit premature. I think there’s still a bit of a disconnect between stock market valuations and and where the real economy is. But in that context, we remain focused on adding to our portfolio, good quality industrials, a little bit averse to cyclicals at the moment. Plenty of cash on hand to put to work when we think it’s the right time.

Simon: Yep. Thank you.

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