Featuring Simon Conn & Marc Whittaker

Portfolio Managers Simon Conn and Marc Whittaker review calendar year 2023, with a focus on the December quarter. They discuss global and local markets, how the QVE portfolio performed, as well as key stock holdings. An outlook for 2024 is also provided including positioning of the QVE portfolio.

Edited transcript

Marc: Welcome everyone to the calendar 2023 review of the QVE portfolio. Fair to say a very volatile year, but one that certainly finished very strongly. Simon – what was your take on the year?

Simon: I think the Nasdaq being up 44% probably tells you everything we need to know about the year. Extremely volatile. Obviously, inflation was the main theme for the year. But as those inflation expectations and numbers fell quite rapidly towards the end of the year, we saw a big rally in the bond market. And that really fed through into the equity markets with the last two months of the year being very strong. But the preceding 10 months were very volatile. 

Locally, the ASX 300 up 12% and the Ex 20 sector lagged to be up just under 10%. But really for the quarter, which is what we’re talking about today. Again, the Nasdaq was up 14%, it was very strong. And the Ex 20 sector up 6.4% lagging the benchmark, the ASX 200, about 200 basis points [2%].

And in that environment, for the quarter QVE posted a 5% return, which is slightly behind the benchmark, but I think was a solid outcome. We’re in a fairly defensive position, and we had held on to those gains earlier in the year, had held up better than the market, but were left behind a little bit towards the end of the year. So we did 8.8% for the year. So I think it was a solid outcome, and our focus on income generation and resilient businesses, I think put us in good stead. 

There’s some of that caution around some of the resource stocks in particular with lithium, one sector that was obviously very strong in calendar year 22 now falling rapidly. So that caution there was vindicated.

Marc: It was warranted, for sure.

Simon: In terms of stock stories, Marc, I mean, obviously we had a range of contributors, but, one of our favourite stocks A2B had some corporate news just prior to Christmas.

Marc: It did, A2B was a very strong performer for the portfolio over the quarter up 20% trading at 5-year highs. That really came on the back of a takeover offer from one of its largest shareholders, ComfortDelGro out of Singapore. We got $1.45 per share  all cash takeover offer, which is great…

Simon: Plus the dividend

Marc: …and we got a fully-franked, 60 cent dividend coming our way as well as shareholders in A2B. So, it’s really been a great outcome for the portfolio and really testament to our ability to agitate for change in companies where we see a need for change. And we were instrumental in refreshing the executive function there and the Chairman’s role as well.

Simon: The new management team have done a fantastic job in crystalising the value that was on the balance sheet and turning the business around.

Marc: So that’s been great.

And another great example of a strong performer for the portfolio over the quarter was, Mayne Pharma. It’s not a name that we’ve talked to in the past in terms of strong performers, but it’s really, coming good more recently. That’s really on the back of a very strong, or much stronger performance in its Women’s Health Division and its Dermatology Division. So two parts of that business both performing well. Revenue growth back on track after what was a softish update back in August, but that October trading update that we saw was very well received by the market.

Simon: But then again, another example of where, you know, we’ve been pushing for change in management. New management have come in, and refocused the business on the core women’s health and dermatology business, sold the other businesses, had a cash balance sheet, actually doing a buyback at the moment. 

Marc: which is good.

Simon: so they’ve positioned the portfolio well, and NEXTSTELLIS seems to be getting good growth. Obviously, you know, launching during Covid was difficult.

Marc: NEXTSTELLIS being their core female contraceptive product. That’s on track, by all measures that we look at, and the company performing a lot better than it has in the past. So, a very strong performer up almost 90% for the quarter. 

Simon: We had some other good performers obviously, companies like Bega, which had been sold down heavily after the result, global dairy prices recovered, and so the stock’s been strong.

AZJ, Aurizon, again still looks very cheap, but it was up over the quarter.

CQR, which we have been adding to, the Charter Hall Retail fund, very attractive yields, it rallied towards the end of the year.

Marc: Rallied on the interest rate thematic as well.

Simon: And look at Southern Cross Media, one we’ve owned for a while, looking again very cheap. Got some corporate activity in the beginning of the quarter with ARN bidding for them and then it’s up on the back of that activity.

Regis again positioning themselves well, made a couple of small acquisitions, really building out their aged care portfolio which gave us another strong performer. 

For the quarter, not everything always goes up and gaming exposure to Sky City, which has got strong land backing and Tabcorp, were both weak over the quarter, frustratingly. Tabcorp, the key piece of news there was the renewal of the Victorian licence on much more favourable terms. So their tax rate will fall dramatically, which is a significant uplift. We anticipate about $120 million EBITDA uplift to their earnings, so it leaves them on, you know, PE of 11. But obviously, the gaming market is soft with the softer consumer, and that’s been weighing on both stocks. So a case of the micro working, but the macro playing against them, but I think both stocks positioned well going forward.

Marc: They certainly both look very cheap. I think it’s just a matter of time. As we’ve seen with a number of stocks in the portfolio, we’ve seen a lot of good quality at attractive prices and that’s come through that that value has been realised.

Simon: M&A is clearly a theme that’s come through in the last, 6 months with corporates sitting on good balance sheets, looking for acquisition, looking for ways to grow their business, obviously buying smaller businesses, is a way for them to grow their business.

So in terms of activity, we also added, Steadfast, it did a capital raise at $5.14 through the quarter. We’ve added that to the portfolio again, at I think attractive prices. APA did that capital rise at $8.50 and we added more on the back of that. And then Origin, obviously, with the bid falling over, we had a small position. But now looking attractive in the ($)8s, good yield, and so we’ve been adding to that position over the last few weeks. 

Conversely with Mayne’s rallying we’ve been trimming that position, its had a good rally.

We’ve sold out of Pact, which we were also instrumental in pushing for a much higher price. So I think we got a good bump out of that one. Locked that in and we’ve moved on. Newcrest – the take over from Newmont again precipitating a fully franked dividend. We’ve banked that and exited near Christmas which is now a top twenty stock.

Marc: Codan’s another position which we have exited on fair value grounds as well. 

Simon: It’s been a good trade for the fund. 

In terms of the outlook Marc, I think, that the next news flow/data point will be reporting season at the interim. But I think, you know, we both, are sort of here thinking that it’s a lowish growth environment. Definitely the companies we talk to are focused on maintaining their margins with cost pressures continuing to be a feature. Whether its wages, electricity, compliance costs… you name it, the cost pressure remains. Top line seems at this stage to be okay.

Marc: Holding up fairly well actually. 

Simon: The economy seems pretty well positioned with unemployment relatively low in terms of trade at good higher levels. I think most companies seem to be able to grow their top line. We’re focused on the profit growth, and I think it’s just a low-growth environment. In that environment, we’ve continued to position in companies that we think can maintain and hopefully grow their earnings and look appropriately priced, because I think the worst thing is paying too much for a stock and you’re risking a capital loss. Also obviously very focused on the income given our big, strong income focus, in QVE. So, the portfolio has a prudent amount of cash. We’ve been trimming and building up our cash with a few of these takeovers, and after A2B this will be higher. And looking to re-enter some of these positions and looking for opportunities in any market volatility.

And I think the outlook will be, through the year, continued volatility. There’s uncertainty around the economic outlook, and all these global conflicts continue to weigh on markets. So, still an uncertain volatile market I think. And one where you have to be prudent and active.


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