Welcome to Djerriwarrh Investments full year financial results briefing. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, you can press star one one again. If you wish to ask question via the Q&A box available on the webcast link anytime during the conference. Please be advised that today's call is being recorded. I'd now like to hand the conference over to our first speaker today, is Mark Freeman, CEO and Managing Director of Djerriwarrh Investments. Thank you. Please go ahead.
Well, good afternoon, everyone. As stated, I'm Mark Freeman, the CEO and Managing Director of Djerriwarrh. Welcome to this full year result briefing. I'd like to start by acknowledging the traditional owners and custodians from all the lands that we are gathered on today, and pay my respects to the elders, both past, present, and emerging. Today on the call, we have joining me, Brett McNeill, who's the Portfolio Manager, Olga Kosciuczyk from the investment team, Andrew Porter, our CFO, and Geoff Driver, our General Manager of Business Development. Before we start the presentation, just a bit of housekeeping on this webinar. This briefing is based on the material available on the company's website. If you are using your computer to access the presentation via the webcast, the slides will change automatically.
If you are accessing by phone only, the PDF of the slides with page numbers is available on the website. Finally, please note, following the presentation, there will be time for questions and answers. You can ask a question either via the webcast or through the operator. Now we begin with the slides. Page two or slide two is our disclaimer. Just to say, we're talking about the company, we're not here giving any advice as such. Moving on to slide three, the agenda. I'll just give a bit of an overview, then I'll pass across to Andrew Porter. He'll give a summary of the financial year. i would suprise to talk through the results in more detail and update on the portfolio, some outlook comments, and then we'll all be available at the end for questions.
Just moving on to slide 5, just an overview. Djerriwarrh is one of the largest income-focused listed investment companies on the market. It began its life in 1989 as a listed company, and shareholders get the benefit of full transparency associated with being an LIC, as well as the high governance standards delivered by an independent board of directors. The Djerriwarrh shareholders own the management rights of the company, so there's no fee leakage to third parties and no additional fees, such as performance fees. Djerriwarrh is part of a broader group of LICs, which include the Australian Foundation Investment Company, or AFIC, AMCIL and Mirrabooka Investments. This supports a broader research approach and scale to the operations. Just moving on to slide 6, to dig deeper into the investment objectives of Djerriwarrh.
Djerri, as we call it, seeks to provide an enhanced level of fully franked income that's higher than what you would get on the market, we deliver this at a very low cost to shareholders. This bar chart on the left, you can see when you include franking credits, Djerriwarrh's been delivering a yield of around 1% to 1.5% ahead of the index. This chart is showing currently sitting at about 1.2%. A much higher yield when you include franking than you get on the index. We also aim to provide shareholders with attractive total returns when you include franking credits, dividends, and capital growth. You can see on the bar chart on the right, the total returns, if we look at 1 and 3 years, we're just a little bit behind the market.
Effectively, the call options we sell, and Brett will go through this as well, catch some of the blue sky. When you have very strong markets, we will tend to lag the market a little bit, but we will still be producing income much higher than the market, and that's the trade-off of Djerri: higher income, but catch your blue sky. In terms of the total return, I see these numbers in line with our objectives, and I see them as actually very pleasing outcomes to shareholders. We move to the next slide, just showing where the share price is in relation to the NTA. At the moment, the share price is trading at quite a discount to the stated NTAs at 30th of June, which was AUD 3.16, and the current share price today, Geoff 293.
AUD 2.90 odds, so still at a discount to that last NTA. With that, I will pass over to Andrew Porter, our CFO, to talk through the financial year on slide 9.
Thank you, Mark. As Mark has said, we're on slide 9, and I'll just run through these boxes in order. The profit for the year, AUD 39.1 million, that includes the open option position. Although for accounting purposes, it is the, and I'm doing quotation marks here, "profit," we actually concentrate when the board is setting the dividend on the net operating result, which excludes those open option positions which haven't yet expired or been closed out. That was AUD 39 million for the year. On first glance, that's basically down for the year, but last year included AUD 6.5 million, essentially scrip dividend, as a result of the BHP Woodside merger.
If you exclude that, which again, the board did when they were looking at the dividend, that profit was that net profit was up 15% from 2022. That's what we call the net operating result. As a consequence of that, the board were able to increase the final dividend to 7.75%, which makes it 15% for the year, up from 13.75% last year. That produces, Mark has said, a dividend yield, including franking, of 6.8%, and that has a full calculation of the, of the franking benefit included. Taking the boxes on the right-hand side, now, the management expense ratio, which is the costs of running the company, were down to 0.40% from 0.45% last year.
That's effectively AUD 0.40 for every AUD 100 invested. This is predominantly down due to profits in AICS, which is the service company in which Djerriwarrh has a 25% shareholding due to a one-off change in incentive plans. Depending, of course, on the portfolio movement, 'cause that's one of the key drivers of the MER, I would expect that MER to move back to historic norms by 0.45 or 0.46 in the future. The expenses overall, actually excluding that profit, were in fact slightly up in the period. The portfolio return figures, again, Mark has shown those on the previous slide, at 14.2%. When the market runs strongly, due to the fact that call options can hinder some of that upside, I would expect that performance return to be slightly lower than the market.
Indeed, that was what happened. Overall, I think the board are very happy with that result. The portfolio, as it stands, gross of debt, AUD 911 million. That's up from AUD 783 million in 2022. Finally, it's not on the slide, but we're often asked the question, after we pay out the final dividend of 7.75% from the figures that are in the annual set of results, I would expect the AUD 0.21 of franked dividend. We have franking credits in order to be able to pay out a further AUD 0.21 of franked dividend. Okay. That's it from that. Happy to take any questions afterwards, but I'll pass over now to Brett.
Thank you, Andrew. Good afternoon, everyone. Having gone through some of the result highlights, what we'll do now is aim to give some more detail on how the increase in Djerriwarrh's profit and dividend was achieved this year. We'll start on slide 11 with this section, the results in detail. Slide 11 gives a summarized profit and loss statement, which breaks down Djerriwarrh's profit into its key components. The focus we have here is on our net operating result, which, as Andrew mentioned, it excludes any non-cash items such as the BHP Petroleum Woodside merger dividend that occurred in financial year 2022. Focusing on our net operating profit, starting at the top of the profit and loss statement here on slide 11, we can see we have two main income contributors. The first is our dividend and distribution income.
This is the income that we receive from the companies that we own in the investment portfolio, it was up 16% for financial year 2023 to AUD 35.6 million. Our second main income contributor is our option income. This is the income that we generate from our option writing activities, it was up 18% to AUD 14.8 million for this financial year. We have two main operating costs, the first being our finance costs, these were up 149% to AUD three and a half million dollars as a result of the increase in interest rates and borrowing costs that we experienced during the year. Our second main operating cost is our administration costs, which, as Andrew ran through, were down during the year. They fell 9% to AUD three and a half million dollars.
These items led to an operating result before tax that was up 15% to AUD 43.7 million. Our tax expense rose in line with the profit increase, that was up 15% to AUD 4.6 million, and this delivered a bottom-line net operating result that was up 15% versus the prior year, coming in at AUD 39 million. Taking into account the extra shares that we issued during the year, namely the share purchase plan and the DRP and the DSSP, the net operating result on a per-share basis rose 6% to AUD 0.1516. We paid total dividends during the year that were up 9%, coming in at AUD 0.15 for financial year 2023.
Overall, we see the key outcomes for the, from the net operating results from the year being: we had profit and dividend growth that was driven by strong results from both our dividend and distribution income, as well as our option income. The total dividends of the year of AUD 0.15 were covered by the net operating profit per share, which came in at AUD 0.1516. If we look now at our two main income contributors in some extra detail, and we start with the focus on the dividend and distribution income on slide 12, by looking at it in the context of five-year performance.
As we can see in the left-hand chart, the financial year 2023 result of $35.6 million of dividend and distribution income has recovered well since the COVID lows of just $22 million in financial year 2021. It's almost back to the pre-COVID levels of financial year 2019. The right-hand chart shows the dividend and distribution income when measured as a yield on our portfolio value, and these are the green bars in the right-hand chart. We plot them against the dividend yield of the broader share market, the ASX 200, which is shown in the blue bars. As we can see, for financial year 2023, the portfolio's dividend yield was 4%, which was just below the market's dividend yield of 4.2%. Moving on to the second key income contributor, which is our option income.
Slide 13 also shows the five-year context for our option income. Overall, financial year 2023 was another good year for our option writing activities. The AUD 14.8 million of option income was the highest amount that we've recorded in the last five years, which we can see in the left-hand chart. It was also a good result when measured in terms of a yield on the portfolio value, which we detail in the right-hand chart. Having covered the net operating profit result, looking at how our dividends and option income has performed over the last five years, I'll now pass over to Olga, who will start with an update on the portfolio.
Thank you, Brett, good afternoon, everyone. Our main investment objective is to pay our shareholders an enhanced dividend yield. To achieve that goal, we generate income by writing call options against select portfolio holdings. This slide would be familiar to our shareholders. It's the performance of the market as defined by our benchmark, the S&P/ASX 200 Index, overlaid with the top-down view of our portfolio's call option coverage. We started the financial year with an option coverage of 26%, which is below our target range of 30%-40%. This positioned us very well for the subsequent market rise. As the market sold off around October, we wrote put options in high-quality companies like Woolworths, Coles, and Macquarie Group.
As the market started rising again, we were slowly building up our coverage to 40%, which subsequently decreased to 32% at the end of the financial year as a result of option exercises and expiries. The current positioning of our option book in terms of expiries and moneyness is encouraging, and we think it's positioned us well to deliver on our investment objectives. On Slide 16, we show our key transactions in the financial year 2023. During the year, we sold 4 holdings: IAG, Iress, Atlas Arteria, and InvoCare. As our long-term investment thesis for these companies have either changed or played out. We also got exercise across BHP, Woolworths, Commonwealth Bank, Westpac, CarSales, and Amcor. Following option exercises in Amcor, we also decided to sell the rest of our holdings, as we are concerned about the company's ability to grow earnings and dividends.
We have reinvested the proceeds into high quality and high yielding companies. You can see the logos of these companies on the right-hand side of the slide. Firstly, we substantially increased our holdings in banks during the year as we are attracted to their high, fully franked dividends. We waited patiently for valuations to become attractive before we invested over AUD 90 million across CBA, NAB, Westpac, and Macquarie Group. As share prices recover, we will seek to write options against this company to further enhance what already is an outstanding dividend yield on those companies. We also added to our resources holdings. We got exercise in AUD 29 million worth of BHP at an average price of AUD 44 and bought over AUD 40 million at an average price of just above AUD 41, which was a pleasing result.
We also increased our holding in Woodside Energy, recognizing the company's improved balance sheet and growth optionality post their merger with the BHP Petroleum business. We know that geopolitical issues and the lack of investment in the oil and gas space has translated to a better than expected outlook for LNG pricing, which we believe will translate to robust cash flows and, by extension, attractive yield for our shareholders. We also added to Region and JB Hi-Fi. Market concerns around what higher interest rate environment means for both asset valuation and consumer demand translated to attractive valuations for both companies, which we took advantage of.
We also added two new stocks to the portfolio during the year. The first was Port of Tauranga. This owns the dominant port asset in New Zealand. We think it's a fantastic asset, unique infrastructure asset that has good pricing power and has attractive returns, has a strong balance sheet, and we think it's well placed to deliver a good mix of income and growth for the portfolio over the long term. We also added Macquarie Technology Group. This is a data center, cybersecurity, and telecommunications business. It's a founder-led company, has an excellent track record, and very strong growth prospects, given the sectors that it operates in and the market position that it has. We're able to establish a position in the company through their recent equity raising.
On Slide 17, we show some of our portfolio's key statistics and holdings as of 30th of June. On the left side, we show that we own 48 companies in the portfolio, and the portfolio value was AUD 940 million, which translated to NTA of AUD 3.16 per share. We finished the year with a call option coverage of 32%, which is on the lower end of our long-term average coverage. We also had AUD 12 million of put option exposure, which is around 1% of our portfolio. As a reminder, we write put options in high-quality companies we would like to buy more of at attractive prices. On the right side, we show our top 20 holdings. We own a good mix of companies spread across different sectors.
Our companies have above-average dividend yields and solid long-term growth prospects, which positions us well to deliver on our objectives in a variety of market conditions.
Turning now to our outlook comments, which are on slide 19. Definitely a tough market environment, given high inflation, rapid increases in interest rates, a lot of pressure on households and consumer spending, but the macro environment's always very tough to pick. In our outlook comments, we bring it back here to what we think, you know, are the important key contributors to Djerriwarrh's profit and dividend, being our dividend income and our option income. In terms of our dividend income, we think that the adjustments that we made to the portfolio during the last 12 months, set the portfolio up really well for the coming financial year. In particular, some of the purchasing that we've run through today, such as NAB and BHP.
Looking at our dividend income for financial year 2024, I think the key sectors that influence the final result will be the banks, resources, and retail. In terms of the banks, it's looking like a tougher environment ahead, but we think the Australian banks, the majors, are very well positioned. They have very good capital positions, conservative and sustainable payout ratios, simpler business models, and they're attractively priced. Well provisions for potential bad and doubtful debts, and so with negative sentiment against the sector, we've been able to buy at what we think are very good dividend yields. Putting all that together, we think our base case is that they can largely hold their dividend levels for the next 12 months, which would be a very pleasing result. Looking at resources, they're inherently cyclical and volatile by nature.
As we sit here today, the market, in terms of sell-side consensus, is forecasting dividends to fall in financial year 2024 versus 2023. There is some conservatism baked in, I would say, to current market forecast. Even with that, the majors like BHP, Rio, and Woodside are still trading on attractive dividend yields. We think we've got good exposure here without being overly reliant on resources for our dividend income. Looking at the retail stocks, the tougher consumer environment will definitely make this a big focus in the upcoming profit reporting season. When we consider our major holdings and the big contributors to our dividend income, supermarkets, Coles and Woolworths, we think, are well placed.
JB Hi-Fi and Wesfarmers, whilst they're more discretionary, in nature in terms of what they sell, Wesfarmers being the owner of the Bunnings business, amongst other businesses. We think, you know, these are extremely high-quality companies that are very well managed, strong balance sheets, sustainable dividend payout ratios. We think all that means that we can still expect a reasonable level of dividends for the next 12 months.
We also believe that our current options book position is encouraging. This is for 2 reasons: only a small percentage of our options are currently in the money, and our call option coverage is at the lower end of our target range, giving us scope to write more options as the year progresses. As always, our key considerations are call option coverage levels, as well as volatility across the broader share market.
In summarizing, we think the strategy of owning a portfolio of high-quality companies and then enhancing the yield through option writing, can deliver an attractive level of income and growth over the longer term. We believe that the current portfolio settings that we have, especially around our dividend income and our option income, should allow us to achieve our long-term objectives, in particular, delivering an enhanced yield over the market. With that, I'll pass over to Geoff, who will conduct the question and answer session.
Thanks, Brett, and thanks, Olga, for that. The first question I'm going to ask is: How do you judge the ratio of call options to put options within the portfolio?
Yeah, sure. Thanks. Thanks, Geoff. We'll always have a much greater level of call option writing activities versus put options. While they can both generate good amounts of option income, there's different risk profiles. When we write a call option, if it gets exercised, we have to sell the stock. That's more manageable than in the other case, the put options, where if we get exercised, we have to buy the stock. It's a much different consideration when it comes to sort of like your capital management and the cash flows. Call options will always make up the majority of our option-writing activities.
Thanks, Brett. A comment here on the overall option market and opportunity, how does it look going forward? Are there any changes shareholders should be aware of in the options market? I guess it's getting back to the point.
you know, Djerriwarrh a reasonable-sized player in the options market, what's that look like going forward?
Yeah, sure. Conditions are good. There's no major changes. The key influences on our ability to earn option income are basically the amount of coverage that we have in the portfolio, which is why I would, you know, mention many times about our call option coverage, how we can supplement it with put options. Then it gets down to the prices at which we write the options and the duration of them, and then the pricing of the actual options gets influenced a lot by volatility levels and interest rates. I'd say on the first lot of considerations, like how we write the options, active management's the key. The running the options portfolio requires daily active management, and it's something that's very management intensive, but we think can generate really good income over time.
When you look at the market influences, so volatility and interest rates, volatility has actually been quite low over the last 12 months. The average volatility on the Australian share market was lower in this financial year than in financial year 2022, which sort of runs counter to maybe some perception that it's been a really high volatile environment. Volatility is a big influence, but it's something that hasn't worked that it hasn't actually worked in our favor. That's something that might be able to be of benefit. With interest rates, you have a higher interest rate environment, it should lead to higher premiums. They're the kind of the two macro influences. Another thing that's worth mentioning is how we tend to use European options a lot more than American options.
Now, just as a reminder, we only write options over ASX and New Zealand-listed stocks. The European and American bit comes down to when you can get exercised on the option. What we've been able to find is that by using more European options rather than American options, we get exercised less prior to expiry date, meaning that we retain the stock and any dividend income. There's a balance there in terms of the premiums we receive and the like, but overall, we think it's been an enhancement to our overall yield. No major market developments. The liquidity is still reasonable in the option market, remembering that we only write single stock options. Yeah, volatility and interest rates will continue to be key influences that are, you know, outside of our control.
Thanks, Brett. There's a comment here about the yield that we achieve, I guess, on the underlying portfolio from dividends. The question becomes: looks like the yield on the ASX 200 or the portfolio we have is slightly lower than the ASX 200. Shouldn't we have produced a higher yield in that, against that benchmark?
Yeah, that was the graph on the right-hand side of slide 12. It's a balance. We're balancing up income and growth. At the product level, we want to pay a dividend that is higher than the ASX 200 dividend yield, that's our enhanced yield. Remembering that our dividend comes from our option income and our dividend income. When you get down to the portfolio level, we target and require a portfolio dividend yield that is about the market dividend yield. It doesn't have to be above the market dividend yield every year, because of course, you have other areas like the option activity that can make up in our enhanced yield.
When you look over the last 5 years, which is that chart on slide 12, the portfolio's dividend yield has been around the market level. Sometimes it's been above, sometimes in line, and sometimes below. It'll be a consequence of the balance of income and growth that we have in the portfolio. That gets back to our stock selection. It'll also be things like there might be special dividends or high dividends paid by certain stocks or sectors during the year, and we won't necessarily buy into them just to get a high dividend for 1 year. The enhanced yield target, we aim to deliver every year, but we're also managing this portfolio for the long term to deliver long-term growth in income and capital.
There's a concentration risk in chasing particular high-yielding stocks at the moment, which may not be there tomorrow.
Yep.
A couple of questions here, I guess, related to the current discount that the share price is trading at to NTA. The questions really are along the lines. Do we plan to utilize the buyback facility to given the discount to net asset value has widened over the last, I guess, 12 months, and certainly I mean, we used to trade at quite a large premium, now trading in a discount. The second question, again, what are we thinking about in terms of actively managing that NTA discount? I'll throw it to you, Mark.
Yeah, well, look, we do have a buyback facility in place, which we've had there for years and years. We haven't really utilized it. I think we'd probably be something we might consider when we see a much larger discount. I guess our preference is to see the market sort through these types of discounts, and we think the set of results the team's produced probably highlights the value in the stock. We can see the NTA. You know, we want to give the market a bit of time to digest. Obviously, the dividend outcome, you know, the yield's very attractive. The growth in dividends the team's produced has been excellent. As I said, we'd rather the market, we'd rather retail investors sort of discover this and be able to take advantage of the opportunity.
We will certainly be out speaking more about where we're at. You know, we talked about, you know, sort of the strategy reset, which is sort of more than three years ago, and the team are hitting all their targets along that. We'll certainly talk about that. Look, there's a point where a discount might get too wide, and we look to utilize it. At the moment, I think we'd rather sort of get out of there and talk about what we're doing and preferably see the discount close. Of course, you know, wide discounts are always favorable if you're a buyer, and it's not if you're a seller. At the moment, sort of favors buyers of the stock.
Just a reminder, you can ask questions through the, either the web or through the phone. Just a question here, and interesting, you've got some New Zealand stocks in the portfolio. I mean, how do you go about looking at those in the context of using options to enhance income there?
Sure. Much the same way as we do with the ASX-listed stocks. A good diversity to the portfolio can be an extra source of income and growth, particularly when you can access unique infrastructure assets like Port of Tauranga and Auckland Airport. With the options, we have the same ability to write options over those stocks as we do with ASX-listed stocks.
Auckland is listed on the ASX, so that's fine, and there are OTCs available on some of the more widely traded New Zealand stocks.
There have been, other New Zealand stocks, such as, Mainfreight, Fisher & Paykel Healthcare. We've
Mainfreight.
We can write options, and we do over those stocks, when appropriate as well.
A question here again about the share price, and which is understandable, I guess, given the shareholders we have. Saying the 10-year overall return is not particularly attractive. Solid yield, but does not appear to be attractive market-based on-demand for the stock. Please comment and advise if there are any. We now reached a maintainable share price level.
Yeah, well, look, I can't really comment on the share price, but, certainly, you know, we're still disappointed with the longer-term numbers. As I touched on before, we had a strategy review about sort of just over three years ago. Really, what was happening before that, was probably a little bit more, too much of a focus on trying to sustain a, probably what was an unrealistic yield. That really inhibited our total return. We thought the balance had sort of got out of whack.
This reset we had was to try and say, "Well, we think if we can do 1% to 1.5% yield higher than the market, that is attractive income." What it allowed us to do is bring back our option coverage to the sort of levels the team are talking about, and then produce much better capital growth. I would say sort of going back to what Djerri was a long time ago when we first started, in terms of coverage levels, the sort of yield premium, and then the total returns that are being produced. I'm certainly very pleased with the numbers we've produced since that strategy reset. I'm confident the team will keep producing the sort of numbers we have over the last few years.
Always be aware that when you are trying to produce a much higher income, when the market's running hot, it does provide a bit of a cap on the blue sky, and that's sort of what's happened over the last 3 years. These are very, very comfortable numbers.
There's no doubt that the shareholder, profile of shareholders is such that there's those that can fully utilize franking credits are a large part of our shareholder base.
Yeah, well, probably, that's certainly what we're seeing because a lot of our investors, a lot of the returns in Djerri is about the value you get from franking credits. A lot of our investors are in self-managed super funds, and certainly ones that are in a pension phase, where you get full cash back on franking credits. There's probably no surprise that those sort of investors dominate our register.
Thanks, Mark. I guess this is a question about, like, risk and how we manage risk within Djerri. Does Djerri have a custodian? How are the assets safeguarded? I guess, are all the options cleared through the ASX Clearing House? I'll throw this to you, Andrew.
Thank you. Well, taking those questions in order, no, Djerriwarrh does not use a custodian. We hold all shares in our own name. We have looked at using a custodian in the past, and the cost-benefit analysis would indicate, certainly at this stage, we're much better off doing it in-house. Secondly, in terms of the safeguard, we have a sponsoring broker who manages the HIN for Djerriwarrh, so they hold the shares on our behalf, just like any shareholder would have with their broker. In a lot of ways, we're like a very large retail client in that respect. Lastly, with regards to the third question, which was a t the clearinghouse?
At the clearinghouse.
Yeah, all of the ETOs are done through that. ETO is Exchange Traded Options. They are done through the clearinghouse. The OTC, the over-the-counter options, are done directly with another counterparty, which is one of the large investment banks. Djerri does not have any exposure on that, because we have sold the option, and we receive the cash. That's the case at the moment. That's a very risk-friendly approach in order to do things. It's something we monitor regularly. We look at the options on a daily basis, we look at the exposures, and we look at the counterparties. It is a focus, particularly of my and my team's attention.
Okay. Well, we don't appear to have any more questions. There's certainly no questions on the phone, and we don't have any more questions coming through the web at this point of time. I guess on that basis, we'll close the presentation, and I'll pass back to Mark.
Yes. Thanks, Jeff. I appreciate everyone coming online, and as I said, it's, you know, I'm very pleased with the results, seeing the growth in dividends, the yield premium, and now we're seeing sort of the expected total returns. We're in line with the way that Djerri has over the long term. I think as the team talked about the portfolio positioning, you know, we're in very good companies. The option position is strong going into this year. I'm very hopeful that the sort of performance numbers that are being achieved will continue. Thank you for participating in this call.
Thank you. This does conclude today's Conference Call. Thank you for your participation. You may now disconnect your line.