Okay. Good morning, fellow PL8 shareholders, welcome to this, Plato Income Maximiser Limited, half year financial year 23 results. My name is Chris Mayer. I am the Director of Listed Funds at Pinnacle. We handle all the investor relations for the company. I'm also a director on PL8. It's my great pleasure to welcome Dr. Peter Gardner onto the call with us today.
The other doctor, Dr. Don Hamson, is seeing investors up in the Gold Coast, he couldn't make it today. Peter will give us an update on the portfolio and the market as they see it from Plato's perspective. We'll try and keep us to under 30 minutes. We have quite a lot to get through, we'll get through the Slides pretty quickly and get onto your Q&A.
If you do have questions, as per normal, if you could please tap them into the Q&A box at the bottom of your screen, and Peter and I will endeavor to get to those at the end. This presentation is being recorded. We will send you a replay shortly after this afternoon sometime.
If you do wanna follow the Slides, you can either just look at them on screen or, if you don't have them on screen or a screen in front of you can pull them up off the ASX. We put them up on the ASX earlier today. With that, if we go onto this first Slide, it's really just a disclaimer Slide. It's necessary just to inform shareholders that we are not here providing personal financial advice.
Please do not take any recommendations or stock tips as personal financial advice today. As I said, we'll go through a company update. I'll do that. Peter will give you a market update, and then we'll move straight onto questions. In terms of the company, you know, profits for an LIC are somewhat unusual in that it's really driven by the returns of the portfolio.
For the half year under review to the end of December last year, you can see a few things worth calling out here. The portfolio was up 12.3% ahead of its benchmark. That drove, together with some income from the portfolio, a healthy profit, AUD $43.4 million for the 6 months.
We also note that we paid dividends at that very steady rate of AUD 0.0055 per share per month, fully franked, resulting in AUD 0.033 per share for the 6 months. Again, that income is ahead of its benchmark, we'll get onto shortly a reminder of the objectives of the company and how we've done relative to those objectives.
The only other thing worth calling out here is we did undertake, many of you participated in the share purchase plan in December of last year. It was very successful in terms of the amount of capital raised, what's more pleasing is the participation rates at 41% of all shareholders participated in the share purchase plan.
The capital raised there of AUD 85.8 million was roughly 16% of the capital in the company. When we've compared that against other share purchase plans from other LICs in the market, that is right up there in terms of successful participation by shareholders. We thank you very much for your continued commitment to the company.
The NTA waterfall, as I commented earlier, the fact that the portfolio was positive for the period drove a large increase in the NTA of AUD 0.10 per share. Just a reminder that the little red box there on this Slide 6, is the dividends paid, so AUD 0.033 for the period. While the dividends reduce the NTA per share, it obviously also reduces the share price when it goes EX-dividend.
It is something that factors into your total shareholder returns. The NTA at the end of the calendar year was AUD 1.05 per share. It's currently sitting at around AUD 1.08 per share, so up a touch this year as markets have been a bit more buoyant in 2023.
In terms of portfolio performance, I personally, as a director, am very pleased with the performance. We hope you are too, as shareholders. That's a fantastic year that Plato had. You can see there, 4.5% return for the 12 months against a benchmark return of 0.5%, so 4% excess return.
Peter will give us a little bit more on what drove that, but I think it's fair to say that, in a year like 2022, where growth, high growth stocks, particularly tech stocks that don't pay large dividends, underperformed substantially for the year, it is reasonable to expect the Plato performance to do well in a year like that, and that certainly is pleasing to see that Plato were able to deliver that.
Just getting, I always think it's good to go back to basics and remind shareholders of what the commitment was that we made to you at the time of the IPO in the prospectus of PL8. There were 2 objectives that PL8 has that remain in place today.
The first objective is to generate an income in excess of the benchmark. The benchmark really is the ASX 200. You can see there in the dark blue line on this Slide, is the income from the Australian share income portfolio of Plato.
That's the fund that PL8 invests into. It's a proxy, if you like, for the income that PL8 earns on its portfolio. The blue line, the light blue line below that is the income return of the index or the benchmark. You can see that over time, and this is going back further than the IPO of PL8 in 2017, because the fund has been around for longer than that.
Over time, whether it's the PL8, 5 years in existence or the fund's 10-year track record, you can see the income of the fund has been between 2% and 2.5% higher per annum. In terms of its yield, income yield than the market.
I think a very pleasing result for shareholders of PL8, that the fund that it invests in continues to achieve this objective number 1, which is to achieve an income higher than the market. The second objective is to outperform the benchmark or outperform the market in terms of total return. Again, on this chart, you can see the dark blue line is the total return of the fund that PL8 invests in, and the gray line below it is the total return of the benchmark.
Again, you can see that the fund has, over time, outperformed its benchmark, and I think pleasingly, has had a very tight correlation actually with the market. In PL8, essentially what you're getting is really an investment that is very closely linked to the market's return. We try and outperform the market by a little bit.
As I showed on the previous Slide, the objective to generate substantially or meaningfully higher income than the benchmark. Those 2 Slides indicate that the company has definitely delivered on its objective at the time of the IPO back in 2017. Not only do we try and achieve greater income than the market, but we also want to use the company structure, the LIC structure, to its advantage.
Really the main advantage of the LIC structure, other than being able to provide this strategy to you on exchange, is that you can smooth that income. We don't just want to beat the income of the market, but we also wanna deliver that income to you as shareholders in a very steady manner.
You can see from this chart that in the last nine months we've kept that distribution at that very stable AUD 0.0055 per month, fully franked. Again, 1 of the real benefits of an LIC is you can pay monthly fully franked dividend, and PL8 has I think really become quite a poster child for that.
Finally, before I hand on to Peter, any LIC presentation would be remiss if we didn't look at how the share price has traded relative to its net tangible assets or NTA. This chart really shows you in dark blue is the share price of PL8, the gray line is the NTA or Pre-tax NTA, and the light blue line is the discount or premium that the share price has traded on relative to its NTA.
You can see over the last 3 years, PL8 really has attracted a consistent premium. That's a very pleasing sign. It generally indicates there's more buyers than sellers, and that there's strong interest from new investors to purchase shares in the company.
It's probably worth calling out that when we have done share purchase plans as we did in the end of 2021 and end of 2022, as I mentioned earlier, the premium did reduce for a very short period of time. We think that's a reasonably natural phenomenon because the shares that we offered in the share purchase plan were being offered at close to their net tangible assets.
There's an arbitrage opportunity, I think, for investors to sell the share at a premium and buy back at NTA. Once that transaction's out the way, it's been very pleasing to see that the premium has been regained, and that actually happened even quicker in the most recent share purchase plan in December of 2022.
In fact today, this chart is to the end of December. If you looked at the premium today, we're back up at that 15% level, a very pleasing outcome, I think, for shareholders. I'll wrap the company presentation up there and hand over to Peter, who will take us through the portfolio update. Peter, over to you.
Thanks, Chris. Yeah. I thought we'd start the market update by talking about some of the changes to legislation going on at the moment. To start this off, yeah, we'll kind of note that obviously retirees are quite different to accumulators in terms of what they're looking for out of their investments.
They wanna live off the income, and so they value that income much more highly than would accumulators in the same situation. They are obviously taxed differently as well, and so the not first AUD 1.7 million is taxed at 0%. Above that AUD 1.7 million at the moment and is currently taxed at 15%.
Obviously that's been the change that's going through the media now with the Labor Party announcing that from FY26, so 2025, 2026, after the next election, they propose that after $3 million of your superannuation, that will then get taxed at 30%, so the amount of your super above $3 million.
While we think this change from their previous policy that they took to the 2019 election where they were really, they were trying to stop franking credit refunds, we think this new policy is a lot better than that, because it doesn't touch the franking credit regime, which can obviously hurt all retirees, whether they're rich or poor. This policy is obviously targeted more towards the more well-off retirees.
We think that's 1 positive thing. The negative is that they don't appear at the moment to be willing to index that AUD 3 million. That AUD 3 million is proposed to stay the same, albeit the Treasurer has said that that's in future governments to decide whether they will index it kind of going forward.
That obviously means that over time, as inflation kind of causes that AUD 3 million to, in real terms, start to reduce, that will then affect more and more retirees going forward. The projection I saw in the paper was that in about 10 years' time, then that'll be affecting about 10% of people that have their money in super, as opposed to the current 0.9...
0.5%. That actually might be more than 10 years. Maybe it was around 20 years. Yeah, so that's kind of our thoughts on the policy at the moment, that while it's better than the previous policy, that it still potentially needs some changes in order to make it fair.
The other thing retirees face is that kind of longevity risk, and I'll take you through a couple of Slides, yeah, that look into that in the current market environment, where there's obviously a lot of inflation at the moment. In terms of the taxation, risk, you might have seen this Slide before, but this just shows you the value of AUD 1 of Pre-tax income, how much that is worth on an after-tax basis, based on investors in 3 different types of tax brackets.
The first 1 on the left-hand side is the pension or tax-exempt clients, where $1 of Pre-tax income is worth $1, except in the case of a fully franked dividend, where you get that value of the franking credits back as part of your tax refund, it's actually worth $1.43. The profile is pretty similar for super or accumulation investors, where the most beneficial form of after-tax income is still that fully franked dividend.
If you were to look at the rates, if Labor were to introduce this new 30% tax bracket, that fully franked dividend would now be worth $1, because you effectively wouldn't get that refund back anymore because the refund that you would get would be taxed at $0.30, so that would go to $1.
The long-term capital gain would go to AUD 0.75. The short-term capital gain and the unfranked dividends would go to AUD 0.70. It looks a similar profile. From the perspective of PLA, we don't expect to be managing our assets any differently.
If this change were to come through, we'd still be looking to maximize your kind of income, maximize the total return, on the basis of those zero tax investors, which obviously impacts other investors as well. In terms of, yeah, what's happening in the current market environment, obviously interest rates are rising, and you've seen the steepest increase in interest rates since the early 1990s.
If this interest rate cycle continues, and we're expecting another 25 basis points to happen today, then we'll see the biggest rise in interest rates from the RBA ever in Australia's history. Interest rates are rising, and obviously that's good for kind of the term deposits that retirees can get.
The challenge still is that inflation is even stronger than those return on interest rates, which means your real earnings, as in your after-inflation earnings, are actually going backwards at the moment. If inflation's around 7.8% in 2022, and you're earning 4% on your term deposits, then you're actually going backwards by 3.8%.
There is still a benefit in exposing yourself to returns that are gonna be kind of inflation adjusted or gonna be impacted by inflation. The other kind of thing that retirees need to worry about is that longevity risk, which is obviously a good risk to have in that you're living longer, but it means the risk that you'll run out of money.
In the current market environment, if you get a -5% real return in a couple that's retired at 65, where they've retired with AUD 1 million, if they earn a -5% real return, that's the dark blue line down the bottom, then they're scheduled to run out of money around 83, and they'll enter the full pension at 72.
Now, there's nothing wrong with being on the full pension, but I don't think most couples retiring at, with AUD 1 million would expect to be on that, after just 7 years of their retirement. Earning a negative real return is really, like as we say, a killer for retirement balances.
Whereas if you can get a 0% real return in the light blue line, then that money should last until about 93. If you can get a positive real return, a positive 3%, which is what shares have on average delivered for you historically, then you'll obviously your money is then far more likely to survive, till, you know, the time that you do.
In terms of what our asset class outlook for income is, going forward, we've got a chart here which looks at various different asset classes, whether it's cash, 10-year bonds, term deposits, company credits, so this is bonds, the MSCI World, so that's global shares, property trusts, REITs, or Australian equities. We look at it from the end of 2020.
Obviously the rates on a lot of those assets, particularly the interest rate kind of correlated assets like overnight cash or 10-year bonds were all very low, but they've come up a lot recently. You see those big increases that bonds are now up to almost 4%. Term deposits have just hit over 4%.
In terms of our forecasts, when we look at Australian equities, it is still the highest yielder amongst all the different asset classes. Our latest forecast with that is a, is a yield, when you include franking credits, of just below 6% in the Australian market. We're still forecasting a very good income coming out of Australian equities.
When we look at the most recent reporting season in 2023, over AUD 35 billion of dividends were declared. That was less than last year as a result of some big dividend cuts from the likes of BHP, and Rio Tinto because the iron ore price dropped over that period.
When you look at it, if you look at the chart on the right-hand side, you can see it's a massive discrepancy depending on how you measure the change in dividends. If we look at the kind of average change in dividend, when we look at all stocks together, we get a strong dividend increase of 27%.
When we look at the median increase, we get 6.9%. We think that's probably a better way of getting an indication of what the average stock is doing. It was up 7%.
When we look at the market cap-weighted average, so when we weight stocks according to their market capitalization, so large cap stocks, get a higher weight, then we actually see that it's 8.9% less than last year as a result of those big dividend payers such as BHP and Rio cutting their dividends. Overall, it was a really good reporting season for dividends, and we saw strong increases from some energy stocks, so Ampol, Viva Energy.
Everyone's kind of witnessing higher petrol at the pumps, and that's impacting the profits of Ampol and Viva Energy. Whitehaven Coal, Santos, and Woodside also had big increases in dividends over the period. We also saw strong dividend increases from financials as well.
Some of the insurers like QBE and Suncorp, they've been able to increase their premiums quite a lot in the current market environment, and their investment earnings were also going up in the higher interest rate environment. The higher interest rates are actually positive for those stocks. They had strong increases in dividends.
Commonwealth Bank also increased its dividend by 20%, so they are able to see an increase in their Net Interest Margin, but I'll talk about that in a future Slide. AMP, long-suffering AMP shareholders actually saw a dividend this period, which was positive for them. The other area of increases for dividends came in the consumer discretionary sector. It was definitely kind of Different stocks are reported differently in the consumer discretionary sector based on how that individual stock's going.
It's definitely kind of changing in that environment as you see consumer spending start to slow. We had strong dividend increases from JB Hi-Fi and Super Retail, as well as Woolworths and Wesfarmers. We had good in some areas. In other areas, the retail sector started to come under pressure, but we're still seeing Australian consumers spending in certain areas.
Now 2 companies in the ASX 200, Alumina and Healius, both omitted their dividend, so weren't paying a dividend, which is quite normal for there be a couple of stocks doing that. We also saw the big dividend cuts, as I mentioned, in Coronado, Sims, Rio, South32, BHP, and Evolution Mining, which is a gold miner.
The other stocks that saw dividend cuts, which we had forecast some of these dividend cuts going forward, were Downer, Magellan Financial, which was our kind of dividend trap that we've been talking up. AGL Energy also had a big dividend decrease to 50%, Aurizon, and also Domino's.
There were cuts in the overall market, which meant that overall, 62% of companies increased their dividends, 13% had flat dividends, and 25% reduced their dividends, which is a pretty normal kind of reporting season for dividends when you look at it. If I go into a bit more detail about Commonwealth Bank, overall, it was a good result. Profit was up 9% from last year, just over AUD 5 billion for the half.
It means CBA is earning more than AUD 10 billion per annum now when you look at it. They increased their dividend by more than they increased their profit, which was good for shareholders in terms of their dividend increased 20%. Part of that may be the early signs that companies are changing as a result of the change in government policy around off-market buybacks.
If companies can't do off-market buybacks, then we had forecast that some companies would change to doing special dividends or to increasing their normal payout ratio. We saw 2 companies where it seemed like that was happening. 1 was CBA, where it increased its dividends by more than its profit. The other 1 was Ampol, which paid a big special dividend.
Ampol has been a kind of perennial off-market buyback candidate. Every 3 or 4 years it has been doing an off-market buyback, but it's switched to doing a special dividend in this case. That's still positive for shareholders.
They're still likely to get those franking credits, just in a different form. Overall, the biggest kind of thing coming out of CBA's result was that its Net Interest Margin, while higher than last period, actually fell for the last 2 months of the year. You can see that chart. It's possibly a bit small, but on the right-hand side where you see their Net Interest Margin over time.
You had seen that coming up recently in the last year or 2, but you can see it kind of peak in October and then slightly reduce in November and December. That actually caused the banks to respond negatively to the results, not just CBA, but across all the major banks, as the market kind of looked into that and thought, "Okay, have we seen the top for net interest margin?" '
Cause net interest margin generally get helped, as interest rates increase because the banks have generally been able to put up, the rate on their mortgages by higher than they put up the term deposit rate. A lot of you guys would probably experience that. In this case, the competition from the banks is getting pretty strong at the moment.
You've actually seen that in net interest margin peak and then come down a little bit. We'll see what happens going forward in that regard. Yeah, that kind of caused a bit of shock to bank investors. Yeah, it's worth noting that bad debts are still incredibly low. The banks haven't seen any tick-up in bad debts or people not paying their interest at the moment.
Yeah, consumers are still looking pretty strong. It's worth noting as well with CBA that they're now able to fund 75% of their loans from deposits. All the banks have been pretty forward at trying to get more deposit funding for their loans rather than having to rely on overseas investors.
The last results I'll touch on quickly is Wesfarmers, which announced a 14% higher profit than last year or 10% higher dividend. They did also report that their retail trading through the first 5 weeks were broadly in line with the growth they got last year. Certain sectors of the consumer are doing really well in the current market environment.
It's a matter of kind of being able to work out which areas are gonna continue to do well going forward. The last Slide is looking at our overall dividend cut model, which hopefully a lot of you will have seen before. What we actually do at Plato is we model each individual stock and work out the probability of a stock cutting its dividends.
What that allows us to do at the market level is to aggregate that and say, overall at the market level, what is the probability that Australian companies are gonna cut their dividends? Now, on average, on average over time, that's around that kind of 20%-25% level. You did see spikes during the GFC in 2008, and also with the COVID pandemic.
You can see the most recent stats, which is obviously the ones you're interested in. We have seen a tick up in that probability of dividend cuts recently, as you've seen iron ore prices come back, but also interest rates go up, and there being a bit more challenges on the Australian economy. Recently, it's come back down a little bit over the last couple of months, and it's now trading around kind of...
Well, not trading, but it's now around average kind of levels. We are forecasting a pretty good dividends going forward in the Australian market. Overall, to summarize, rising interest rates will continue to challenge asset prices. We still think it's a good reporting season going forward. Those rising interest rates will also challenge kind of the safe assets, like the fixed income kind of assets as well.
Yeah, dividends are going strong. Our dividend cut model's still forecasting strong dividends going forward. Balance sheets of Australian companies are very strong. We do think it's definitely an environment where active management is very critical in avoiding the dividend traps in this kind of uncertain environment. I'll hand back over to Chris.
Great. Thanks, Peter. Well done for getting through that. I think there's always a lot of noise, isn't there, about dividends, especially with tax and franking and so on. I think the summary of all of that is that actually the environment for dividends remains pretty robust. At the margin, you know, there may be some tax noise.
And buybacks and so on, but it doesn't fundamentally change the strong dividend-yielding nature of your portfolio. There are a lot of questions, Peter. I think it's only fair we probably get through these in chronological order. If you do have a question, again, it's not too late. Please put them in the Q&A box. We'll get to them.
The first 1, Peter, I think this one's directed at you, is from Mike. He asks: Can you explain if there is tax as mooted on unrealized gains in super above that, AUD 3 million threshold, what does it mean for income that can be generated from investing in shares?
It shouldn't affect what any companies do. In terms of it, obviously, this change is just affecting kind of retirees with more than AUD 3 million in their balance sheet. The income coming from equities should all stay the same. In terms of, yeah, any distributions, in that regard, it's the same that it's always happened.
However, I think what Mike's referring to is that people are trying to work out, and it's all just speculation at the moment, how it will be that the Labor Party change to the AUD 3 million cap will actually be calculated by the super funds. Super funds generally have a 15% tax rate, and they calculate it across all their different clients.
When you've got large superannuation funds, it is challenging to work out how they're gonna tax certain investors on certain parts of their assets at 30% rather than 15%. Certain people have mooted that the way they'll have to do that is by taxing unrealized assets.
Because the kind of gains that they'll make on your superannuation won't be able to be differentiated between those different clients, they'll then have to tax some of that. I think we'll leave that to the tax accountants because we're definitely not that, and I think it's worth noting that these are all still kind of proposals where it hasn't been finalized how it's all gonna work out at the moment.
Would have thought on balance too, if there is a tax on unrealized gain, it sort of makes the income relatively more attractive because income's been taxed already. It's sort of on a relative basis, income looks more appealing.
Peter, this second 1 from Douglas, maybe I'll take that. It's at each share purchase plan, you've mentioned it should reduce costs. Costs have remained steady at 0.8%. When will the cost charged to us come down? I think, Douglas, we've always committed that the total costs will come down. I think what you're talking about with the 0.8% is the management fee that Plato charges to run the portfolio.
That has stayed steady at 0.8%, and I think as you've heard from myself and Peter, that's pretty good value given the performance that they've been able to generate. The total costs have come down.
As the company has grown, through the capital that's been raised, through the share purchase plans, and remember, in 2021, we also did a placement, the MER or the total expense ratio of the company, which is the management fees plus the operating costs of running the company, we're sitting at about 1%. That's the 0.8% plus about 0.2% of operating costs. It was at about 1% in 2021, so before the capital raises were undertaken.
Since then, our expectation for 2023 is that that total expense ratio will reduce to about 0.93%. You can see there is benefits to shareholders of raising additional capital because you have certain fixed costs that are amortized over a larger capital base.
The third question from Andrew is: Are you considering another SPP at the end of this calendar year? Andrew, I think what I would say there is, there's nothing set in stone. We obviously take shareholder feedback very seriously when it comes to these ideas like raising additional capital.
We do get a lot of reverse inquiry from shareholders who love PL8, but often struggle to put additional capital into the company when it's trading at a substantial premium to its NTA. And so it's really that reverse inquiry or that feedback we get from shareholders who want to deploy additional money into the company, but would prefer to do it closer to NTA that, if we get consistent feedback again in that regard, then I think the board would consider additional share purchase plans.
But there's certainly nothing set in stone. Okay, question number 4 from Wayne asks: Peter, regarding your longevity projections, what is the inflation rate you use for that?
Yeah. Our general longevity or inflation projection is around 2.5%, which is the kind of the middle of the RBA target band of 2%-3% going forward. We're not forecasting the kind of inflation levels that we've got in the current market environment. Yeah, we've just got those kind of standard projections.
Okay. Ross asks: Is there any plan on introducing a dividend reinvestment plan for PL8? It's a good question, Ross. We have debated this at the board. I think in general our feeling is that shareholders predominantly want the cash every month. It's 1 of the real attractions I think of PL8 is the cash dividend.
We don't feel like a dividend reinvestment plan is high up on the list of what shareholders overall want. Although you've obviously asked the question here, so I presume it's something that you would be positively disposed to. The other reason why we haven't done 1 is it can be very expensive to administer a dividend reinvestment plan on a company that pays a monthly distribution.
It's a balancing act between do shareholders overall want it and what is the cost of administering it. We will take it on board that certainly your view, Ross, seems to be that a DRP would be something you would be voting in favor of.
Scott again asks: Is there a regular SPP? Scott, we would encourage you just to make contact with us and let us know if that's something you would be favorably disposed to or whether you are asking it for some other reason. The final question here, Peter, and it's good because we're up against that 11:30 A.M. time limit. I'm gonna probably butcher this person's name, and I apologize in advance. I think it's Gaetano.
He asks: Hey, guys, do we expect there to be any special birthday dividends this year? I think the answer to that is no. We certainly don't wanna give shareholders the impression that that special dividend we paid last year is gonna be an annual event. It was for the fifth anniversary of the IPO, so I don't think you shareholders should be expecting a special dividend this year.
Again, the question is about additional share purchase plans. I think, you know, maybe what we will do is come back to shareholders with a bit of a strategy around capital for the company, just to give you a bit more of a feel for whether share purchase plans might be something that's a regular occurrence or not.
Seems to be a consistent question. Okay. I think that's all we have time for, Peter. Shareholders, there's approximately 100 of you on the line. We thank you all for your attendance. Again, the replay will be available shortly for you.
We thank you not only for the time today, but also for your continued support of the company. I think you would agree that Plato's done an excellent job in the 12 months just past with the portfolio. Peter, we thank you and Don very much for your efforts, and thank you for your time today.
Thanks, everyone.