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    Uncovering reporting season with Stephen Bruce | recorded webinar


    Jodi Pettersen: Ok. It’s right on 12:30, so should we get started, Steve? Sure. Excellent. And thank you, everyone who’s joined for today. My name is Jody Peterson. I work for Invest in today. We have very kindly joined by and Bruce, who’s the portfolio manager of Investment Income Generator Fund under the code EIGA. We are going to be talking to Steve about what’s happened in the most recent reporting season and how that’s going to impact the EIGA or we call EIGA portfolio. Before we dive in and hand over the reins to Steve, I want to remind everyone on the webinar today that this is being recorded so that people who can’t make it can watch in. Also, another one to note is that there’s the Q&A in chat function at the bottom of your screen, so please use those to drop questions throughout. For Steve to ask, and I will help moderate there. Also, of course, that maybe we can drop to the next slide. Steve, there’s the all important disclaimer slide. So what this one really tells us is that we’re speaking in a general nature. Only today we’re everything we’re speaking about is not financial advice. So always seek your own advisor and your own advice and read the PDF at Invest dot com dot a u. Steve before we jump in. Maybe some people who don’t know what happens normally during reporting season.


    Stephen Bruce: Yeah. Thanks, Jodi, and good afternoon, ladies and gentlemen, and thanks very much for your interest today. So twice a year companies have their results, presentations and generally from most companies in Australia, they have a June financial year end. So within two months of year end, so by the end of August, they have to deliver their their results for the full year. And when when that occurs, they release their accounts to the to the stock market. They generally have a presentation that’s available to to analysts or to the general public, can listen in to it these days on webinars, etc. And so really, it’s a very important time as an investor because it’s the it’s the time of the year when you get the, you know, the greatest insight into how companies are travelling, what’s going on in their business and in in a way, it’s a little bit like, you know, getting your school tests back in a way because for most of the rest of the year, their markets are trading on expectations and suppositions, etc. But it’s on results day full year in August and half year, generally in February that you actually see what the numbers really were. So it’s a very, very interesting time for investors.


    Jodi Pettersen: Fantastic. So tell us what happened, should we dive into the details?


    Stephen Bruce: Okay, thank you. All righty. Well, it was a really interesting period. Even more so than usual because of all the disruptions that we’ve had, you know, to the economy and the markets due to due to COVID over the last over the last number of years. And on the chart here, I mean, what we’ve done is just plotted out what market earnings have been over over the last couple of years and then what the market is expecting them to be going into the 2022 year. So if we look on the left, what we can see here is that, you know, this is what overall market earnings were a bit under $100 billion in 2019. Then COVID came along, and you can see overall market earnings were down 17 per cent in in 2020. The banks had a big reduction in earnings. Industrials were down 20 per cent. But, you know, resources were actually still strong through that period. And you know, the resource sector has been really, really interesting and resilient all through this. So the earnings were down 20 per cent, now 17 per cent. And then as we roll into the year that’s just finished, there was this really strong recovery, which is, you know, very pleasing to see. And so overall earnings were up 38 per cent from from the COVID impacted 2020 year, and that earnings growth was across all the different sectors of the market. We can see bank earnings in the blue. Down the bottom, we’re up, we’re up 50 per cent.


    Stephen Bruce: Industrial earnings were up over 20 and again, the resources were really strong, with earnings up up 61 per cent. So you can see it the overall level as well. Not only did earnings recover a lot from the from the COVID impacts, but they were higher than the pre-COVID level, which is which tells you some good things about the economy and then people make what people see in the results. Just gone obviously drives their expectations about future results. And so when people look forward into the current financial year that we’ve just begun now, the FY22 year that ends next June. Currently, the market expectations are for earnings to be up around around 18 per cent again, with bank earnings continuing to grow. Industrial sectors of the market continuing to see earnings growth and recovery and the resources to be up strongly again. Now just in the last little while with the sell off in the iron ore price, you know, maybe this expectation for resources earnings is is going to prove a little bit optimistic. So that will probably come back a bit. But overall, people are expecting, you know, good solid earnings in the current financial year, and that’s good for the markets and good for earnings and good for dividends. And so over the month of August, the market, we sort of think about the response to the results. The market was up bit more than 2.5 per cent. So that’s telling you that results were generally well received. But of course, when you think about how the market performs during a month, there are a lot of big macro factors that can influence that as well.


    Stephen Bruce: But net net, it was always a positive, a positive time for the markets. If we move on to probably what was the biggest real theme of the of the reporting season and something that’s very important to a fund like this, which is focused on on income generation, is that companies were returning very large amounts of capital to shareholders, and they were doing this through a combination of buybacks, both an on market buyback or an off market buyback. Capital returns and then special dividends, as well as just increasing their ordinary dividends. And and interestingly, this this big increase in dividends and capital returns was occurring across all sectors of the market and and it was really provided a very positive signal about the, I guess you’d say, the health of the underlying health of corporate Australia and the strength of balance sheets in corporate Australia. And if you look at a few of the big examples of this, if we just start with the banks now, one of the things about the banks is that as we were as covered said in, they reduced, they reduced their dividends and they raise capital to shore up their balance sheets. Now, fortunately, the effects of COVID have not been nearly as bad as what was originally feared on the economy and on the banks bad debts. And this has left them in this really super strong capital position.


    Stephen Bruce: And so the banks have now started handing some of this money back. And if we look on the left here, three of the four banks have announced some significant returns. Cba being the biggest where they’ve they’ve they’re undertaking a $6 billion off market buyback. And as many of you know, off market buybacks are attracted to paid in for investors who are on low tax rates. They provide you with a positive after tax return and and this fund participates with its holdings in off market buybacks for that reason. So CBA CBA was the was the biggest at $6 billion. And then we look ANZ, a $1.5 billion on market buyback and NAB with $2.5 billion now on market buybacks don’t have the same tax advantages as an off market buyback, yet they do boost earnings by reducing. A number of shares on issue, and we’re waiting for Westpac now, Westpac, as you know, many of you have read in the press, have had some particular issues of their own. So they’ve held off on announcing how much capital they’ll return. But they do have a lot of capital and would expect in November for them to hand some of that back. So all the sectors probably got $20 billion of capital that it doesn’t need and it will be able to give back. So but it wasn’t just the banks. Many of the other companies were doing it to a Woolworths and Wesfarmers $2 billion each. Telstra are a bit over a billion dollars, and that was the proceeds of selling off part of their mobile phone towers business for a really high price.


    Stephen Bruce: And so, you know, they committed to returning half of those proceeds to to investors through a buyback and Suncorp $250 million. So, you know, across the board, we saw a lot of money being given given back to investors now to get moving onto resources. That was the sector that wasn’t on the previous slide, but the resources sector was really the standout in terms of earnings over the last year. All commodity prices were very strong. Iron ore in particular, was really strong as the biggest commodity in the market. It was very important and what that meant was that the the iron ore miners, the BHP, Rio and Fortescue were producing enormous amounts of cash flow and earnings over the year. And I’ve put some charts in here which I took from the Rio results presentation, which just highlighted if we if we look on the left, what we can see the yellow. So the Green Line, that’s the iron ore price. You can see how high it went up in the last six months and just how much money. Rio earned twelve point two billion dollars in just in half a year. So it was their biggest, their biggest half year earnings by sort of like 50 per cent in the last in the last decade. But the other side of the equation is not just how much money you’re making, but it’s how much money you’re spending.


    Stephen Bruce: And on the right hand side of the chart, we show the capital expenditure for Rio. So what we’re seeing is you’ve got very, very big cash flows coming in at the same time as the amount of capital expenditure you’re undertaking is quite low. So what that means is the amount of cash left over to go to shareholders is is big, and Rio paid a $9 billion US nine billion US dollar dividend in the half. And when you add up the dividends from the three big miners, it was over 20 billion US dollars in the half. Now the iron ore price has come back a long way since then. But the amazing thing is if you put in today’s iron ore price of the $120 million, these companies are still generating a huge amount of cash trading on a sub 10 times earnings multiple and should be able to pay close to a double digit dividend distribution in the coming year. And that’s also a function of the fact that, as I said, applicable to corporate Australia, generally balance sheets are in really, really good shape. So as we know, you know, the enemy of the dividend is over geared balance sheet, but that’s not an issue for for so many companies in the market at the moment. Moving onto the banks, which are a big part of the portfolio and of course, a very big part of the market. Now we all know banks have had a tough five years with royal commissions, et cetera, et cetera.


    Stephen Bruce: But really, you know, that’s all in the rearview mirror now. And when we look at the banks, all those sort of headwinds that they’ve had in the last, say, five years are now starting to turn into into tailwinds. Credit growth, which had been slowing quite considerably, has now started to pick up again. And if we just look at the chart here, these lines show the the new fundings for mortgages of different types that have been made in the last little while, and you can see they’re all starting to point up led led by owner occupier where the new loans are off the chart. And in fact, the rate of pick up is likely to cause the regulators to step in and try and call it a little. But net net, that’s that’s positive for the banks that the acceleration in loan growth. The other thing that’s been weighing on the banks in recent years is as interest rates have been falling, their margins have been getting compressed. So the difference between what they lend and lend out and what they pay on deposits is has been getting narrower. But that’s now started to stabilise and won’t be seeing much of a drag going forward. And the other big thing about the banks is that they have the credit quality is surprisingly been really, really good or through this period. So they’ve got big provisions for bad debts that they don’t need. So all that adds up to a pretty good earnings outlook and combined with the surplus capital that they have, we can be pretty confident that they’re going to be paying attractive dividends over the over the coming years.


    Stephen Bruce: When we think about some of the other sectors of the market, there were there were winners and losers and that was really driven in terms of the earnings delivered that was really driven by how they were impacted by by COVID and what that meant for the economy in terms of some of the sectors that did well, the insurance sector was a beneficiary because when you think about insurance, we keep paying our premiums. But if we’re not driving our car, we have less car crashes. If we are at home, it’s harder for robbers to come in and steal our stuff. And if a house catches on fire, we probably put it out rather than the house burned down. So the insurance sector has been doing pretty well. Similarly, the consumer staples and consumer staples, the biggest part of that is things like supermarkets. That’s been a real beneficiary of people staying at staying at home or, you know, eating at home, etc. It’s boosted their sales. It’s consumer discretionary, which is actually that sort of flip side of consumer staples has actually been remarkably resilient through this. As people, you know, consumer confidence has been good. People have still been spending. So the retailers have actually been doing well. Now a lot of it’s been driven by online sales, et cetera, which have picked up the slack from from closed stores.


    Stephen Bruce: But again, you know, surprisingly a part of the market that’s been strong and the telco sector, everybody, everybody needs good broadband and communications in this sort of environment, and that’s been a positive for Telstra, etc. And then the healthcare sector, I mean, parts of the healthcare sector have been impacted, for example, hospitals which have been had their elective surgeries cancelled. That’s been a headwind for them. But other parts, for example, pathology companies are having a fabulous time with all the COVID testing. So a bit of a mixed bag there on the on the on the sort of other side of the ledger companies which have been negatively impacted. Obviously, anything to do with travel and leisure has has has had a pretty tough time infrastructure and utilities, you know where they’re meant to be really defensive. But if not many people are driving on your toll road, you don’t collect, you don’t collect many tolls. And as I mentioned before, parts of the healthcare sector have have been impacted. But what we know with the with that is you can only put off, you know, medical medical procedures for so long. So if you didn’t get your need this year because of COVID? Guess what? It’s going to be hurting even more next year. And so you’re going to have to go and go and get it done at some point. So a mixed bag there in terms of


    Jodi Pettersen: Don’t mind me jumping in there. Sure. We’re looking particularly discretionary, discretionary retail. You said that, you know, the numbers have been quite resilient because people are still shopping online. Are you concerned about supply potential supply issues going forward? I have been reading on the news that retailers are expecting supply issues as kind of a lagging effect of covert and shipping delays, which could impact them. And even today, Australia Post has said that they’re not going to ship post any business deliveries for the next five days because they’re overwhelmed. Is that something that you’re concerned about and is that something you’re taking into account?


    Stephen Bruce: Yeah, that’s right. I think that’s I mean, it’s getting a huge amount of air play at the moment. And really, that was one of the key kind of themes that came out of of reporting season. And these sort of disrupt logistical disruption and you’re seeing it across every, every part of the market, really. So for with retailers, the standard worry with a retailer is they have too much inventory and they can’t sell it all, so they have to sell it cheap or write it off. The concern for retailers this year is they haven’t been able to get the inventory because the shipping well, things are not getting produced in nearly the volumes that they need to be for a whole bunch of reasons. Factories are closed because they’ve all caught COVID or you can’t get the chips that you need or you can made stuff and you can’t actually get a container to put it in, let alone slot on a ship. And so we’re seeing this across supply chains, supply chains, everywhere. So yes, that is likely to present a headwind for for many retailers now. We don’t have a lot of retailers of that sort in the portfolio, and the real view there is that they have had a very good time. So it’s probably other parts of the market that could be doing a bit a bit better from from here.


    Stephen Bruce: But when we sort of think about that more broadly and I guess the question you asked, it falls into the category of of rising rising costs as well. And that’s something that we really saw. It was called out by so many companies and it was across a large number of areas of labor. Funnily enough, companies, whether it’s here or overseas, are just struggling to find enough enough qualified labor. And part of it is that income support and stimulus measures are still in place. So people have been reluctant to stop getting that sort of thing and to actually go back out and maybe risk catching COVID to go back to a job. But that scheme is becoming a bit of a headwind. As I said before, commodities prices, pretty much every every commodity price has been really strong. And you think at the most basic level of every physical thing, it has a commodity input, whether it’s plastic, which is made from oil or metal or what have you. So that’s probably starting to feed through as well. Shipping and transport, you know, well documented that there have been all manner of issues along the whole, the whole supply chain there and. Couple of charts we’ve put in a kind of interesting if we look on the top right here, it’s what’s called the Baltic, the Baltic Dry Index, and that’s an amalgam of a couple of dozen of the world’s key shipping routes.


    Stephen Bruce: So they look at essentially the price of putting a container on a ship across these routes that most of the world’s trade travels on. And you can see it’s off the charts expensive just at the moment, which that forms a cost input to to pretty much everything that is that is globally traded. But then if you look down, we look at the price of lumber. So this is the price of lumber in the US. Now lumber goes into a range of things, but particularly building housing framing, which is probably the biggest single driver. But you can see again off the chart, but it’s come back very quickly. So the real key issue that is going to be for four markets because this affects inflation and in fixed interest rates and all these really critical things to markets is, is this inflation? Is it transient? Is it just caused by disruptions? And I’d say a lot of it is caused by disruptions. You know, when the ports are functioning properly, the containers will get in and out quicker, etc., or how much of it is going to be persistent and due to structural factors, which will feed into into a higher level of inflation. And I think the most likely outcome is is is something in the middle now.


    Stephen Bruce: To date, companies have been feeling there’s import cost pressures. But what we saw in the last results is they’ve generally been able to pass these these costs on because demand has been strong. So from a company earnings point of view, so long as demand continues to be robust and our balanced view is that it will be as reopening here and everywhere else really gathers momentum over the coming six, six, 12 months, then they will have some, some pricing pricing power. But ultimately, you know, time time will tell. And this all ties into the inflation debate, which then drives interest rates, which drives stock valuations. So does this result in that nice two to three per cent inflation that central banks everywhere have been trying to get for years and years? Does it turn into something more sinister? But at the moment, I think, you know, we’re not we’re not too worried just now, one or the other. Other really big topics that came out of reporting season was this focus on ESG. So that’s environmental, social and corporate governance factors. Now this is becoming ever in the world a far, far more significant issue from from investors point of view and companies are being held to a much higher standard, which is a very good thing because you need to drive this accountability, to drive change, to get the outcomes that that we need now the most, you know, probably the most critical one of these is around carbon reduction reduction targets.


    Stephen Bruce: Now everybody has a view on global warming and these and these sort of things. But what we’re seeing is that many, many more companies are now adopting carbon reduction targets within their businesses up and down and up and down their supply chains. And part of that is yes, do you say we will be zero by 2050? But let’s face it, 2050 is a long, long time away. But increasingly companies are putting in more granular targets on shorter timeframes, be it 2025 or 2030. Typically, companies are saying we want to have our emissions down by 30 per cent by 2030, and this is the pathway to do it. So there’s some accountability there. Another one of the big issues is around what’s called modern slavery, and essentially that means companies and there are increasing statutory requirements for larger companies. To do this is to have evaluated their supply while their own businesses, but be to have evaluated and assess their supply chains to make sure that there is nothing resembling modern slavery going on now. This is quite challenging when you have very long supply chains into, you know, all around the world. But you know, it’s increasingly and it’s an important thing and increasingly being undertaken by companies and demanded by investors.


    Stephen Bruce: One of the other things that this is all resulting in is a bit of portfolio realignment. Whereas where businesses are exiting more carbon intense activities, for example, you’ve seen many businesses exiting thermal coal. So some of the mining companies saying, yes, we do, we do iron ore, which is necessary. We do copper, which is going to be important in the energy transition. And we’ve got this business in thermal coal, which is going backwards. So we’re we’ll just move out of that and then a final thing. And this is a very positive thing for Australia is that as people become more focused on all these issues around environment and how you look after your staff, et cetera, it’s a lot easier to do these things in well regulated jurisdictions with with strong legislation around all these things. And Australia is a perfect example. So you just think, would you rather be running a copper mine in the Congo or a copper mine in Western Australia? I’m pretty sure I know which one’s going to be having better standards and and being. Lower risk, so that was a, you know, a big a big issue in reporting season of this increased focus on environmental, social and corporate governance issues. Now another another thing is that’s really been a big part of the market in recent times and not not just in reporting season, but over the last six months or more has really been M&A activity picking up.


    Stephen Bruce: And we’ve got some charts here which just show the amount of M&A activity done so far this year in Australia, on the left and globally on the right. And you can see there’s just been this massive pick up, you know, compared to, say, the five year, the five year average where it’s multiple times and that’s been driven by by a number of factors. Firstly, money is really, really cheap. Equity markets are high. So if you’re using script to do a takeover, your script is valuable. Yes, so interest rates are low and companies generally are more positive than than not on the outlook. So they’re taking the opportunity to make these big moves and down the bottom. I’ve just popped in some of the logos of some of the companies that have been involved in activity. Now we’ve had shares in some of these companies. We think about Boral was taken over by by seven group, which we were at. We’re a shareholder in and we think there’s a good chance that they’ll be able to extract better operating performance out of that business. Bhp is selling its oil and gas business to Woodside. Similarly, Santos has taken over or merged with with oil search Afterpay, which we don’t hold because it’s a non dividend paying, really expensive tech stock has been acquired by Square, which is an even bigger loss, making non dividend paying tech company in the US and then some of the others.


    Stephen Bruce: Telstra it has been involved in corporate activity in the sense that, as I mentioned early on, it sold a 50 per cent stake in its mobile phone towers business for an enormous price to a consortium of infrastructure investors. So the final factor that I hadn’t mentioned on that list of of of things driving this may wave has been the entry of what’s essentially called infrastructure funds who are looking for relatively long duration, stable assets. And these sort of funds have enormous amounts of money being allocated to them by the big global pension funds, and they’re looking at an increasingly broad range of assets that could fall under the definition of long duration, stable, stable assets. And on the right there you can see Sydney Airport, where a consortium of infrastructure funds have tried to. Super funds have made a bid to privatise that because it’s the exact sort of asset they want, so we would expect to see significantly more M&A ongoing in the market over over the next while. And many of the stocks in the portfolio have the sort of characteristics which would make them interesting to an acquirer.


    Jodi Pettersen: Just a positive kind of sentiment, right? Like that is a good signal for the market.


    Stephen Bruce: It is a good signal. It is. So people are not taking a batten down the hatches kind of mentality. They’re stepping out and they’re stepping out and doing things and trying to build their business and position it for the for the future. Because as we’ll get to it in the end, you know, the market’s a little bit worried just just at the moment about about a number of things. But by and large, I think you can paint a pretty positive picture on the on the medium term outlook.


    Jodi Pettersen: It’s interesting because I don’t mean to interrupt too much here, Steve. I think it’s interesting because politically in the media, we’ve we have seen all the discourse being absolutely dominated by COVID and the talk of COVID. But what these numbers show is that the business community has been moving up. That’s right. That’s right. They’re not like while COVID is obviously an impact and we you you totally nailed that down in terms of what businesses has been positively and negatively impacted. The overall vibe I’m getting is that. They’ve kind of just moved on and doing much more exciting things like all this mergers and acquisitions activity.


    Stephen Bruce: That’s right. You know, business management look forward and the equities market simply is always forward looking. We know what the numbers of reported were were interesting, but we’re always interested in next year’s numbers and the year after. So when we think about the market and that points really summarized here, if this is just the ASX 300 price level chart and so you can see, despite COVID, we’re above pre-COVID levels levels in the market. August, the end of August was another record high. Now the market’s given back just a little bit a little bit this month. And I think, you know, we’re sort of climbing a bit of a wall of worry around things like the US debt ceiling that needs to be lifted again and particularly what’s going on in China. Around Evergrande, the property development business is causing markets concern as well, along with, you know, some maybe more hawkish talk coming out of the Fed around around tapering and the potential for rate hikes. But I think the important thing to remember is they’re talking about that because in their view, the underlying economy has recovered very strongly. The labor market strong, the housing market strong. The number of job ads is is strong, right? So they so they are saying rates being zero isn’t appropriate and endless bond buying isn’t appropriate at the moment. And those are again, positive signals around the market mightn’t be very positive.


    Stephen Bruce: If you’re a tech stock with no earnings, you know, trading on 100 times revenue. But for a general business which is geared to the overall economy, which is performing well, then that’s that’s good news. So just on that, you know, when we look at all the indicators, there’s positives and negatives. But on balance, things are things are looking pretty good out there. And what this little chart we’re showing here, it’s put together by by Bank of America Merrill Lynch. And essentially, it’s an amalgam of a whole bunch of indicators around the global economic outlook, around markets and credit markets and industrial production, et cetera, and earnings upgrades. And really, you know, it’s showing that the operating conditions currently that we’re seeing are very positive. And that’s that’s what’s going to underpin earnings growth. And then we when we sort of think about the bigger picture and just just sort of stand back and say, Okay, so what are we, what are we looking at going forward at the global level? There’s been very, very big stimulus and would expect stimulus to continue, and this is like a really big change in the market. So if you go back pre-COVID, it was all about monetary policy and lowering interest rates. That’s kind of changed now. Yes. Interest rates are still low, but governments have realized they need to step up and actually spend money and direct spending to infrastructure, etc.


    Stephen Bruce: to give more broad based economic growth. And that’s going to be ongoing. And you’d expect that the US will get some form of infrastructure bill through in the not to in the not too distant future role. Interest rates, et cetera, are starting to come off their lows by any historical measure. They’re still going to be at very low level. So, you know, slightly changing up in the bond yield, you know, the US 10 years, up to 20 odd points in the last couple of days, but it still had only 1.5 per cent. So the effect of that on the real economy is not all that significant effect on some parts of the stock market might be a bit more so. But really, you know, interest rates are still going to be very easy by historical standards. And then in terms of getting everything back on track, you know, the vaccine roll out globally is the key, the key event. And we look at all the charts and all the data, and we know that that’s now accelerating and then a final point and people have very, very varying views on this one. But I would say, you know, the US that we have today is a bit different to the one that we had last year in their willingness to try and be a bit more, take a bit more of a leadership role role on some of the important global issues and make things the backdrop perhaps a little bit more harmonious than the than the last administration was.


    Stephen Bruce: And then when we think about Australia, obviously what’s happened here with lockdowns, et cetera, has been a setback. But the reality is the upside, if you’re trying to find an upside is is a dramatically accelerated the take up of vaccinations where we were just meandering along and really getting nowhere and, you know, will be through, well, you know, it will be through 85, 90 per cent before you know it, which will put us basically the top of the world in terms of in terms of vaccinations and allow allow the economy to reopen. And then before we went to lockdown, this time, what we saw was the economy was performing very strongly. The property market was good. The employment market was good. It was hard to find part of the economy that was that was really struggling. And so we would expect the economy here to bounce back very quickly once things once things begin to reopen fairly shortly. So when you put all that together, we think there’s there’s a reasonable basis to be quite optimistic on on the on the outlook going forward. And we have our portfolio generally level leverage leverage to that sort of recovery scenario. And just on, you know, I like showing people these charts, just talking about the effectiveness of vaccinations.


    Stephen Bruce: This is the UK right, where the UK got off to a rocky start with COVID, but then caught up very quickly. And if here we see, if on the top left we talk about the proportion of the population vaccinated, you know, 67 per cent one dose, so will be well ahead of that very shortly. So, you know, reasonably high level of vaccination, if we look on the bottom left a number of hospitalizations, so you can see the level of hospitalisations, probably about half they were in the original January peak, which was the bad one. Then you move across to the sorry, that’s the number of new cases, about half if you move along to the top right where we see the number of people actually in hospital dramatically lower than last time. And then, you know, the final test and the most important one is the number of people dying again, vastly vastly lower than we saw last time. And so that’s with a lower level of vaccination than we’re going to achieve. So if you use that as the experience you can benchmark against, then I think we have a reasonably good basis of being confident that we’ll be able to return to somewhat normality in terms of how we have the portfolio, the portfolio setting. We, as always, you want to have good diversification across a number of the themes and sectors and drivers.


    Stephen Bruce: Some of the stocks we have in the, say, the consumer discretionary sector try to pick up this sort of rebound in activity as people come out something like an aristocrat. That’s an interesting one. It’s it’s linked into gaming revenue, particularly in the US, where casino attendances are off the charts. All this sort of pent up demand as people have been coming back, which is good for them. Similarly, Ampol, as people come out and start driving again, you know, fuel demand is going to to bounce back. We’re quite positive on the resources sector still was even with a lower iron ore price. The cash generation, you know, as I talked about before, will be very, very strong, and the dividend payments over the coming year will again be very, very strong from these companies, the banks they are again, I talked about the banks, they’re in a back in an upgrade cycle. Again, dividend and capital return will be strong insurance again. I mentioned the insurance sector outlook. As we all know, premium rates keep going up and globally, the insurance sector is in one of the strongest premium rate cycles that has been seen in a in a very, very long time. And the other thing that’s helpful for insurance companies is if interest rates do go up a little bit, they earn a lot more on their investment portfolios, which will help their earnings.


    Stephen Bruce: So they’re in a good spot there. And it’s always it’s always important to balance the the sort of more cyclically exposed stocks in your portfolio with some good defensives. And I’m on the defensive front. We have Woolworths, where it’s performing very, very strongly operationally and as also highlighted, it’s got a significant buyback ahead of it, which will participate in Telstra. And that’s an interesting one because a little bit like the bank’s Telstra has had a number of years of significant headwinds, in particular the NBN rollout every year as the NBN rolled out that eight into their fixed line earnings. Now that’s finished. So that headwind has has passed. And as we know with the 5G rollout, that’s driving good demand in mobiles and combine that with some cost savings and Telstra’s back in an earnings upgrade cycle. They recently put out some quite strong, strong and positive targets for the for the for the coming years. So, you know, this is something I think we’ve seen with a lot of stocks where they haven’t been under quite a bit of pressure for quite a few years yet. They’re now back into an earnings and earnings growth cycle, which is good. Wesfarmers will continue to go from strength to strength we have, particularly with with Bunnings. And then finally, one sector of the market that I quite like because it marches to its own tune is agriculture.


    Stephen Bruce: You know, the agricultural sector doesn’t much care what interest rates are doing. It’s not that affected by by COVID, etc. It’s more around climatic conditions and and and ongoing demand. And some of the stocks in that sector, like GrainCorp, for example, is having a fabulous time because as many of you would know, agricultural conditions in Australia are fabulous at the moment. So those gives an idea of some of the key holdings in the portfolio in terms of the income generation in the portfolio. Now, of course, this fund is all about generating growing income stream for people in the year gone by. We’re distributing dividends were impacted by COVID. We paid 1.3 cents per unit in distribution and that equated to 5.8 per cent cash distribution, or 8.4 per cent when you include franking credits. So that’s based on the unit price at the start of that year. When we think about the year coming, we’ve increased the cents per unit distribution by about 30 per cent to one point seven cents per month. And what that means is that what that means is that the distribution again will be around 5.5 per cent net or around seven per cent cash when you include franking credits based on the unit price at the at the start of the month. In terms of the results, the portfolio, the fund’s been going for a little bit over three years now, and we can see over that period, it’s always generated a very strong level of distribution income so that what you can see there is the distribution yield, including franking credits, and that’s been generated by a combination of dividends, as well as being boosted by participation in in off market buybacks, which I said at the start is it provides a positive after tax return for the fund in terms of the capital growth.


    Stephen Bruce: The unit price has been largely largely stable over the period, and the total return since inception has been 9.8 per cent per annum. So in summary, what we took out of the reporting season was was generally positive read throughs on the outlook and the and the condition of corporate Australia. And we think, very importantly importantly, that the dividend generation and capital returns going forward will continue to be strong. And just to recap on how we think about this fund, I mean, the philosophy of the fund is it’s all about investing in financial and sound companies with with growing profits. And this is going to lead to dividend and capital growth over time, which will provide investors with that reliable income stream paid monthly and provide a hedge against inflation. So that’s the end of my end of my presentation. I’d love to take any questions that have come through.


    Jodi Pettersen: We’ve had a couple come through state. So the first one is from Peter, who says, Do you think that Sydney Airport is trading under the that given Sydney airports is trading under the offer price and there may be concerns about such an important asset going private that the market is saying that this may not go ahead?


    Stephen Bruce: I think the reason yeah, you’re right, it’s trading around 50 cents below the the offer price, I think a tow versus eight seventy five. Roughly the main concern is I don’t think it’s there’s a concern that about it being privately owned as opposed to publicly owned because many, many other infrastructure assets are privately owned. The issue is there is a slight tricky issue in that some of the consortium bidders, I believe, will be required to divest or potentially required to divest some stakes in, I think, in Melbourne airport. So that could be the that could be the sticking point. But I think either way, the intention has been made pretty clear that there are people who are happy to pay, you know, singing a price for this asset. And bear in mind, the price being offered is only back where it was pre pre-COVID. So what I’m saying is we have a high degree of confidence that the transaction will be completed.


    Jodi Pettersen: And another question I’ve got here comes through from Robert, who says given the Chinese Communist Party’s belligerence in trade towards many nations, including our own and their stated ambition to take over Taiwan plus military buildup, that is ongoing. Are you reviewing any Chinese investments as a bad long term risk?


    Stephen Bruce: Yeah. So we don’t have any companies which are invest which invest directly in China to any material extent at all. The main exposure to China in the portfolio, obviously, is the miners and their sales of iron ore. But the Chinese are nothing, if not pragmatic, and I think they will happily buy. Our iron ore is so long as it’s the most practical iron ore for them to buy it at the right price. Now we know in the long run China is going to become what China’s demand for iron ore overall is going to reduce as their industrialization peaks out and they develop a bigger scrap pool. Because one of the things that they’ve never had, because they’ve been growing so fast is they haven’t had a whole heap of old buildings, et cetera, being pulled down, but going to electric arc furnaces. So all their steel is new steel made from iron ore. So over time, yes, there’s going to be a decline. But in the short term, it will just move depending on the short term economic circumstances. And the other thing, the other thing to bear in mind is while demand has been strong for iron ore, supply has been also constrained as well. And it’s a fairly, you know, it’s a fairly tight market with three or four big players, you know, the three in Australia and then buy in from Brazil. And it’s not really in an environment where demand might get a little bit softer there. It’s not really in their interest to suddenly increase supply. So I think what you’ll find is that the the market will stay fairly, fairly tight over overall. So, you know, it’s a big question, isn’t it? I mean, what goes on with China and the rest of the world over the next, the next while? I mean, nobody really knows. But as I said at the start, the amount of direct investment of any of our companies in China is very, very, I’d say, basically negligible.


    Jodi Pettersen: Steve, I’ve got another big long term question, and it comes back to the vaccine rollout that I know that you’ve analyzed closely the developed nations like the UK and Australia and what the vaccine rollout, how that impacts markets there. I’m kind of interested. Have you been looking more broadly in terms also developing markets? My personal concern is that, you know, if we don’t vaccinate the emerging markets quickly, that variations on COVID could continue to evolve putting putting the whole economy further at risk. That’s something that you look at, you consider.


    Stephen Bruce: Yeah, I mean, that’s absolutely right. I mean, the equity around it is is important for obviously for moral reasons. And as you say, from avoiding further variants, which could or may be worse, maybe less, maybe less bad. And the truth is, obviously the emerging markets are behind. However, from a from a direct economic point of view, those countries are generally not big economic participants compared to the developed markets so far. Stock market investment point of view It’s what’s happening in the developed markets. That’s more important. However, there are some positive signs if you go and look at say you remember in the news, maybe it was only like a month ago. Indonesia was the new epicentre of delta wave infection and death. If you go and look at the statistics out of Indonesia now, it’s just collapsed. Whether that’s accelerating vaccines or just natural passing through because so many people have had it, I’m not sure. But things are getting better in those countries almost exclusively. I’m sorry, almost entirely. Things are improving. And yeah, but yeah, everyone needs to. Get them caught up.


    Jodi Pettersen: Yeah, I agree. I’ve had another question comes through here from Andy, he says you paint a very positive picture, at least for the shorter term. What are the biggest risks to that positive picture?


    Stephen Bruce: Yeah, I think the biggest I mean, there are always black black swan events, right? So I’ve seen here and I think, what’s the market worried about at the moment? People they’re worried about, you know, just today, people are worried about the US debt ceiling now. Every other time it’s been approached, there’s been a sort of short government shutdown. Then it’s been lifted and then life’s gone on. So, you know, the base case assumption is that that repeats here. Other thing people are worried about is China evergrande now. We know the Chinese are sensibly trying to rein in their property market, the leverage their developers and try and deleverage consumers as well. Now you want to do that in an orderly fashion, and that seems to be what they’re trying to do. If you think about China Evergrande, people say, Okay, it’s got these vast amounts of debt and it does, but it also has vast amounts of assets, so it’ll probably be pulled apart. The projects will be taken by solar development companies and completed. Everyone will probably get their apartments. The subcontractors will probably get paid because the Chinese government, the last thing they want is systemic debacle in their in their property sector because property is 25 to 30 per cent of GDP.


    Stephen Bruce: And it’s also two thirds of the typical Chinese person’s total assets. So, you know. Every every effort will be made in an economy which is very tightly controlled to avoid that happening now. Of course, there’s always a risk that they miscalculate and do something that doesn’t, doesn’t work. So that that is that is a big risk. And then the third risk I’d sort of point to is, you know, we all we’re all kind of making an assumption that monetary policy can be starting to be wound back slightly without causing too much of a too much of an impact to growth or markets. There’s a risk, there’s a risk that that does not occur, that the impacts are greater or that you get into some sort of slightly stagflation situation where you’ve got bad growth and inflation. And you know, we’ve been there not for several decades, but it’s been in the past. So it’s no doubt that there are risks, but sort of on balance, I think there’s probably enough to be to be positive.


    Jodi Pettersen: Last questions, please put them in the Q&A box right now, everybody, because we’ll win this up soon. But Steve, I had one other question around, particularly the resources in terms that you had that slide that compared the income that they’re receiving. But then also what they’re paying out their capex in terms of their capital expenditure, what they’re spending their money on. And while the profits were soaring due to the high iron ore price, you said that the capex expenditure had been remained quite conservative. Is there a risk that it’s too conservative? Is there a risk that the resources aren’t spending enough to just the way the the I mean, we know that governments right now are putting lots of resources into infrastructure. Could the could the miners be underspending here?


    Stephen Bruce: Well, I think the miners have been through several cycles of poor capital discipline, and I think they’ve learned the hard way that commodity price cycles don’t last forever and spending a heap of capex at the top of the cycle or making big acquisitions at the top of the cycle is a very good way to end your career really, really badly. So I think there’s room to be optimistic that they’ll be disciplined. However, it is worth bearing in mind that they are probably at a low point in the in the capex cycle. But if you look at, say, iron ore, there are not significant expansion plans. Where they’re spending their money really is just replacement of mines which are being depleted. There will be more projects in in more what you might call future facing metals like copper, for example, or lithium, where we know they’re looking at things. But I think, you know, in terms of really massive expenditure, I think they’ll be quite disciplined going forward.


    Jodi Pettersen: Right. I’ve had a question here from pizzas. Do you have any overweight positions in the health care sector?


    Stephen Bruce: Yeah, we do in the healthcare sector at the moment. Helios would be our main position, and it’s an interesting one because Helios, as we may know, it used to be called primary healthcare. So it was the biggest operator of GP practices and the second biggest pathology operator and the third biggest radiology operator in Australia. It recently sold the medical practices off. Now they’ve been a bit of a dead weight around. It’s around its neck because medical centers is actually for a whole range of reasons, a very challenging kind of business to make a buck from. Whereas pathology and radiology are actually great businesses, so it’s now it’s now sitting there with a bigger balance sheet as the number two pathology player in Australia with about 20 per cent market share nationally. And what that means is you’re also doing 20 per cent of all the COVID tests naturally and every COVID test you do, you get $85 and Australia is doing probably 200000 a day. And that just means these guys are enjoying a massive, massive cash flows now and that will definitely tail off. And we all hope it tails off quickly because COVID goes away. But if we look overseas, even as people become vaccinated and reopenings of have taken place, the level of PCR testing stays very elevated for a long time. So there’s a lot to kind of like about that stock at the moment.


    Jodi Pettersen: Fantastic. Another question we’ve had come through. What’s your views on A2 milk?


    Stephen Bruce: Yeah, A2 Milk has never been the kind of stock that our funds invest in. It’s always been. Well, share price is down 75 per cent from its highs, but it’s never been a stock which is really stacked up on valuation or dividend for us. So typically it’s been one year leave to the more to the growth managers. Funnily enough, though, we were just actually having a talk about it this morning at our meeting, and one of our guys is doing a fair bit of work on it just at the moment because, you know, as we know when when things are looking terrible is often when the opportunities start to arise.


    Jodi Pettersen: Yeah, what’s the. Quote, when people are greedy and when people are frightened, you do the opposite. That’s right. I’ve had another question come through from Neil, he says. Does the growth in stock prices that you own affect the dividends that you pay to investors? No, I think that means is is what’s the relationship between this growth and stock prices and dividend growth?


    Stephen Bruce: Yeah. I think typically growth in stock prices by over the long term growth in stock prices mirrors growth in earnings. And so as the earnings grow, the dividends generally grow in line. It’s not like a perfect relationship, but over the over time, that’s the case. And you sort of think if you sort of take it back to the to the simplest level, corporate earnings are like a proxy for GDP growth. So, you know, GB grows over time, so corporate earnings grow over time. So dividends grow, grow over time.


    Jodi Pettersen: Well, I think that’s all the questions that I’ve got come into the inbox and all the ones on my list are also been answered, so I think this is where we will end it for today. Thank you again, Steve, for your time in answering all these questions and providing this important update on how EIGA’s been going during the reporting season. I also want to thank all of our audience today and very engaged and loving all the questions, and I’m loving the feedback from you, probably saying great presentation. Thanks. Thanks, Rodney. And so please, if you’ve got questions, hit me up at the end of email or on our website, the little chat bot. I answer that. So let’s keep chatting and also remember to keep following us on social media. We’re quite active on Instagram these days, but we invest a year, Stephen laughs. But my engagement is high. So you know, the numbers don’t lie as we say, so thanks again and again. Appreciate everyone’s time.


    Stephen Bruce: Thanks, Jodi, and thank you, ladies and gentlemen.

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