SGH Ex-20 Australian Equities Fund update with portfolio manager Hamish Tadgell

SGH Ex-20 Australian Equities Fund – September 2024 Update

21st Oct 2024

Hamish Tadgell & Phillip Li, Portfolio Managers*


Hamish Tadgell: Welcome to the SGH 20 Australian Equities Fund update for the September 2024 quarter. My name is Hamish Tadgell, lead portfolio manager of the fund, and I’m joined today by Phillip Li, assistant portfolio manager.

The fund had a strong performance for the September quarter, up 6.5% net of fees. However, it lagged the benchmark, which was up closer to 9% and posted an extremely strong performance. The fund has historically offered very strong downside protection and it’s not unusual for the fund to underperform in very strong markets.

To give us a little bit more colour in terms of the performance for the quarter, Phillip, could you maybe give us a bit of an update on the key contributors and detractors?

Phillip Li: Thank you, Hamish. From a contributor perspective, it is pleasing to see that all of the Ex-20 portfolio core holdings continue to outperform the market. The likes of Northern Star, which was lifted by higher gold prices; Somerset, a New Zealand retirement operator where we saw private equity transaction, which pulls up the attractiveness of that sector.

ResMed the CPAP (continuous positive airway pressure) device and mask manufacturer continue to see resilient sales in the face of GLP ones and also chorus the New Zealand equivalent of the NBN, where in the latest reporting season they lift their dividends as their CapEx cycle comes to an end.

Hamish Tadgell: The fund has a number of smaller cap holdings and a number of those also performed very well in the last quarter. Is there any of those that I could perhaps ask you to call?

Phillip Li: Yeah, that’s right, Hamish. The fund has been supported by a number of these smaller position size, but higher growth, structural compounders, they remain the fund, the likes of Hub24, the advisor financial platform provider that continues to win share of incumbents thanks to their superior technology and service offerings. Also radiologist software provider ProMedicus – they recently announced that one of their existing clients, Mercy Health, renewed their contracts for higher prices. This only points to the Return on Investment that their customers are getting when they use their Visage software.

Hamish Tadgell: I think during the quarter there were also a number of stocks that we didn’t hold that affected the performance, principally Brambles which had a very strong result and the portfolio hasn’t held that. And WiseTech, which the portfolio doesn’t hold currently.

Having said that, some of the other names that detracted from performance, the likes of Ordinate, Johns Lyng Group. Phillip, would you like to give a bit more detail around those two names in particular?

Phillip Li: Sure, Hamish. We did have a few disappointing positions during the reporting season. And some of these we have exited. Johns Lyng Group, which is a company that focuses on home restoration and repairs, during reporting season, they came out with softer earnings outlook given the lower frequency in weather events and therefore lower catastrophe related restoration works for them. The other company was Alternate, which is the AV technology business. They disappointed by announcing that FY2025 was more of a reset year for them before growth resuming in FY2026. While the company continues to be a market leader in supplying componentry to the audio and video markets, the earning visibility has declined with their own OEM customers order lead time shortening. And both of these companies we decided to exit on the basis that we have a lack of confidence in terms of the earnings visibility of these businesses.

Perhaps Hamish, you can and talk about Beach Energy, which is a stock that, whilst disappointed in the reporting season, we have continued to hold on to the position in our fund.

Hamish Tadgell: Thanks, Phil. Energy as a whole, I think, underperformed significantly through reporting season and in some cases that was driven by the macro environment and the decline in the oil price over the last quarter.

Beach Energy is an East Coast gas producer. It’s a company which we’ve been invested in for a while. It came out with a disappointing reporting season update after writing down the reserves in relation to one of its gas projects. But we think this is a bit of a deck clearing exercise by a new management team and we remain very confident.

Around the broader prospects for the company particularly are excited by the talent that the new management team brings. But also the key focus remains on the weightier project in WA, the joint venture with Mitsui. The project has been delayed as a result of contractor problems, but we believe that the company is now through those issues and over the next three to six months we should see first gas through the Waitsia project, which should be a peak catalyst for a RE rating in the stock. So it remains a key position, we think the valuation looks very compelling at these levels. And in fact, we’ve used the recent weakness to add further to the position over the quarter.

We saw some significant macro news in that the Fed Reserve cut interest rates by 50 basis points and outsized move against an expected rate cut. We also saw late in the quarter the Chinese Government come out to stimulate the economy with a number of adjustments to interest rates and banking measures.

We expect that there will be further rate cuts and we also expect that there’s a high possibility of further stimulus.

Phil, how have we changed the portfolio? Maybe you’d like to give us a little bit of colour, some of the things we’ve done over the last quarter giving consideration to that, but also reporting season, which was clearly clear featured through August.

Phillip Li: As we mentioned in our post reporting season webinar, one of the sectors that we called out was the real estate sector. The outlook there from our perspective is actually incrementally more positive. With rates likely to have peaked, we anticipate the reversionary interest cost headwinds there that have constrained growth in terms of cash flows and dividends for that sector to finally be easing. And we closed our underweight position in that sector by adding the likes of Arena REITs, which is a childcare real estate investment trust and also GBG Group, which is a diversified property group where we think that some of the parts are attractive.

As for China stimulus that obviously benefited a few of our materials holdings, the likes of Capstone Copper, Pilgrim Minerals and also our overweight in the gold sector.  We’ve also added additional positions into that sector, including the life of South 32 in the last quarter.

Hamish Tadgell: I think one of the other things that came out of reporting season for us was that we sort of see more tailwinds in the healthcare sector. Volumes are certainly looking to pick up, particularly in the diagnostics area and we recently added IDX.

Phil, perhaps you could give the listeners just a little bit of more perspective around the investment case there?

Phillip Li: So out of reporting season, broadly speaking, we saw that patient volumes were returning across the healthcare sector. We like to play this space via IDX, which is a national imaging diagnostics provider. We think this fixed cost business in the face of receding inflationary wages, coupled with patient volumes returning, we should see operating leverage and margin expand.

They are about to undertake a merger with Capital Health. We think they’re complementary portfolios and would yield synergies over and above what’s announced by the market. And furthermore, one of our pillars in our marginal safety framework, which is valuation, and our entry at sub-12x EV EBITDA looks quite attractive, but really given we recently saw Helias sell their Lumis diagnostic imaging business for circa 17 times.

Hamish Tadgell: Another stock that we recently added towards the beginning of the last quarter was Botanix had an Investor Day update during the quarter. Any colour that came out of that, that provided the update and just sort of how we’re thinking about that at the moment?

Phillip Li: Management provided an investor update to the market post securing a FDA approval for their drug software, which they look to commercialise, I think importantly, a lot of the groundwork is being progressed and from our perspective discussions with insurers are making very good progress and the management is indicating they are likely to secure these contracts, with the pricing and coverage that they expected prior to launch. So it all comes down to execution from here, but so far it looks like management is making a lot of headway to ensure these products could be a commercial success next year.

Hamish Tadgell: As we look towards the end of the year in the December quarter, we think the fund is very well positioned and some of the changes that we made should continue to drive performance.

If we see further fiscal stimulus from China, which we do expect, we think that the number of the materials names in the portfolio should contribute positively. We also think the portfolio is very well set up for further interest rate cuts from the Fed, which again we expect through the course of this year and into early next year. Some of those repositions and longer duration structural growers that Phil talked to, we think are well positioned to continue to contribute.

As a reminder, the Ex-20 Australian Equities portfolio is a concentrated portfolio of 35 to 45 stocks, and we focus on quality investing at a margin of safety. And that focus on quality has shown through time to provide good downside protection for the portfolio in down markets, but also seeing it contribute very positively in up markets. So, we look forward to speaking to you again at the end of next quarter. Thank you.

Phillip Li: Thank you.

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*The text has been edited for clarity.


 

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