I'd like to welcome everyone for dialing into today's call. On the call you have myself, Oscar Oberg, and Tobias Yao to my right, portfolio managers of the small-cap products that we run at Wilson Asset Management, being four funds called WAM Capital, WAM Microcap, WAM Research, and WAM Active. Now, in terms of how the call will go today, I'll talk about our outlook for small-cap companies. I'll then pass it over to Tobias, who'll talk about how we saw things through reporting season in February. We'll then talk about some key stock ideas that we quite like at the moment. And then we'll jump into the question-and-answer session that will be run by Camilla.
So look, we've had a great start to the financial year, and in particular in the first half of the financial year that you've seen that we've released to the market across all funds. And the highlight being WAM Capital, which has actually managed to outperform the market by just over 5% in this period. So look, you'll see on the presentation we've released on the ASX today that we've given our performance figures up to January. Our net tangible asset announcement will come out on Thursday in a couple of days time across the four funds. And we'll actually put an updated presentation there in terms of of how we're going for up to February. But in terms of what I can say is, you know, we've had a very good reporting season across all four funds. Very happy with how we're going.
It was the best reporting season that we've seen really since over the last four years since around August 2020 coming out of COVID. So look, to give a summary of how we've seen things, look, overall we're very, very positive. It's probably the most positive we've been in a long time. And I think it's fair to say over the last two and a half years, on these conference calls we've talked pretty consistently about how small-cap companies have underperformed the broader market. And that's the All Ordinaries Index, which is effectively our benchmark across WAM Capital, WAM Active, and WAM Research. I think the best example I can give you here is in the 2023 financial year, the team managed to outperform the Small Ordinaries Index or the Small Cap Index by close to 10%.
We only just outperformed the All Ordinaries Index by over 3%. In other words, there was a 7% headwind in our performance numbers in 2023. Now, as a reminder, it's worth noting that close to 50% of the All Ordinaries Index consists of six companies being the four major banks and also Rio Tinto, and BHP, and CSL. And these are companies consistently that we haven't held across the funds as we prefer to focus on our undervalued growth companies in the small-cap sector. We think the pausing of interest rate rises that we first saw in the United States in December of last year and what we do expect to see in Australia as we go across through 2024 is going to be very positive for small-cap companies.
We think this will actually reverse the underperformance that we've seen over the last few years. In fact, it could be a very positive period for small-caps where we actually outperform the broader market over the medium term. Now, we've provided a very simple slide, or chart in the presentation. All this is showing is the Small Ordinaries Index and the All Ordinaries Index. Very simply, what you can see there is that the Small Ordinaries Index is trading at a level 15% below its all-time high, which was in 2021. The All Ordinaries Index, which is obviously largely dominated by large-cap companies, is just surpassed its all-time high through December and January. Look, basically what we're saying here is it's been a very positive period for small-cap companies since around December, when that changes in the macroeconomic environment occurred.
It's been very positive through February. But what that chart tells you is there's still a long way to go for that underperformance to be recaptured. So as I said before, sitting here today, we're, we are the most bullish we've been on small and Microcap companies for some time. And this largely reflects the fact that there are some sectors out there, which are trading at multi-decade lows in terms of their valuation. In Small and Microcap companies over the last 12 months, we've seen extensive takeover activity. And in fact, the last 12 months we've seen AUD 18 billion of takeovers in this period, which is over 50% higher than the five-year average. We've been very lucky in our portfolio of that period. We've had takeovers in Silk Lasers, Estia Health , Ansarada, Healthia. What else, Tobias?
Genex.
Genex, Superloop. So it's probably the most we've seen to be, to be blunt. So we've been very lucky along the way. But when we look at the portfolio today, we, we expect it to continue. There's just so many companies out there that are trading below, you know, what they should be. And I think in public markets, bizarrely, we're seeing valuations actually lower than what they are in private markets. So, you know, we think private equity's going to be very active over the space, you know, in the small-cap space over the next few years. More importantly, we see a very positive environment ahead of us in capital raisings and initial public offerings. And this is a part of the market that's really been dead for the last two years. And as an example, I saw a company today.
You know, we saw it I think it was about six months ago. And it's probably going to come on as an initial company on the ASX at a 50% discount than what we initially thought when we initially saw it 6-12 months ago. So that they're the opportunities that we're seeing here at the moment. Now, while all funds will benefit from this, it's WAM Microcap really that is the big beneficiary. And this is largely because the companies we invest in WAM Microcap are below $300 million market cap . So they're very small companies and they need capital for growth. So capital's been or capital raising's been a dirty word over the last 2.5 years. We actually think like it was in 2020 and 2021, it was very positive for a number of companies we own.
So look, we're seeing a very strong outlook for that, going forward. So look, I'll leave it at that. You know, while everyone's on the call, I'd like to thank everyone for their support. We really appreciate the calls and the emails that come through.
But look, I'll pass it over to Tobias, who'll talk about reporting season.
Yeah. Thanks, Oscar. So as Oscar said, you know, we are very pleased with the February reporting season. So it's actually the first typical reporting season we've seen in over two years. And by typical, you know, our definition is that companies that reported good news went up. So what does that tell us? It tells us that the market is now focusing back on the fundamentals of the business rather than getting impacted by macro sentiment, which you've seen over the last two years. Over the last 6-12 months, we've rotated materially into tech and growth companies. Now, our view was that over the last 2 years, many of these high-quality tech companies were actually winning market share while at the same time cutting their cost base and optimizing the cost base.
Given the macro sentiment, many of these companies were trading at significantly below their intrinsic values. So we increased holdings and bought positions in companies like Nextdc, Megaport, Temple & Webster, Life360, just to name a few. And those have done well during the February reporting season when they came out and reported accelerated growth, which led to more investors looking at these businesses and going back and buying these businesses. In addition to technology companies, we also took a contrarian view over the last 6-12 months in increasing our exposure in retail and consumer discretionary spend. Our view was the fact that, you know, we believe over the next 12 months consensus or sell-side analysts on the street, their forecasts for many of these retail and consumer discretionary names were very bearish and very low. And we thought that was unwarranted.
So we increased positions in Harvey Norman. You may have seen Oscar talk about Harvey Norman on the last webinar. Nick Scali, Premier and Myer . And so when many of these companies reported in February, you know, the gross margin was a lot better for many of these businesses. And the outlook wasn't as bad as what people were expecting. So many of these businesses actually did pretty well. So technology and retail, companies that we had in the portfolio really helped us over the February reporting season. And the reason why we are bullish in small-caps over the next 12 months is the fact that typically when you have momentum and when you have upgrades in many of these businesses, they continue to keep going over the next few halves.
So we feel very well, having positioned appropriately for what is potentially going to be a very good 12 months. Now, today I also have to provide two stock picks. So I might choose one from WAM Capital and one from WAM Microcap. The first one in WAM Capital is a company called a2 Milk. It's a milk and infant formula company that sells in Australia, in China, and also in the U.S. Now, for those shareholders that's been with us for a while, you may have heard us talk about a2 Milk, you know, six or seven years ago when, you know, we had a lot of a2 Milk. We had a lot of Blackmores. And they were exposed to the China trade.
Now, the reason why we are back in a2 in quite a large position, we started buying around December and January, is the fact that over the last two years there's been seismic changes in China, a key customer end market for a2, and a lot of regulatory change. And a2, thanks to the execution of the management team, has been able to come through this, a lot stronger with a much higher market share. So, you know, the birth rate declining has been a key negative theme. And this year we believe the birth rate could actually increase. So a2 was able to grow revenue even when the overall market was shrinking. Our view is that when the market is now growing, the revenue could accelerate. Now, a2 reminds us a little bit like Nextdc this time last year. Now, it's very different businesses.
But like Nextdc and Harvey Norman, these are large businesses that's often overlooked by large-cap managers, and overlooked by and too large for small-cap managers. So they're sort of in that middle area. It had high short interest, and people, the negative views or the bearish views were predicated on macro concerns, which we think, you know, are unwarranted. And therefore, as the fundamentals come through, in this case, earnings upgrades, potential EPS or creative acquisitions, the share price will re-rate. A stock idea in the WAM Microcap portfolio is a company called GenusPlus . It's a founder-led business with the founder David Richards owning over 50% of the business. Now, GenusPlus is a construction company which effectively builds transmission lines in Australia.
You know, one of the reasons why we like the story, we think it's a long-term structural growth story, is because of the Rewiring the Nation initiative by the government, to spend over AUD 20 billion on turning the current transmission network to be more fit for purpose. Effectively with all the new renewable hubs, energy hubs coming online, the transmission network is a little bit antiquated and needs service providers like GenusPlus to effectively build these transmission lines. And so we believe Genus could win more contracts. They've had a massive tender pipeline. They've upgraded recently in February. And we believe these contracts could lead to further earnings upgrades. So these are my two stock ideas.
Now I'll pass it over to Oscar for his two stock ideas.
Thanks, Tobias. Look, my two ideas are the first one is a company called SG Fleet, which we own in WAM Microcap. We also own it in WAM Capital. SG Fleet is a fleet and novated leasing company in the automotive industry. So we've owned this company for quite some time. It's been a frustrating stock for us. We've owned it for, I think, four years. It has upgraded earnings consistently over that period of time. The only problem has been is that the large source of the upgrades has been elevated used car prices coming out of COVID. So in terms of our peers that don't own the company, they've been worried about this moment when used car prices will fall and then what that impact will happen on the SG Fleet earnings.
Now, we actually saw used car prices fall quite considerably, in the first half of this financial year for the company. And that part of their business, I think, fell around 20%-25%. However, through new car deliveries and the strength of novated leasing and prudent cost control, SG Fleet actually grew earnings through that period and actually grew earnings through that major headwind. So we think the business has now found a new base. We think the business can keep growing through here. They're also integrating a large acquisition that they made in 2021. And a lot of the synergies from that acquisition will occur in the next 12 months. And what's even more attractive is the valuation. Now, SG Fleet is trading on a price-to-earnings multiple valuation of 9x earnings. And its closest peer, McMillan Shakespeare, is trading on a multiple of 15x earnings.
So we're very bullish this company. We think it's definitely turned the corner. And we think it can double. Now my final stock or the final stock we'll talk about is G8 Education, which is the largest childcare operator in Australia. Now, this company has been a dog, full stop. Like, it's been a shocking company for a number of years for a variety of reasons. However, our major catalyst to buy the company was meeting G8's new CEO, I think, just over a year ago. And, G8's new CEO has a background in retail, very good at rationalizing their footprint. In other words, getting rid of their loss-making, well, stores at his old job, but childcare centers, handing back unprofitable leases or selling them, which we believe is a great tailwind for growth as we look going forward. Now, coupled with that, through COVID, occupancy has fallen.
So it's 3% below what it was at COVID. It's currently at around 76% versus pre-COVID at 79%. And we think, think due to what they're doing internally in the business, that occupancy can increase 1% a year really over the next three to four years. So in terms of how the business or how we're looking at the business over the next three or four years, we see a quite conservative pathway to around 15% per annum earnings per share growth. The company has effectively a net cash balance sheet. It's very low levels of debt. So we think there is the ability for capital management. So potentially that could increase closer to 20%. And we see a very attractive valuation. The company's trading on a price-to-earnings multiple valuation of 12. We've seen it as high as 20x over the journey when it was doing well.
So again, we see, you know, call it 50%-70% upside in the share price in this name. So look, that's, I guess, the formal part of our presentation. I'll pass it on to Camilla now for the question and answer session. Now, we're happy to go to the depth like we always do. But, you know, if we do forget a question that comes through, look, we'll contact you personally after the call. So yeah, thanks again.
But, yeah, I'll pass it over to you, Camilla.
Thanks, Oscar. Thanks, Tobias. That was a great update. Before we open up for questions, I just wanted to touch on a few things with you both that come through, quite regularly from investors. So we recently announced our interim results. WAM Research and WAM Capital were partially franked. Can you speak to the franking levels and the dividends across the four funds that you manage?
Yeah, sure. So I'll start off with the easy ones. So that's WAM Research, WAM Active, and WAM Microcap. So for those three funds, we held the level of franking and the dividend consistent with what we did with the final dividend to the interim dividend. Now, from WAM Microcap, it's worth noting that that's the first time we've maintained the dividend, you know, really since the 2017 initial public offering. Now, we are conscious that the profit reserve is very high. But, if you look at the dividend yield, on the WAM Microcap share price at the moment, it's very high at 7%. Now, actually, what really matters is the yield on the net tangible assets per share, that's even higher at 8%. And that's before we even consider franking. So we've had a lot of feedback.
I assume this will come up with some questions in the call around why has the WAM Capital share price fallen so much? Well, it's a similar dynamic with WAM Microcap. Because we're paying out so much in a dividend, we need the market and our performance to grow quite considerably to offset that dividend and to grow the net tangible assets and affect the share price, effectively the share price. That is one of the reasons why the board held the dividend. You know, it's worth noting that nothing's changed in WAM Microcap. If we have good years, there is the potential for special dividends.
Now, on WAM Capital, you know, I think it was interesting, going into the October board meeting, which I went into, you know, I think it's fair to say myself, Geoff, and the board thought there was probably 0% chance that we were going to hold the dividend into, or hold the April dividend at AUD 0.0775 a share. While we'd been outperforming the market, you know, the market was down at that point in time. We're only just up a very small amount. And so it hadn't generated enough profit in the profit reserve. Now, since December, the, you know, the market has obviously gone up a lot. But we've gone up more than the market. So as it stands today, you know, we were able to pay the AUD 0.0775 dividend in April.
We actually have further visibility, as we look into 2025 across the October 2024, sorry, October 2024 dividend and the April 2025 dividend. So again, have a look at the net tangible assets release on Thursday. And you can see the level of profit reserve and how much coverage that we have for the AUD 0.0775. Now, in relation to franking, okay, so it's very similar to WAM Research. So with franking, you can only pay franking from your realized profits. And that all that means it's a fancy word for saying when I sell the shares and they convert to cash. With dividends, you can pay dividends from your unrealized profits, right? So when that's when the share price goes from 100 to 120, I haven't sold the shares. But in my portfolio, it's gone up 20%. That's an unrealized profit.
Your realized profits, which is when I actually physically sell the shares. Now, because we had the sell-off in 2022, you know, and 2023, market went up but not too much. We actually haven't sold much in the portfolio in a relative sense than what we have historically. And so what that means is we haven't generated enough franking credits over that period. And we were short as the board was looking. It was a board decision, and it was very similar to WAM Research. We potentially could have paid 100%. But we've chosen but we would have had nothing in the tank for the future dividends. So the board has chosen 60% as a number. There is some visibility over 60% into the next dividend. So how about I leave it at that? And hopefully I tried to make that as simple as possible.
But, I'll, I've been talking too much. So I'll leave to you, Camilla, for the next question.
Thanks, Oscar. And you actually just covered off a couple other questions with your answer. So thanks for the detail. You both spoke to reporting season. Sounds like you had a lot of good runs. But let's talk about some losses. Can you name a few stocks?
Yeah, we always have some stinkers. And, yeah, we're having a laugh the other day about there's a portion of the portfolio across all the funds really that you'd almost just like to carve off and forget a bit forget again. But, there was one company in particular, all my fault. I think we talked about it on the, present I've got a feeling we spoke about on the conference call probably a year ago. The company's called NextEd. It's in the international education sector. It was a great stock for us in the 2023 financial year. I think we first bought shares at about AUD 0.70 or AUD 0.80. And it went it more than doubled. And then it came crashing down. And the reason is effectively cost of living pressures, full employment. There's been an influx of immigration coming in. And the government said, "Enough's enough.
We're cutting immigration or cutting those really high levels of immigration back to where it was pre-COVID." These guys do English language schools and vocational courses for international students. So you couldn't get a worse sector really, or business that's leveraged to immigration. So look, yeah, the revenues have fallen really quickly. And it hasn't given the management team enough time to cut costs. We owned a lot of the company, well, we still own a lot of the company. We're about 10% of the company. But we had a big swing at it a year and a year or so ago. It came off in 2023. It hasn't come off in 2024. And unfortunately, when a company falls that much and it's illiquid for a big fund like us, it's tough to get out. So, you know, we haven't sold a share.
But unfortunately, we're sitting there at 10% of the company. So that's probably my gift to the portfolio, Tobias. What's yours?
Another one that probably hasn't performed as well as we thought is the company called The Reject Shop, which.
This wasn't your stock?
Well, it was mine. Yeah, that's okay. But just in terms of one that hasn't performed, you know, they saw an issue with shrinkage, which is effectively people stealing, and we thought they would do pretty well in an environment where consumers are sort of pulling back purse strings and trying to spend better. It hasn't really occurred. You know, obviously the management's trying to optimize the business right now. But, you know, compared to, say, something like Kmart, which has done incredibly well, it sort of has really underperformed, you know, some of its peers. So that's one that probably hasn't done as well.
Well, I think with that one as well, it's got AUD 100 million of cash. And I think the market capitalization's what, AUD 160 million , AUD 170 million or something like that. So we've got a good backstop in the cash balance. But, yeah, it has been a disappointing stock, that one.
Yep.
Great. Thanks. The next question is from Paul. It's a bit of a long one. So I've just broken it down slightly. He said that you've said WAM Capital shares have returned 15.1%. The share price has decreased 12% in the last quarter. So where are you getting this 15% from? He's down 29% in his portfolio. So are you being honest with investors?
Yeah, look, yeah, thanks, thanks for the question, Paul. Look, obviously we're always honest with our investors. So there's I think what you've got to understand here is when we're saying 15%, that's the portfolio. That's our portfolio return. Now, in a perfect world, the share price really should follow that portfolio return. Now, you're investing in a listed investment company, right? And one of the positives and also the negatives within a listed investment company is that when you first list on the ASX, your share price has a life of its own. So at various points in time, you could be at your share price could be at a premium to what the assets are worth, which is the assets being the portfolio that we run. At other periods of time, you could be at a discount.
Now, Geoff, obviously our founder and chairman, who everyone knows on the call, always likes talking about how he likes buying a dollar of assets at AUD 0.80 . Now, that occurs when a listed investment company effectively is trading at a discount to what the portfolio is actually worth, which is effectively our net tangible assets. Now, we are shareholders in WAM. We're frustrated as well. However, I think it's worth noting and this is, you know, an unfortunate occurrence, let's call it, is that at the end of 2021, WAM Capital was trading at, I think, about a 30% premium to its net tangible assets. And we've talked many times on this call. When the sell-off happened in 2022, the share price was pretty stayed pretty flat. And there was a big lag between the share price falling and the market falling, right?
Now, the portfolio went up around 18%, I think it was last year. It's up 20% now. We've just given the way that maths works, we've only just starting to cycle through that period and actually being able to grow the net tangible assets. But the main one is, is that when it was trading at a 30% premium, right, effectively now it's trading, I think, at around an 8%-10% premium. So that is 20% that you've lost just purely because of the share price. In terms of our performance, that is what it is. But the share price itself has the premium has contracted. Now, the other thing as well that a lot of you need to include when you look at that analysis is the total shareholder return. Now, through that period, yes, the share price has fallen a lot. We acknowledge that.
But we've actually continued paying out. And the board has continued to choose to pay out quite a high level of dividends. Now, that AUD 0.15, AUD 0 .0775 a share twice a year, if you call it AUD 0.15 , that's on a net tangible assets of, I think today, I'm guessing I think about AUD 1.50, AUD 1.55, let's call it. So effectively you're getting a 10% yield on our net tangible assets. And that's even before we consider franking. So just to stand still, we need to effectively generate positive performance of over 15%-16% just to keep the net tangible assets standing still because we're paying out so many dividends. So look, in summary, look, it's a long way to answer the question. Obviously, we're shareholders too in WAM Capital. We're frustrated with the performance.
But the big reason why the shares have fallen is because it was trading at a 30% premium. And today it's trading close to 10%. So you've lost 20%. You need to add in dividends that we've paid you over this journey. The dividend yield is extremely high. Some may argue it's unsustainably high. But that will actually improve your total shareholder return because you've received dividends. And as well, the 2022 sell-off was quite sharp. And we've only just started to cycle through that now in this current financial year. So hopefully that gave you a good summary. But always happy to have a phone call if you need some more information.
Thanks, Oscar. Thanks for the detail. The next question is from Andrew Owen. He said, "Could you please comment on whether you're still invested in MMA Offshore and what you consider fair value in its share price?
Yeah, and you'd point to me because Tobias was telling me fair value was about AUD 3 a share. And I thought it was AUD 2. So I was selling it. And Tobias was telling me to hold on. Look, no, we're still in the company. We own around 4% of the company. We did own a lot. We owned 10%. I made the great decision of selling some of it. I think it was about AUD 1.20, AUD 1.30, which is when we went below 5%. It was a mistake. I should have held on because it went into the earnings that the company's produced was much higher than what we thought it would be. Also, it's gone into the small cap index. So that's created more passive or call it ETF buying, which has meant the shares have gone up quite a lot.
To answer your question, yeah, if you asked me six months ago, I would have said probably around AUD 2 was fair value. I think you can get well over AUD 3 quite easily. It's got a great management team. They're doing all the right things. Plenty of cash. Capital management's coming. Potential acquisitions. So it's still got lots of catalysts. So yeah, unfortunately, I would have liked to have 10% of the company today. But we did sell some. But, you know, it's been probably our best stock since Afterpay.
Second best.
Oh, second. Yeah, yeah, second best. Two are TPG Singapore and this one, Mermaid.
Thanks, guys. The next one is from Peter. He said, "When will you pay quarterly dividends or at least spread the dividend pay dates over a few months?
Just, I'll start off with the quarterly dividend. I think, look, I think all our investors have been there for a long time, you know, know the volatility that you see in the share price through the ex-dividend dates in particular. I think if you added, and this is probably one for Geoff, to be frank. But my view is that if you're adding another two dates so you're having four ex-dividend dates instead of two, it's going to create a whole heap of unnecessary volatility in the share price. So that would be my answer there. On the dates, I think that's probably one for Geoff. Sorry.
Thanks, Oscar. I'm going to skip down the list just because you just mentioned this company as being one of your best. Ashok has asked, "Have you completely sold out from your holding in Tuas Ltd?
The short answer is no. We sold out a little bit, which sort of led to the ceasing to be substantial. We're still very, very positive. Tuas, given, you know, they're sort of just starting to gain traction in Singapore. They're only about 10%-11% of the market share in Singapore. And if you looked at TPG Telecom over the many years, they grew their business in Australia. They went to 25% of Australia. And what we're looking out for in the upcoming result is the broadband strategy, which they've just started, and how quickly they can gain share in broadband. So unfortunately, you know, it's done really well for us. So we had to sell a bit given it was a very large position in a fund.
Just to link it back to size of subs, it doesn't, you know, when we size subs, it doesn't mean we've sold out of a company. We're just adjusting the size of the position.
Yeah, so what it is when you say it on the ASX or say WAM Capital ceases substantial in the company. Now, all that means is that we've gone you know, we might have gone from 5.5% of the company to 4.5% of the company. And, you know, it doesn't mean that we go to zero. You know, a company like that would take six months to get to zero. And we're certainly very, very positive on the company. So we're not doing that. But, you know, if you have a look when we became a substantial shareholder, I think it was what was it? AUD 1.80?
Yep.
I think I told you at AUD 1.
Yeah. Told me at AUD 0.50.
No. No, but look, you know, we were taking profits in the company. It's been a tremendous performance. Tobias is, you know, it was all his work. He's done an amazing job on it. So but yeah, just remember that. It does. It's substantial, doesn't mean we're going to zero.
Thanks, guys. The next one is from Michael. He says, "Do you think undervalued growth companies and small to medium-sized businesses like the ones that you hold in WAM Cap stand to gain from the forecast interest rate cuts?
I'll say yes. And sort of this is our typical hunting ground. So in our view, that's going to be additionally positive. But in terms of what we're trying to figure out, we're trying to figure out the fundamentals of these businesses because, you know, let's say we're picking tech companies. Not all tech companies can exhibit high levels of organic growth. And so we're trying to differentiate the ones that we believe can continue to take market share from their peers versus everyone else. So we spend a lot of time trying to understand that as well. So overall, the macro sentiment will benefit. You've also seen takeovers in this space, like Altium, which is a circa AUD 10 billion company got acquired.
You know, and that's AUD 10 billion of sort of capital invested in or tied up in growth that should cascade down to, you know, many of the other tech companies on the ASX over time. And so we're seeing a few, you know, quite a few green shoots in the space. And we think that's going to help tech and growth companies in general. But we're still trying to pick the best out of the bunch.
I think the hardest thing that's been over the last two years with the rising interest rate environment is that our stock picking you know, and we've talked about this in the call numerous times, it's actually been pretty good. And unfortunately, the index, how the composition looks, you know, as I said earlier in my presentation, you know, a substantial amount of the ASX is the Big Four banks and the two large resource companies, BHP and Rio. We don't own them. We never have. So when they're going up, that can be a significant headwind for us, which a number of our listeners will know. You know, they've done tremendously well. I mean, you know, Commonwealth Bank, I think, hit AUD 121 the other day. I think that's 10% of the market. We don't own a share. So that's been the hardest bit. We've been calling the stocks.
It's just the weight of money is going to the large-cap companies, right, because interest rates are being priced up. There's uncertainty around future earnings. Now, if we just have an environment we're not even looking for interest rates to fall. We just want them to be flat. If they're flat, then that's all really we think we need because the stock picking should get us there. And then investors will just have more confidence to invest in small-cap companies again.
Great. Thank you. This next one is from Alex. He said, "You mentioned you're the most bullish on small caps that you have been in a while. So do you see the Small Ords testing its record highs this year like the ASX 200 and All Ords have done?
We think it can. There's a lot of companies you know, we've talked numerous I think on this last conference call back in when we were at Brisbane early September, we talked about our bet on consumer discretionary as an example, which is retail, automotive, housing stocks, etc. And, you know, that has really played out. That's been one of the team's great calls, really. But there's still more to go. You know, we're looking at, say, like a Nick Scali as an example, which has probably more than doubled since we owned it. You know, most of the analysts are still quite pessimistic on the company. It's done well. But it's still trading on a price earnings multiple of 13x. It's net cash. It looks like it might want to do an acquisition.
So we've seen that trade as high as 16x and 17x when it's through an in-and-upgrade cycle. Now, Harvey Norman as an example is currently trading on, I think, about 12x earnings. And, you know, most of the market capitalization is in property. It's net cash. We've seen it trade as high as 16x and 17x in an upgrade cycle. And why that's important to talk about is those stocks are around 30% of the small cap index. So yes, there's some tech companies that have gone really, really well over this period. A number of companies have done really well. But it's that 30% that we see effectively just getting a higher valuation, call it 20% higher valuation in time, right, which could happen if interest rates start falling. I mean, people start getting more bullish and more positive on retail.
That really should get you there to the all-time high that I was referring to before. So yeah, we are bullish. We think it will happen at some point because the underperformance, as you saw in those charts, it's been quite savage, really. And it's been one of the highest periods of underperformance we've seen over the last 25 years.
Great. Thank you. This next one is from George. He's looking for your comments on a stock. "Are you still positive on Cettire given the speeding ticket recently issued to them by the ASX and the company's response?
Yeah, what a topical stock. The answer is yes, we are. Look, one of the beauties of the WAM investment process is, you know, and we are an active fund manager. So, you know, we had quite a large position in Cettire at the result. You know, the stock, I think, went from AUD 3.30 to almost AUD 5. You know, we halved our position through that period. I mean, it was a, you know, been one of our best-performing stocks, really, through that February. You know, we only had half our position that we did when we went into that. And you always do things like that for companies like this that are quite topical. They're new to the market. People are trying to get their heads around it. There's a bit of noise around it. And this stock certainly has this.
It's no different from Afterpay when it first came out. And so yeah, when the article came, we saw it on what was it? Monday morning? Yes, last week. You know, we knew the stock was going to fall a lot. But the reality was our weight was quite low. And we know the stock really well. We've met management numerous times. We've spoken to peers over or competitors in the U.S. and Europe. Done a lot of work on the industry. Will Thompson, who works with us, has done a tremendous job on it. So we took the liberty on, when situations like that, to buy more stock. And we've been buying more stock every day since. So I guess in summary is yes, we're still very confident on the company. Its largest competitor in the U.S. fell over in December. It was actually through that December period.
It had a great result, Cettire. But it was actually a very tough quarter because their competitor was heavily discounting to stay alive. And so now that competitor's gone. So these guys could end up being the largest player in this space. So we actually just fundamentally on the numbers, we still like the stock. Is there going to be more noise on the stock? Yeah, probably. But, you know, it was very similar to Afterpay in the early days. So yeah, we're still positive on it.
Thanks, Oscar. This next question, I know you can't really answer it, but maybe you can speak to the profit reserve. It's from Michael. He said, "Do you think the next dividend for WAM Capital will be AUD 7.75?
Board decision, Michael, obviously. I'm not on the board. Yeah, how about look at Thursday's net tangible asset release?
Great. Roger says, "Is WAM Microcap planning on acquiring any other small cap LICs?
No, never say never. But no, we are trading at a premium. So, you know, if there was a listed investment company trading at a discount, we can make it accretive and beneficial to shareholders through an uplift in the net tangible assets. Then potentially, that's something we could do. But that's not on the radar at the moment. What I will say on WAM Microcap, though, is right now, we think is the best opportunity we've probably ever seen in that space. It is like a hunting ground. There is just so many companies there at the moment. And why is that the case? Effectively, we've had a very uncertain period with interest rates and the war and everything like that, inflation, etc. You've seen a whole gravitation in the market towards large cap companies, right?
We think at the moment what we're seeing, hopefully, is a period where all that weight of money starts flowing down to the mids and smalls, which WAM Capital focuses on. At the moment, microcap companies are dead. They're atrocious. Like, we saw them in February. You know, they're upgrading earnings expectations and going down 10%. Now, we're looking at that going, "Whoa, there's so many opportunities here to invest." And look, to be perfectly honest to all the listeners, I said to the board in I think it was in July. And, you know, I said, "I thought it was a high chance of us underperforming this year in WAM Microcap if we were right that interest rates would stabilize or fall because we thought the weight of money would go into small caps, not microcaps." Now, we are outperforming in microcap.
But that is largely due to the fact that we've had quite a number of takeovers. And we've been very lucky in that sense, in that regard. Most of our portfolio is just static and doesn't move. You know, we have our misses as well as, you know, but I'd say for the most part, we've got probably 30% of the portfolio that just doesn't move. Market goes up. Sometimes it goes down. So I guess what we're saying is that that space, if we're right on small caps doing well in the next 12 months, we should start seeing investors starting to come down into microcaps. And this is what we saw in 2020 and 2021. And that will be very positive for the WAM Microcap Fund. Sorry, long way to answer the question.
We also haven't seen any capital markets activity, which WAM Microcap's a massive beneficiary of that. Yeah, definitely seeing a lot of opportunities in that space.
Thanks, Oscar. Interesting time for microcaps. Next one, we'll go back to a stock pick from Graham. "What is your view of Bubs?
So probably no view at the moment. I think they, you know, we were positive. Bubs would have been two years ago when they first entered into the U.S. The reason we got it wrong was the fact that the management just couldn't execute. It was a very large market, required a lot of capital to do it well in the U.S. And so for sort of a microcap Aussie company, you know, and obviously with sales in Australia and sales in China and having to take on effectively a very large market in the U.S. during that period of time was very difficult. And, you know, we got it wrong. We lost money on the investment. And so they've had a change of management since.
I think we need to see more sort of runs on the board just to understand how they're actually going to take advantage of the current temporary license they have to sell infant formula into the U.S. Obviously, we're bullish a2 Milk. They have a U.S. business as well. And they're looking at the infant formula space in the U.S. as well. So that's probably where we're playing the infant formula space. And so definitely prefer a2 Milk over Bubs.
Thanks, Tobias. Another one. Trevor is asking about Nextdc. "Do you think they'll ever pay a dividend?
So yeah, the answer is not in the short term. I think Nextdc.
Oh, I'd say never.
Probably never. Not in the short to medium term.
Don't want to be in Nextdc for a dividend. No way.
Yeah, so we first bought Nextdc, I think, around AUD 9 this time last year. At the time, the catalyst we had for Nextdc was just winning contracts. And these were cloud contracts, contracts, you know, with the likes of Amazon, Microsoft, Google after effectively two years of COVID where effectively all the contracts died, you know, was very hard to come by due to supply chain issues. And what's actually happened since is with the, you know, ChatGPT and with the AI, you know, effectively trend taking off in earnest, you know, some of the contracts they're talking to now are significantly larger to contracts they've ever won in the history of Nextdc. Nextdc is a growth company. You know, they are a beneficiary of AI now.
They're beneficiaries of AI because a lot of the hyperscale guys need data center capacity to be able to compute for a lot of the large language models for AI. And so, you know, we have an investment in Nextdc for growth. So we're not there looking for a dividend. And I think the business is effectively, you know, positioned that way effectively to grow as quickly as they can.
Thanks, Tobias. Joseph has asked, "Will you place a small amount in small pharma and biological stocks?
Look, we're very much generalist investors. And we focus on all sectors, really, in the industrial space. And biotech is one of them. Now, I think it's fair to say over the years, and it still is, it's still something that we find difficult. It's not really, you know, if you're ranking all the sectors up against each other within the industrial space, it's probably the lowest in terms of our expertise. Now, in saying that, you never say never. And we've done very well out of Neuren over the last 12 months. We actually exited the stock. We just thought a lot of the catalysts had played out. And there was a bit of risk emerging in the company. You know, Telix as well. We haven't owned it for about six months. But we did quite well out of it, you know, particularly in that recovery phase from 2022.
So look, we're always looking at these companies. I mean, what we've learned over the journey is, you know, once they start executing, there's sort of no limit to where the share price can go. So they can be very, very good stocks if you get them right. If you don't get them right, they can be a disaster. So look, there's always part of the portfolio that's open to biotech. I think at the moment, I don't think we have one. Neuren was quite a large position. But we did exit. So yeah, so we're actually nude at the moment. We don't have any in the portfolio.
Thanks, Oscar. Lawrence asks, "What was your reason for selling Select Harvests?
Well, I picked the low on that one, that's for sure. Look, again, we have seen substantial in that one. But look, it's still a big position. And it's, you know, I think effectively, we've gone from, call it, 6.5% of the company to about 4% of the company. Now, why did I sell? Well, as I said, I probably picked the lows in the share price that day, probably. Look, it was, look, concerns around their balance sheet, really. You know, we did talk about the stock a few months earlier. Conditions got worse. And in Australia, they had a shocking harvest. This is in last year, in 2023. And so I think the noise around or the feeling was, particularly after that November result, that they probably needed to raise equity. Different market back then as well.
So our view was, geez, if they're going to raise, it was just at the time when Healius had just done a discounted capital raise and had performed poorly. So on the day of the result, effectively, I took the opportunity to sell some stock. You know, I think we sold in the high threes. Then the stock fell quite considerably afterwards. Then honestly, you know, from that point, we probably picked to buy a day. The almond price price started rallying hard. The market started rallying hard. You know, we actually put back a lot of the stock that we sold at around 320-330. So we've actually hadn't done too badly out of that selling. The almond price continued to go up. So it looks like it's going to, it feels like, touch wood, it's going to be a good Australian harvest.
You know, if that all plays out, they should generate a whole heap of cash that can pay off their debt. You know, the stock is still trading at a discount to its net tangible assets. We still like it fundamentally. And as I said, it's still a very decent position in the portfolio.
Great. Thank you. This next one is from Ian, who says he understands why you like M&A activity. But he's asked if you're concerned that the ASX is disappearing. He notes that we have lost many good dividend-paying companies to foreign acquisition. What are your thoughts on that?
Oh, absolutely. Huge concern. I mean, if, you know, from a dividend-paying perspective, it's probably Matt and John in the large cap portfolio with WAM Leaders to speak to there. But just if we look just at really good companies, growth companies in small and mid-cap companies, in the small and mid-cap sector, yeah, we've lost CSR. We're losing Adelaide Brighton, Altium, you know, Virgin Money U.K. There's a whole heap. You know, the building materials sector, as an example, has been fascinating. You know, if you sold Boral, Adelaide Brighton, and CSR in the space of a few weeks, which sort of gives you an indication of how people overseas are feeling about Australia. I think it's not a bad place to invest in. So yeah, I would agree. And it's hard to get initial public offerings away.
So, you know, the universe in small caps is just getting smaller. And at the same time, superannuation funds, you know, are growing really quite a lot. So, you know, it makes our job a lot harder. Definitely, definitely. So it would be great to see some more IPOs. They've just got to be priced appropriately.
And I think to add to what Oscar was saying, you know, the Aussie dollar is very low. So if you're an overseas acquirer, it's probably as cheap as it's ever been in terms of acquiring a business in Australia. So, you know, we think the M&A activity will continue over the next 12 months.
So as an example, we owned a company called Healthia. And I would have said it was one of the mistakes in the portfolio, you know, and that was all me. But I got a phone call when was it? The end of the last day of August. And I was down the South Coast. And I think I'd cracked open a beer. And it was about 6 o'clock. I got this random number. And it was an investment banker. And he's like, "Oh, you own some shares in Healthia?" And I go, "Yeah, I own 10% of it. You know, it's been terrible, blah, blah, blah." And he goes, "Oh, we just had a takeover bid by private equity at a 90% premium." 90. I've never seen that before in my career. But that just shows you how undervalued, particularly in that microcap space, is some of the number that companies are. I mean, there was a company yesterday, I think, that got a TASK. It was a tech company called Plexure. It's called TASK.
What was it? 110% premium. So that's what we're seeing in the microcap space right now. That's why we're really excited about it because we can just see some bargains like that right now that if they're not going to go up in the Aussie market, they're just going to get taken out. So yeah, that's hence why we're quite bullish on the microcap portfolio.
This next one is from Alan. You have touched on it earlier, Oscar, but if we could just revisit. He said his investments in WAM Capital and WAM Research in April 2021 have reduced in value while at the same time, the ASX recorded record highs. Can you please explain why small caps have performed so poorly?
Yeah, so as I said before, there's a number the biggest dynamic as to why that happened. If you go back to April 2021, very positive time in the market, right? And, you know, small caps were doing well. Everyone was doing well. WAM Capital was trading at, I'm guessing, probably between a 25%-30% premium to its net tangible assets, right? So that would mean if we liquidated every company, sold every company in the portfolio today, you would have gotten 25%-30% less, right? Because the share price is trading much higher than what the actual assets are worth. And this is why all people on the call should be monitoring really closely what funds are trading at a premium, what funds are trading at a discount. Geoff would only buy funds that are trading at a discount, right?
So when you say the 30%, obviously, we feel terrible about that. But that 20% of that 30% is effectively the premium in WAM Capital shrinking. It's gone from a 30% premium to a 10% premium, right? Small caps have underperformed over that time. So within that 10%, I'd say, you know, probably half of that relates to that. And then what you've got to add back, and it's hard without seeing your portfolio, is the dividends you have received through that period. It's actually quite a lot of dividends. So it shouldn't be as bad as the 30% of previous. Yes, the share price might be down that much. But if you add back dividends that you've received, it would be a bit better. So look, again, Alan, very happy to if you want to call in to discuss.
Yeah, unfortunately, a lot of our newest shareholders in that 2020, 2021, 2022 period, before the sell-off happened, bought shares at quite a high premium. The premium of the WAM Capital share price has shrunk. It's gone to about 10% today.
Thanks, Oscar. We've had a few people join the call a little bit late. We've got a few questions on how WAM Capital will be able to maintain its high dividend. Can you talk to this?
So the simple fact is, if we were in the same position in October, the dividend was getting cut, straight out. It was getting cut. And I think it's worth understanding we've talked a few times how do we pay dividends? How does it occur, right? It occurs from making unrealized gains and realized gains. So unrealized is that example I gave before. Share price goes from AUD 100 to AUD 120. I've made an unrealized gain of AUD 20. A realized gain is when it goes from AUD 100 to AUD 120. And I sell at AUD 120. So I make a AUD 20 in profit and receive that money in cash, right? So effectively, we need the market to keep going up. When the market is going up, we're generating what's called profit, right, which we add to a reserve, right?
In periods when the market goes down, right, say, the portfolio, say the market goes down 20% and our portfolio goes down 5%, right, as a fund manager, I'm really happy because I think we've done a good job. We've outperformed the market by 15% at a really bad market. But as a shareholder, you're not happy because I've generated a loss, right? So if you generate a loss, you can't add profit, right? So when COVID occurred back in 2020, we had a huge sell-off in the market from January to June, right? And then the market started recovering. Now, because we had a period like that where the market fell a lot, we weren't generating any profit. We're generating losses. Yet, we were still paying the same rate of dividends, right? So we ate into our profit reserve, right?
Now, that dynamic has been in play really for the last five years. And, you know, when we came out of COVID, look, I remember a board meeting in July 2020. But the board thought we were going to cut the dividend. And then the market just shot up, right? Same things happened this time. In October last year, going to that board meeting, we were talking about potentially cutting the dividend. And the market from December has gone like that. And our portfolio actually has increased a lot relative to the market, which has been great. So we've been able to add more profit reserve, right, which you'll see on Thursday, right, hopefully give you a little bit more confidence into the next few dividends. But I think you just got to take a step back.
And you just got to say, "Okay, WAM Capital right now is paying a AUD 0.0775 dividend, which is great. But it is a 10% fully franked dividend yield. It's very, very high, very high. And we need the market and say our performance to be in line with the market to be up 15% or 16% a year just to stand still, just to keep funding that dividend, right?" So in periods where the market falls, you know, we're not adding to that profit reserve. And you've got to remember that. So this is the reason why we talk about, unfortunately, the premium going from 30% to say 10% today, right? It could go to a discount one day if we can't pay the dividend or we have to reduce the dividend, right?
So that's, you know, that's potentially where the, you know, obviously, the frustration for shareholders will come through even more 10x more than what it has come through today because, you know, your share price will fall, go to a discount, and will cut the dividend as well. But that could happen. And potentially, it was going to happen. But the market really rallied in December, January, February. So look, again, long way to answer the question to answer the question. But you really need to be monitoring every Net Tangible Assets announcement, what our Profit Reserve is in each fund, and comparing that to our interim dividend. In other words, what is the ability for our profits within the fund to keep funding that dividend over the next few years?
Perfect. Thank you, Oscar. This next one is back to stocks. It's Joseph. He says, "Will you or do you invest in Megaport?
That's a very timely question. We do. Megaport is probably one of our top ideas that's exposed to the AI theme. You know, when we first invested in Megaport, it was on the back of effectively the new CEO starting. One of Oscar's close contacts knew Megaport's new CEO, Michael Reid , really well and gave us the, you know, the two thumbs up that this guy has had an incredible track record when he was running ThousandEyes , which was a subsidiary of Cisco. And effectively, what Michael's done and Tish, the CFO, and Bevan, the Chairman, over the last 12 months in terms of turning around the business is nothing short of amazing. You know, they're having an incredible product, effectively a connectivity product that links companies with data centers around the world, bypassing effectively the traditional telco provisioning process, which is much shorter and much cheaper.
We believe that they are very well positioned for the future where there's going to be a lot of data getting transferred between companies and data centers and, you know, AI models around the world. Megaport is a key beneficiary. We believe over the next two-three years, the revenue growth could accelerate. The good thing is the management's done an incredible job cutting costs as well. They're now in sort of a very profitable position. They're getting strong growth in the top line over the next few years, at the same time, very healthy earnings margins. Megaport is one of our key ideas.
Great. Thanks, Tobias. This next one is from Ashok. He says, "Do you think the IPO market will become more active soon?
Yes, I do. As I said, we saw one this morning that looked really interesting and was on almost half the valuation that they thought it was going to be a year earlier, so potentially. So look, you know, it could be, yeah. Look, I mean, and that would be great. But, you know, vendors and private equity need to be realistic around what their valuations are. And unfortunately, the, you know, the terrible IPOs that occurred at the end of 2022 is still, yeah oh, sorry, 2021 is still in the back of everyone's minds. You know, there was some good companies that IPOed in that period. But their valuations were just way too high. So hopefully, we'll see, you know, some positivity around that market because, as I said before, it's generally very good from the active side or the market-driven side parts of our portfolios.
Thanks, Oscar. Kristen has written in. She said, "Why should we buy more WAM Microcap when the share price is more than the NTA?
That's a great question. Well, look, I mean, okay, so how about I say this? Why have they consistently traded at a premium, right? Two reasons. The dividend, right, and the longevity of the dividend. Look, yes, we're short on the profit reserve. But WAM's paid a decent dividend for a very long period now. WAM Microcap's pretty similar. Look, we've paid. The dividends have gone up quite a lot over the years. And so when you see it, the share price and look at it, you know, it looks pretty attractive relative to its dividend yield. And I think, look, you know, the track record, particularly in WAM Microcap, is that we've outperformed every year really since we IPOed. So that is, you know, and obviously, there's a lot of goodwill just towards some asset management as a whole.
So I'd say just generally, that's potentially one of the reasons why it trades at a premium. Yeah, I mean, every individual is different in terms of what their risk profile is and so forth. I mean, the only thing I'll say is that, you know, Geoff well, I think, okay, I'll go the other view. Why do some funds trade at a discount? Or, you know, it could be the management team has done some poor decisions over the years. You know, maybe they've underperformed consistently, etc., etc. Are they doing things to fix it? Look, that's generally an opportunity. And that's when our WAM Strategic Fund will come in, when they can see an outcome where, you know, something was trading at a discount of, say, 20% that can close that gap and go back to NTA.
So look, I think it's just every individual's preference and risk profile, really. And you've got to make up that decision. But as I said earlier, to the last question, just whenever you're looking at a listed investment company, you've got to look at, is it trading at a premium or a discount to its net tangible assets? What are they investing in? And what is their profit reserve? What is their ability to keep funding the current interim dividend? They're the three questions, really, you sort of need to ask yourself.
Great. Thanks for that detail. This next one's a good one. It's from David for both of you. "What is your highest conviction holding across the four portfolios?
Great question. What's his time horizon?
David has not given a time horizon.
Yeah, five years, I reckon. Yeah, five-year time horizon, some of the ones that, you know, it's a pretty high conviction for us. Tuas is obviously one. Temple & Webster , I'd say Megaport. Regis Healthcare. Are probably the four that come to mind.
What am I going to do then? You've just chosen the four or five.
The other ones, I'm trying to think. It can be like Webjet, Cyclopharm.
Yeah. You've told some growth ones. Well, I'll say some value ones.
Value ones.
So look, I think it's going through a tough spot now. But I really like Ridley. I think that's a really good business. I actually think it's, sorry, an underestimated business by the market. Generates great cash flow, really run by a good management team, taking out costs, investing in the top line. Look, yeah, there's good things happening in that business. Carsales, we didn't talk about that. That's a fabulous business done incredibly well. I mean, any of those classifieds businesses really are great businesses. News Corp, that's a good one. News Corp is a good one to own over the next five years. There's, you know, potential. You know, who knows what happens when Rupert finally passes away.
But, you know, there's some hidden businesses, particularly that news and media business or Dow Jones business, sorry, in News Corp that's materially undervalued by the market that can release a lot of value in time if the family wants to do it. So that would be a good one. You obviously said Tuas, TPG Singapore. Light & Wonder , I think, is a really good business as they become the number two player in the world for gaming. What else? Gentrack, didn't say Gentrack.
Gentrack . I think maybe we love founder-led businesses as well, so companies where founders have, you know, a lot of shares, probably over 20% in the underlying business. You know, it's founder-run. You know, they look at the long term. And they're not afraid to invest for growth. And these businesses typically outperform. And so any company that, you know, has a really good founder that's proven to have delivered value for shareholders, for non-minority shareholders, we'll back them. And we have a lot of these founder-led businesses in our portfolio. So for, I guess, for investors that's looking out sort of 5-10 years time, I would say back to founder-led businesses and pretty much co-invest with them.
But hang on. We've said about 15 companies. We've got to say one each.
Oh. I'll say TUA.
You're going to say?
Tuas Ltd over the next five years.
I'm going to say, oh, that's a tough one. I'm going to say Carsales. I think Carsales is a great business. I still think it's underestimated by the market. So I'm going to say Carsales.
Yep.
Thank you. That was heaps. You both over-delivered there. Another stock. Greg, do you have a view on Archer? The ticker is AXE.
Oh, I've seen it on the wires. But no, we haven't seen it. Sorry, Greg. Sounds like we should.
Another one. Peter, what is your view on DroneShield?
It's done really well. It's funny you say that because I saw we had some about a few years ago. Yeah. But I mean, look, I think it's we own Codan in WAM Capital, which is very much a defense business these days. And it's been growing extremely well in that part of the market. In the Microcap Fund, we own EOS. You know, we bought it. Actually, one of our colleagues bought it, you know, at a really good price. I think it's doubled since he bought it. And these businesses, clearly, there's a war going on in the Middle East and also in Ukraine and Russia. So you've got to be careful around that. And these businesses are benefiting from that. So look, you've got to, you know, that conflict doesn't seem to be ending anytime soon. But these guys are going well.
So you do need to take that into account. Look, I'd say for DroneShield, you know, met them before, liked the technology. It was lost back in that period of time. We've had a look at the numbers. It does look like it's really turning. It's had some great orders as well. But I think for us, we owned EOS. So it was either one or the other. And so we've chosen EOS.
Cool. Thanks, Oscar. The next one is from Ian. You might not have the exact figures. But how much cash are you holding across the four funds?
So I wonder if this is Ian, my father-in-law. But in the four funds, we are 13% cash in WAM, which is actually quite high over the last 12 months. And it was lower in January. So we have taken some profits in a number of companies that have done well. WAM Research is about 10%. I think WAM Active is about 8% or 9%. And Microcap is 8%. Pretty standard. It doesn't really change that. It hasn't really changed much, really, for years around those sort of levels.
Okay. Thanks. And then the next one is Brian. "Do you regard businesses in transition industries such as Ampol as a sound investment with growth potential?
Yeah. I mean, look, I think they're great opportunities, really. I mean, you know, Ampol's we don't own Ampol. I think the WAM Leaders guys do. But the company we own a lot of is Viva Energy , which we've owned for some time. But they were great. They were fantastic buys around three or four years ago where, you know, the EV transition was taking over the world. And petrol cars were going to be nonexistent in 5 years or whatever. And lo and behold, I think it's fair to say it's going to take a lot longer than what people think. And this is giving the petrol station operators time to think how they reposition their business. And that's what Viva Energy has done. So it's bought a company called On The Run , which is the largest service station operator in South Australia. It's a very good business.
They're converting their Coles Express service stations, which is around 700 of them, to On The Run across Australia over the next decade. Now, why the On The Run is a good business is it's a retailer. It's not your standard Coles Express servo that you jump in, buy a pack of chips and some Eclipse mints, do your petrol, and leave. It's a destination. So for those callers in South Australia, they'll know it well. You know, there's coffee there. There's, you know, fast food. You can actually sit there. They've got a lot of their own brands in the servos. They've got their own app, which none of the others. I don't think I've ever used an app from another petrol station operator. So that's something that Fever can leverage as they roll it out. So it's just a different retail experience.
And that's how they're transforming their business, is they're going to become more of a retailer, in other words, trying to increase the volume of people coming to the store, potentially take share away from the supermarkets or probably the Jet that's probably the corner store as people start refueling or charging their cars, you know, in time. So I think so to answer your question, look, yeah, definitely, we always plan themes. So AI is a theme. Energy transition is a theme. Some sectors become in vogue. Others go out of favor. You know, sometimes looking at the out-of-favor sectors like Ampol and Viva were, you know, you can make really good money out of them. Because I think Ampol, for instance, I think well, both stocks have doubled over the last three years. And both look, you know, very, very good going forward.
All right. We've had a couple of people ask this next one. So do you own any lithium or uranium?
We own one uranium company, which is Boss Energy, which has done very well for us. Lithium, we don't own any. The stock that we do like from time to time we don't own now is Pilbara Minerals. It's fascinating, this company, because I don't think I've ever seen a bigger short interest, which is effectively, call it hedge funds betting against the company. In other words, the shares will go down. So I think the short interest, last time I looked, was like 21% or 22% of the shares on issue, which is enormous. I don't think I've ever seen a company as big as that. So clearly, people are negative out there on the company. But if you look at the fundamentals, it doesn't have any debt. It's got very strong cash. It's got low costs within mine. So, you know, for us, that looks pretty interesting.
Because at some point, you know, if lithium prices go up, those guys that are short or selling the stock, they're going to have to buy the stock at some point. And it could go up a lot. So we don't own it at the moment. But we are sort of looking at Pilbara, which is PLS. But looking, generally, for both sectors, I mean, yeah, clearly, beneficiaries of the energy transition move away from fossil fuels, in the case of uranium, opening up more in countries such as the U.S. And in lithium, longer term, you know, still very positive on the space. I think there's just, you know, been an oversupply, generally, over the last 12 months and plenty of processing capacity in China. But in time, that'll free up. And, you know, we're still, you know, longer term, you've got to be bullish on both those sectors.
Thanks, Oscar. This one's from Noel. He said, "Are you expecting WAM Capital and the Small Ords to outperform the All Ords over the next two years?
I wouldn't say, how can I say this? So from December, the Small Ords has outperformed the All Ords, I think, by about—I reckon about 4% or 5%, something like that—as soon as the Federal Reserve said they'll pause interest rate hikes. Now, as I said earlier, our base case across the team is we're just hoping that interest rates stay flat. And the reason why we're hoping it stays flat is you sort of it becomes more about the stock picking as opposed to the macroeconomic data that comes through. And what we view ourselves as is we're not very good on the macroeconomic, you know, reading what the Federal Reserve's going to do, the next CPI print, what the RBA's going to do. Like, honestly, we just want to pick stocks that are going to double in the next three years.
That's what we're trying to do. It's been very difficult to do that over the last couple of years. Look, in time, we think it will revert. Is it going to happen in the next two years? I'm not sure. We don't really care if it does, doesn't. As long as it stays in line with the All Ordinaries Index, then we're pretty happy because we think it's more about our stock picking. And, you know, that should, in itself, you know, hopefully, bring good performance.
Thanks, Oscar. This is one from Chris on the team structure. "Can you talk to a potential succession planning for WAM Cap once Geoff hangs up his stock charts? Is there a key man risk? Or is this just a perception?
Well, as Geoff's always said, so, you know, Geoff leaves, let's call it, the investing, you know, to effectively the teams. So Geoff is always a sounding board. Geoff and I speak a lot of the time. You know, Geoff's obviously done this for a very, very long time. But, you know, ever since I've been at WAM since 2016, Tobias has been there ever since 2015, 2014, sorry, and has been very hands-off, so extremely hands-off. So leaves us to do it. He knows we're doing the work. He trusts us. And so, you know, he's more focused on the business in terms of our growth than the Wilson Asset Management brand as such. So look, yeah, obviously, Geoff is amazing. Like, it would be you know, when we talk about succession planning, it'd be a huge loss to the business when it does occur.
However, does the day-to-day investing change when he steps away? No, not at all. It's exactly the same as what it always was. So, you know, we've got a big team. There's six of us in the WAM Capital team. There's four in the Leaders team. There's four in the Global team, two in the Alternatives team. So look, there's plenty of expertise across the wider Wilson Asset Management investment team. And, you know, we've all been doing this for a very long time.
Thanks, Oscar. This one is Dave again. He's curious if Sigma is on any of your radars across the funds with the reverse takeover of Chemist Warehouse.
Yeah. It's been probably our, I reckon, top three best stocks over the last, you know, call it, this financial year. So we first bought shares at the start of 2022, I think. And again, it was a CEO change. You know, it's been a very funny stock. It's had these sort of it's been a and at the same time, we were buying it. Homeco were buying it. We didn't know at the time. And I remember saying to Sam, who first came up with the idea, he was like, "Oh, let's buy this really, really slowly. We've got lots of time." And then it just started shooting up. And I thought, "Oh, jeez, what's going on here?" So we sort of went with it and got a decent position. And then, you know, fast forward a year and a half time, you know, it was interesting.
We were talking internally, I think, a couple of days before the deal actually happened about, "Oh, who could we speak to? Surely there's an investment banker or someone who's out of the industry who could, you know, if something did happen because there was rumors at the time something was happening, how would it look?" Because Chemist Warehouse is an enormous business. And Sigma's just a small, you know, underperforming distributor that's been there in the ASX forever and hasn't really done much. And then I think two days later, the deal happened. We had no idea. So in that process, you know, that occurred. I think it was in October or November. Now, we spent the weekend. We spoke to the Chemist Warehouse management team. It's an incredible business. Like, it's one of the best businesses we've probably ever seen.
You know, it's very unusual that you get a potentially AUD 9 billion business where we can invest in that in the small-cap space. So normally, that's for Matt and John, Anna and Hailey in the WAM Leaders portfolio. But, you know, effectively, you know, we get a great position in this company. And yeah, like, I mean, the thing is, so to answer your question, yeah, it's been big positions, Sigma. It's done really well for us. Look, we, you know, again, like I said with Cettire earlier, we have taken some profits along the way, you know, because we don't, who knows? The ACCC might have an issue with the acquisition, which might create some uncertainty in the share price. But overall, we do think it'll go ahead. And once it does go ahead, I think the market will then finally see how good this business is.
I think we'll do very well.
Thanks, Oscar. Another stock question. Kirsten has asked for your view on Metcash, please.
One for John and Matt in the WAM Leaders portfolio. We haven't invested in, from our perspective, for a while. Why would that be the case? It would be because their hardware business was a bit of a COVID beneficiary, like a number of sectors were, and was doing incredibly well. And we thought that would come off at some point. Obviously, their grocery business or the core business, you know, it's in a very competitive market where Woolworths and Coles dominate. But in the end, I think it's fair to say we're probably wrong on the hardware business. And it does look like the acquisition they did recently looks quite good. So look, we don't own it in the portfolio. Like, we tend to look at the retailers, like a Harvey Norman or a Super Retail as an example. But I do know that Matt and John own it.
They quite like it. Pays a good dividend. It's quite cheap valuation as well.
Thanks, Oscar. I'll just mention that Matt and John will be hosting a webinar next Tuesday at 3:00 P.M. They could dive further into it. The next one is from Tony. Tobias, you were in the AFR commenting on this one a little while ago. "What is driving Appen? And any thoughts on Audinate, please?
What's happening? Sorry.
It's actually . It's a question. It's a really good question. We're actually asking ourselves today.
It's in trading halt, isn't it?
Yeah. The last one we checked when we came in was Imports and Trading. So I don't know what sort of announcement that's occurred since then. They had a new management team, a new CEO that's, you know, the old CEO left. And I think the last update they provided was positive in terms of, you know, giving the market a little bit more visibility that the, you know, they lost a very large client. That, you know, that's what appears to be a one-off case. So potentially, some of that and, you know, obviously, it was sold down very heavily. So potentially, some reversion of that. So I'll have to go back to their scaffolders and just check to see whether there's been any announcements on Appen since.
In terms of Audinate, look, it's one where I'll say it's a big mistake not investing in Audinate over the last couple of years. We had a couple of chances. We didn't quite get, I don't know what it was, one time. We didn't quite get enough position. I didn't quite get enough conviction. They have a very good IP in terms of the core products. And the business has done incredibly well. So it's one with which I've got wrong, personally, that's done really well.
Perfect. Thanks. Peter has asked, "Do you lend shares to short sellers? And if you do, why?
The answer is no. We agree.
[crosstalk] We don't know why anyone would do that, to be fair.
They do.
Perfect. Thank you. "Tony reckons gold is looking good. Do you own any gold at the moment?
Gold probably is looking good, like, given the macroeconomic environment. So we do. We own two names. And they came actually from the Euroz, oh, sorry. One of them came from the Euroz acquisition, which was Emerald Resources. So it's been a cracker, actually. I think that's probably up 150%-200% since we inherited that portfolio. And was it April 2022? And that business is run by ex-Regis Resources CEO. Morgan Hart is fantastic. He's a good fellow. And he's delivered everything he said he would do. They own two mines in Cambodia. And Cambodia is actually quite a, you know, quite a friendly jurisdiction in terms of mining. And they're the largest operator there. And they've actually, what's more interesting, the catalyst, actually, to buy it was they bought a tenement in Australia called Bullseye.
By developing that mine, that will increase the Australian exposure within Emerald, which should hopefully drive a rerating of the share price. So that's been done incredibly well for us over time. It's a small position, though. We have reduced it over the last couple of years. It's sitting at about 0.5% in the portfolio. And the other company that we own is Bellevue Gold , which we took in a placement, I think, around this time last year, I think, I think, and have traded the stock quite well over the journey. It's in a key risk period right now because the processing mill is fully operational. These guys have quite high-grade gold. And I think there's a big debate in the market at the moment as to whether it's sustainable or not. We think it is.
We do think that they can get through this period, start operating at their full run rate. And when that happens, as we've seen with Emerald, is you can see quite a large rerating of the share price as the company starts going into various gold indices globally. So yeah, we like those two. On the mining services side of the gold exposures, normally, we do own Imdex and ALS Limited. But we don't at the moment for various reasons. Trying to think of any other oh, and Codan, obviously. Codan, which we own quite a lot of, is their gold. About 40% of that business is in gold metal detectors. And, you know, that's been a fabulous business for these guys. And then they had a very good result. So that's probably to be fair, that's probably our biggest gold exposure in the portfolio.
Thanks, Oscar. Next question from Joseph. "Would WAX and Microcap ever merge?
That's an interesting question. I've never had that one before. I'd say no. They definitely no, they wouldn't because effectively, you'd be disadvantaging Microcap shareholders because, you know, our size would get so big. And the whole point of the WAM Microcap portfolio was to stay relatively nimble. You'd be more than doubling the size if you added WAM Research. From a WAM Microcap perspective as well, you would be diluting your profit reserve. Microcap has a profit reserve of AUD 0.50. Research, I think, is about 35%-40%. So, you know, there's a lower profit reserve in WAM Research. So you're disadvantaging your Microcap shareholders there. And also, if you're a Microcap shareholder, you want to be investing less than AUD 300 million in less than AUD 300 million companies, whereas WAM Research, obviously, is the whole market. So I'd say no. Never say never, as Geoff would say.
But, you know, the question I do get asked is whether capital and research would merge or, in fact, would active research and capital all merge at some point. And look, again, it is possible. But each fund has, you know, some funds are trading at a premium, some are a net tangible asset. In Active's case, there are a slight discount. You know, there's different levels of profit reserves. So you don't want to be disadvantaging, you know, each of the shareholders that like the specific strategies by merging into one. So yeah, there's my long-winded answer to that question.
Thanks, Oscar. "Alex has said, 'What assurances are you able to offer investors in WAM that have ridden the share price downfall so far?'
Obviously, I can't give you any assurances. But all I can say is it's been, you know, we've come out of a very challenging period. Like, yeah, 2022 financial year was extremely hard. You know, and it's hard to explain this because, you know, we were sitting in it. Like, but that February 2022 reporting season, like, we had a great reporting season. And, you know, we'd get upgrades of earnings. Shares would go up 5%. And two days later, they're down 20%. Like, that's what we were fighting against when the war in Ukraine occurred and interest rates started going up, right? The 2023 financial year, for us to outperform, which I said before in my presentation, there was a I think it was a 7% headwind in terms of large-cap stocks outperforming small-cap stocks. And we still outperformed by just over 3%.
For me, that was in terms of the team, that was an amazing achievement. If you told me that at the start of the financial year, I would have said no chance. We feel like we've cycled through the tough times. The start to this financial year was still tough, very tough. We were doing well at that point in time, still outperforming. We finally had the call it the macro event that we've been searching for was just, as I said before, rates hopefully flattening out. Whooshka. We've seen the portfolio do well. We've seen small-caps do well. Look, I can't obviously give you assurances. Put it this way, the macro environment right now, as it stands, is a million times better than what it was two years ago. Is that fair?
Like, so much better in terms of our process and how we look at stocks.
Thanks, Oscar. The next one is from John. We know you can't give advice. He's interested in which fund would return the most on capital gain.
Okay. Well, how about I say this? So the fund that should with the highest you would expect the highest risk profile to return the highest capital gain over the longer term, which would be WAM Microcap. Yep, yep. That'd be fair. But obviously, if you look at a total shareholder return perspective, Microcap's, you know, 7% dividend yield, I think, on the share price. I think WAM is sort of 9% or 10%. So if markets sort of just stayed the same way they are now, maybe on a total shareholder return, WAM might be better. But I'd say, you know, looking at sort of an economic textbook, finance textbook, you'd say Microcap should be the one that should do the best but will also do the worst, if that makes sense.
It's got the highest volatility because it's in, as I've discussed before, we're in very speculative stocks there. You know, if we get something wrong, we get it really wrong. At least if it's something we get wrong in WAM Capital, we can get out of it. If we get something really wrong in WAM Microcap, we can't get out. So that's the risk you take. But over the longer term, that should return the best.
Thanks, Oscar. "Trevor's interested in your take on Sandfire Resources for the long term.
Geez, a copper stock. That's tough, isn't it? No, we don't own Sandfire. But look, longer term, I mean, you would expect this company look, there's no OZ Minerals has left the ASX. There's no pure-play copper companies on the ASX. Good management team. Look, clearly, we don't own it at the moment. But, you know, there's no pure-plays in copper. It's part of the energy transition. So you would expect if the guys do a good job, hit production targets, they should do well. And you would always expect them, given OZ Minerals got taken out at such a high valuation, that potentially, it's a takeover target at some point.
Thanks, Oscar. "Ian, next. Would you consider Silex Systems as an opportunity?
Always consider stocks like that as an opportunity. Will and our team saw them recently, actually, quite liked it. It's not a company, I'd say, is in our wheelhouse. It's very, you know, it's obviously leveraged to uranium. It's a sort of tech company sort of. So it's sort of hard to know whether.
Yeah. We like – in our – I think our bread and butter is we like easy-to-understand, correct businesses. And it sort of helps, which is one of the reasons why we typically haven't had a huge exposure in biotechs because they're sort of binary. And so for us, you know, what can we add the most value to the portfolio, to our shareholders, is to finding businesses that we can really understand and investing in those. And hopefully, the margin of safety for us is a bit higher in those type of businesses. So we try to pick the best ones. And obviously, there's opportunity cost. So if we invest 1% in a company, then it stops us from investing 1% in another company that we like more or have more confidence. So we're always thinking about opportunity cost and how best to allocate the capital.
Thanks, Tobias. "Mark has said there was takeover speculation around Generation Development Group in the media a few months ago. Would a takeover be the endgame for them?
Well, endgame, yeah, if someone wants to pay a big premium for the shares, yeah. Well, it could be the endgame. But then, you know, given we're quite a big shareholder there, we'd want a pretty nice premium to the share price. But the article was largely referring to their investment in Lonsec. They own 49%, I think it is, of Lonsec. Lonsec is a ratings house. So it provides investment recommendations on various funds. But it has its own managed portfolio. And that managed portfolio has grown incredibly well. Like, it's currently, I think what is it at? I think it's AUD 12 billion, I think? And it's come from nothing in the space of, like, a few years. And so that part of Generation GDG has actually outperformed expectations massively.
Now, if that was listed by itself, we actually think it would basically be the current valuation of GDG at the moment. That's how we think the market would value it. Now, we didn't actually invest in GDG for that reason. We invested in it for its investment bond business, which is going to be a huge beneficiary of the changes in superannuation that's occurring in terms of restricting amounts over AUD 3 million. To put that in context, I think there's around AUD 200 billion that's over that AUD 3 million threshold. So if GDG was to get 1% of that, it would double that business. So that's why we're very positive on the business. It's got a great management team, great board. We've been there for a while. But if you have a look at the share price, we feel like it's finally breaking out.
Yeah, we see quite strong upside. We think it's very similar to Pinnacle was in the early days back in 2016 and 2017.
Thanks, Oscar. "From Graham, not sure if you know this one, but will you be looking at the IPO for Aegros later this year?
Sorry, I missed that. What, IPO for?
It's spelled A-E-G-R-O-S, the company.
Haven't heard it. Haven't seen it come through. Sorry, Graham.
Next would be Tony. I think we've had this on a previous call. Again, no financial advice. But out of all the WAM products, which ones would be the best investment in the next 12-18 months?
Well, okay, okay. All right. I'll give you this one. This is not advice. But this is my view.
Can I say that? I can say that, can I?
Can you?
I don't know. Can I? I don't know.
Well, I think well, look, okay, put it this way. If Geoff was here, what would he say? He'd say WAM Active because we're trading at a discount. So it's net tangible assets. And if you look at the we had a great year last year. We're having a great year this year. So we would like to think, hopefully, that NTA gap will close.
Great. Thank you. Do you have a view on Strike Energy ticker STX? That is from Dean.
Not particularly at the moment. Sorry, Dean. We have owned it occasionally in the Microcap portfolio. I think their hits on their drilling hasn't been as good as the market has expected. However, given where it's located, it's very strategic in between Beach and Mineral Resources with AWE. You would expect it to be acquired at some point. So yeah, I'd say not one for us. But don't be surprised if it got acquired one day.
Thank you, Oscar. Interesting. The next one is from Geoff Wilson. But it's a different email. So it's not our Geoff Wilson, who's asked, "What catalyst do you think NextEd needs to drive recovery? And how do you rate the chance of that happening?
Oh, I think, thanks, Geoff. Well, yeah, it's what we call it dead. Like, I think, look, it's no man's land for a period of time. The catalyst, like what we always see with the government when they make rash decisions like they have, we saw in aged care, you know, coming out of the Royal Commission. And then they've done a 180. And now it's all positive in the space because they realize they're killing providers. You know, I think there's going to be a huge amount of fallout from their decision around immigration because effectively, a lot of these colleges, you know, scaled up over 2021, 2022. They got massively hit in COVID, right? Then the government comes out, "Oh, we're all pro-immigration, everything like that." And all these guys scale up to take in all these students. And then a year later, they go, "Oh, sorry.
No, we're cutting in half." So I think you'd need pain and blood on the streets from a lot of the private providers. And then for the government to realize that, "Guys, we've probably gone too far here." Now, that's the catalyst. Now, are we there yet? No. I think it's going to be not when the trajectory, you know, the government can see that we're getting back to those pre-COVID immigration levels. And you need noise in the press from, you know, this college that was doing the right thing falling over, going bankrupt, and, you know, all this sort of stuff. And then they realize, "We've probably gone too far. And we actually need international students." It's good, you know, obviously, for tax purposes and education and whatnot and jobs and everything like that.
And you probably need the unemployment rate to start going up as well, which we're probably a long way off. So, you know, I'd love to paint a more bullish picture for you. But I can't at this juncture. So I honestly think you can't be looking for a catalyst in the next 12 months. We do think. Don't get me wrong. Over the longer-term view, we think the business is massively under-earning. They've done all they can. Balance sheet's fine. They've done all they can. We've just got to wait. So unfortunately, I think it will probably take longer than a year for that to occur.
Thanks, Oscar. Next up, Chris. "Oscar, Tobias, what is your view on healthcare equipment stocks?
Do you want to know?
Yep. So a stock you're probably referring to the likes of something like Nanosonics during reporting season. We had a very small position. And that's one that didn't do as well. We're still trying to get our head around something like Nanosonics, for example. You know, the U.S., from what we can tell, is sort of back business as usual in terms of for most companies. But Nanosonics is having some issues, growing pains in the U.S., which has cast doubt on the longer-term trajectory of the business. I think it's fair to say we're still trying to make up our mind on companies like this. And so it's sort of a bit difficult for us. We just, you know, one of my colleagues or one of our colleagues is going to the U.S. for a trip.
You know, we all have overseas trips to do on-the-ground research and meeting a lot of these businesses. So happy to report back on the next webinar to see whether we've probably had sort of more insights on those.
Great. Thanks for that, Tobias. The next question you might want to comment on is another stock. "Do you have a view on Pacific Current Group, PAC?
Well, I think, like, if you asked me last week, I would have said that was a great way to play GQG, which is a, you know, they had a big shareholding in, you know, a really fast-growing fund manager that's listed as well in the ASX that's been doing well. But they sold their stake. Now, I assume we haven't seen them for a while. But given they've sold their stake, that probably is code for, "We're going to use that cash to make acquisitions." I think it would be fair to say. So yeah, maybe that's one we should probably have a look at. But it's always been very cheap. Our issue with the stock is and we had, like, I think it was 2017. We owned quite a lot of it. And the issue while we sold, it's just so complex.
A lot of funds, we didn't really understand that they owned shares in or had a stake in. I think fair enough. Liquidity was pretty tight in the stock as well. So I think, yeah, we might have done okay. Then a buyer came around. We thought, "Oh, you know, we'll take liquidity and sell out." But, you know, I think, yeah, I think you probably want to look at the balance sheet post this GQG sale, read between the lines. I assume they can't when we haven't we don't know this. But we'd assume they're probably looking for acquisitions now.
I think a lot of investors--
Or maybe to capital management, potentially.
I think a lot of investors invest in fund managers, some of the larger ones, just for market exposure. Of course, it's a big or because it's a big index weighting. You know, for us, we're index unaware. You know, for market exposure, we would invest in the underlying businesses. We don't have the same impetus to sort of invest in some of these fund managers.
Thank you. And then next one is Chris looking for your opinion on Link Market , please.
It's under takeover. If it wasn't under takeover, I think we would have said it was actually turning around. But it had high debt levels. So I would have said, "I reckon that was why yeah, it was doing an okay job on costs. But the debt levels were about 3x , weren't they?" So we would have probably said, "No, we don't own it at the moment. But it got taken over in December, like quite a number of other companies." So it's another company that's leaving the ASX.
Thank you. And then Marion has said, "Do you or would you invest in companies such as Connexion Mobility, which have market caps of AUD 23 million? And why wouldn't you?
So the answer is yes, of course, we would. But to put this into context, so the Microcap portfolio is where that would fit. I think the Microcap portfolio is AUD 280 million, something like that in size. You know, that company, you said, I think was AUD 23 million. So to make a difference in our portfolio, we'd need to own 15% of the company, right? So, you know, if we're making a bet like that, we would have to be extremely bullish on the company. And, you know, I think the closest example I can think of of something when we did that was when Noni B acquired the Specialty Fashion Group and was left with City Chic back in 2017. We took, I think it was about 12% of the company.
It might have been a market cap of AUD 40 million or something like that at the time. So look, a long way to answer your question again. But yeah, we'd have to be extremely bullish, extremely positive on the company to do that, to do that. Because the problem is if you're buying into a company that size, if you're buying a big stake like that, you're not getting out of the company.
Thanks, Oscar. Next one, Chris is looking for your view on the future of Cogstate?
It's a frustrating stock, this one.
Yeah. I think we've had a few cracks at Cogstate. And then I think the longer-term story makes sense in terms of how, you know, they're sort of exposed to biotech or pharmaceutical companies needing to do research around Alzheimer's. However, I think probably over the last 12-18 months, we just probably found better ideas that had more near-term catalyst, which is more sticking with how we invest. And so we've gravitated towards ones where, I guess, it's probably a little bit more binary in nature. So it's one where we sort of keep an eye out on. But, you know, we're seeing a lot of ideas in both the smaller market cap space that, you know, that's within our, I guess, circle of confidence and, you know, ones that we like and more liquid.
You know, we think give us sort of 10 years of growth, for example. We're looking more for those ideas. It's one that we have followed. It's not one we have in the portfolio now.
Thanks, Tobias. This is more of a question for the board. It's from Joseph. "Do you think there'll be a rights issue soon to build up your firepower?
Great question. Definitely not in the larger small-cap funds like WAM Capital, Research, and Active. But yeah, I mean, look, it's a board decision. But clearly, as you can tell from our comments today, we're quite positive on the microcap space. We're seeing a lot of opportunities there. We think it's a very similar environment from when we raised money back in August 2020 in the microcap fund. So yeah, look, I mean, look, who knows what markets do over the coming months? But from my perspective and Tobias's perspective, yeah, we'd, you know, in the microcap portfolio, we'd love a little bit of extra cash because we're seeing a lot of opportunities.
Thank you. Then a bit of a buy-hold-sell kind of coming through, a couple of stocks for your thoughts. Kogan, Tyro, and EchoIQ , please.
You do EchoIQ ?
Yeah.
Do you know EchoIQ ?
No.
Sorry, we don't know EchoIQ . You do Tyro. I'll do.
Well, you can do both.
You tend to like the good ones. So I can do the bad ones. So I'll do Tyro.
I'll do Cogstate. So Cogstate is one where Oscar's told, you know, being really bullish on and, you know, being sort of more bearish. And he's been right. And this guy's the stock has done incredibly well in the business. And it's on the back of the profit growth for the business. So that's on Cogstate. So we are positive of the stock. And Oscar's picked the bottom on that one.
Thanks, Tobias. You get everything right, don't you?
I reckon.
Tyro, look, I mean, it's, again, a frustrating stock for us. We do own quite a bit of the company. We're about 6% of the company or so. You know, at the results, it was a funny one because we sort of saw the result. We're like, "Oh, this is good. It's going up." And then it went down 15%. So clearly, we were wrong. Look, the business is going through a bit of a transition. It had too much costs. New CSO did a really good job taking a lot of costs out. But they've got to grow the top line now. And that's what the market's focused on in that result. They didn't grow the top line. They actually downgraded the top line but then upgraded the profit. And we thought that's what the market would care about. But they didn't.
It was the top line as the stock fell. Again, it's net cash balance sheet. As we said, we like the management team. You know, we're hoping that the top line can start moving again this half and as we go into the next financial year. I think that the other thing with that payments industry, which we think is interesting, is they are takeover targets. You know, we would not be surprised one day if there was, you know, if there was a Square or someone who wanted to get into the Australian market. This, you know, buying Tyro, get pretty decent market share on day one. Yeah, been a frustrating stock. You know, we still like it. It's still decent holding.
Okay. Thank you. Next one, Chris is asking for PEXA Group. What's your view?
We've had PEXA for a while. I know our large-cap colleagues like PEXA. It's not one that we currently have in the portfolio. I think it's fair to say the registry business is, you know, coming back because obviously, the property market in Australia is probably doing better than what people are expecting. The interesting part and I guess the catalyst for PEXA over the next 12 months is what are they going to do with the growth business and what are they going to do in the U.K. Those were supposed to be the two growth drivers given the PEXA business itself. The registry business is pretty much like a monopoly here in Australia. So it's not one we currently have in the small-cap fund.
I know the large-cap guys like it because they think there's optionalities with the potentially, you know, shutting down, you know, the growth business if it doesn't do well, if it doesn't break even, or winning more contracts in the U.K.
All right. Thanks, Tobias. Stephen has asked Oscar, "Is a 60% franked dividend, in effect, a decrease in a dividend coming down from 100% franked AUD 0.0775 per share?
It's not a decrease in the actual dividend. It's more the franking, right, that you effectively can offset your tax with, right? So look, a lot of our shareholders, if you remember from, you know, back in when was it? 2019 with Bowen. And yeah, a lot of our shareholders get the cash refunds from the franking. Effectively, by going to 60% frank, you'll get a less, what we call it, a 40% lower franking coming back to you in that cash refund. I thought that was probably the easiest way to explain it. Now, is that permanent? No. As I said in my presentation, you know, the board made the call. We could have paid you 100% this dividend and hoped that the market could go up quite extensively over the next six months and have to sell out of a few stocks to generate those franking credits.
The board took the conservative approach doing 60%. There was some visibility on the next dividend of 60%. But again, like as we said, us cutting the franking like we have, you know, should have effectively been a, how does it say? Warning? Is that the right? Like--
We were on 10%.
Yeah, like it's a precursor. I think it's probably the right word. You know, in terms of where we were at with the dividend, the dividend could have well, it should have been cut. We could have been on this call apologizing for the dividend being cut by 50% or something. Now, the market saved us through December, January, February, effectively. So yeah, so look, yes, we obviously feel bad that the franking has been cut from 100%-60%. But the story could have been a lot more different, certainly, like as we went through the result and on this call today.
Thanks, Oscar. Tony's wondering, "Have you ever invested in ENN, Elanor Investors Group ?
Yep, a long time ago, I reckon, pre-COVID. It's a property sort of funds management business. I think at the time, they were trying to grow their effectively funds under management and taking advantage of some of the opportunities, you know, they saw in the market. It's not one we've followed. You know, it's not one we've followed very closely. I think at the time, it was paying out a very high dividend yield. So, you know, we were sort of getting paid to wait and sit there to wait for the, I guess, increase in the funds under management. But it's probably been a while since we've relooked at it.
All right. Thank you. Joseph says, "What's your view on AX1 and UNI in the mid-cap range for staples compared to your positive view on Nick Scali?
So we own Universal, UNI in the microcap portfolio. Really like it. You know, there was concerns going into that result that it was going to get hit hard because of its exposure to youth. But actually came flying through. And they're accelerating their rollout. So that's good valuation, good management. We quite like that one. Accent, I think that the issue we're not in Accent. We could be. Again, really good management team, founder-led business. So it ticks all the right boxes. I think with those guys, though, the core business is slowing. So that's the Athlete's Foot and Platypus and Hype. But they've got a very strong new business in Hoka in terms of the distribution rights there for Australia, which is doing incredibly well. So it's trying to work out when that sort of inflection point is with their earnings.
Again, yeah, I mean, we never rule it out. But we don't own it at the moment.
All right. Thank you. Let's do a quick buy-hold sell with these ones. There's four from Tony: NXL, EML, RDY, and CCX.
What was the first one? Nuix?
Nuix.
Nuix, probably a hold. We don't have it in the portfolio now. Effectively, we're finding more opportunities elsewhere in technology. EML, buy. We have it in both microcap and capital. The new management team has come in. You know, we believe has effectively got rid of the biggest problem that, you know, that's plagued the business for many years, which is the PFS business over in Europe. You know, the base business, what's remaining could potentially, you know, be, you know, a 5%-10% growing business over the coming years. What's the other one? CCX?
CCX, I think it's a hold. Look, it's been a shocker, obviously, the last couple of years. Was a good business. It's finally through that destocking period. The balance sheet's fine. So it's just got to find out where its true level of sort of the new base of sales are at. I still think there's a bit more uncertainty in the next six months. So it's probably 6-12 months away. What was the other one?
I think the other one's RDY.
Oh, Readytech .
Yeah, we don't have Readytech . But we have TechOne and TNE in the WAM Capital portfolio, which is, I guess, much larger.
We used to own Readytech . But our struggle with that one was there was always all this investment coming into the business that hit their EBITDA forecast. But as Warren Buffett will always say, what does he say? He says, "EBITDA is a crap term that's made up by investment bankers or something." And the profit, which is all that matters, would always miss. So we don't own the shares at the moment. If they fix that up, we probably would own it because they're trading on a very discounted valuation relative to TechOne.
Yep.
All right. Fantastic. Thank you.
Yeah, I think generally in the tech space, we're just looking for the ones that we believe will have the highest growth rates.
Okay. Cool. Thanks, Tobias. Next, looks like our final two for stocks: Square stock and BWP Trust.
BWP, unfortunately, I've got no view. The only thing I will say is REITs, we don't so real estate investment trusts, we don't do. We prefer the fund managers like a Homeco or the land lease guys like Ingenia. However, I will say they're probably all buys, I think, just in the if you've got a view that interest rates are flattening and then going down, they're big beneficiaries, REITs, because they've been a terrible sector in small caps for some time. So yeah, so I don't know anything about BWP Trust. So I'm sorry about that. So I don't know any of the specifics. But I do think that REITs or the trusts will go up over the next period.
Square would be a buy just in terms of how they've really optimized the cost base over the last two years. And they're really taking on what is a rather antiquated sort of banking sort of system in the U.S. And you know Afterpay, it's a small portion of the overall Square business with Cash App and the Square Terminals. And they've continued to win market share in the U.S. and winning share and upgrading. So it's a buy for us. And it's still quite a bit below the previous highs.
Thanks, guys. This is from Greg. "Why do you have to sell stock to obtain franking credits? Don't they accompany dividends that you receive? Or is it because your dividend income is low and the sale crystallizes a tax gain and you pay tax to access those franking credits?
Correct. So that last part of the question is right. But not the first half of the second point, if that makes sense. So you're right. So when you sell the shares and you make a profit, you pay tax. And that tax we pass on to you guys. That's the franking. So that effectively is around, I think it's about 60%-70% of the franking that we give out to our shareholders through our franked dividends. The remainder is generally the franked dividends we receive from the companies we invest in, right? So if we receive a fully franked dividend from a company, what's a company that we own that does fully franked dividends?
SG Fleet.
SG Fleet, good example. Yeah, so SG Fleet. We will then pass that on to our shareholders. Now, just remember what we invest in. We invest in small and microcap companies. A lot of these companies and the other thing is just think about over the last five or six years, the tech technology sector has increased in terms of its weighting in terms of our universe that we looked at. A lot of these companies don't pay dividends, right? So that impacts our ability to 30% of the dividends, let's call it, and all franking every year, right? So where you're in small-cap companies, a lot of them don't pay dividends. And we're not just going to invest in a company because it pays a dividend.
And that's to your first point of that first half of that question when you're saying I think you said, "Are we just selling shares to get the franking?" No, we definitely do not do that because that would hurt your return. We don't do that for the dividends. We don't do that for franking, never, because that would impact the return you're getting on the portfolio. If we were just selling everything just to fund a dividend or franking, it would have been detrimental to you. So we just purely look at the fundamentals of a stock. Does it fit our investment process? And we'll buy or sell the stock depending on the investment process. So yeah, happy. I think it was Greg, was it, that came that question?
Correct.
Happy to have a call later if maybe.
Thanks, Oscar. That is actually it for the questions. We've had a few comments saying, "Thank you for the open and informative session for answering everything." So we'll leave the Q&A there. And then I'll start a discussion.
Can I just there was those ones of the guys that emailed. You know, there were one of--
Yeah, they start.
Oh, okay, right. Okay, cool. I just wanted to make sure we got them all.
Yeah.
I think we did.
Yeah, printed. I think so.
Okay, sweet.
We'll call anyone who--
We haven't apologized. Sorry. We'll get back to you.
We had 97 today. But I'll let you call us.
Is that a record? Was that a record?
I've come back to you on that.
I reckon two hours is a record. I don't think we've done longer than this. Anyway, no, thank you very much for everyone dialing. I really appreciate it. It was a great turnout. Thanks for all your questions. And we're seeing you all in a few weeks for our roadshow. So yeah, please feel we'll be there before the actual formal presentation. So any questions you have, please fire away. So thank you very much for dialing in.
Thank you.