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Edited Transcript of CTN.AX earnings conference call or presentation 25-Jul-19 12:30am GMT

Q4 2019 NAOS Small Cap Opportunities Company Ltd Earnings Call

Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of NAOS Small Cap Opportunities Company Ltd earnings conference call or presentation Thursday, July 25, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Robert Miller

NAOS Emerging Opportunities Company Limited - Portfolio Manager

* Sebastian Evans

Naos Asset Management Limited - CIO

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Presentation

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Operator [1]

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Welcome to the investor conference call for NAOS listed investment companies. Your host is Sebastian Evans, Managing Director and Chief Investment Officer of NAOS Asset Management Limited. Please go ahead, Sebastian.

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Sebastian Evans, Naos Asset Management Limited - CIO [2]

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Right. Thank you very much. Thank you, everyone, for joining the call this morning. Just as -- I mean, if you found it hard to hear me or if there's any technical issues, just give the office a call, or send an e-mail and we can sort it out. This is obviously the quarterly presentation for the fourth quarter of financial year '19. So in essence, a little bit of a summary for FY '19. That'll obviously be covered off more -- in more detail at our road show, which is in September. The documents or the materials were launched on the ASX and also sent out through our e-mail list -- distribution list this morning. So if you can refer to that, that's what I'll be speaking to.

I'll jump straight to Slide -- I mean, Slide 2, obviously, the disclaimer. As I always say, I do refer to a number of stocks in this presentation, so obviously, do your own homework, and clearly don't rely on our comments.

On Slide 3. Just, NAOS Asset Management, really just more of a mission statement. This is a new slide, just for those -- there's quite a few people on this call some who don't know NAOS. Clearly, to provide you with a little bit of context, NAOS has been around, we first listed our first LIC in 2013 with 400 shareholders and just about $18 million of FUN. Today, we run 3 LICs with about $260 million and 8,000 shareholders. The 2 things that have never changed is that we have significant staff and directors have significant shareholdings in all of the LICs. I don't -- me and my staff don't trade personally or have funds in the LICs. And we're committed to an ESG philosophy in all of our investments. And most importantly, our focus is on the market's small- and mid-cap industrial stocks of the Australian Stock Market, and obviously, that excludes resources and other businesses that I'll get to.

On Slide 4, this is just really the NAOS investment beliefs. I've spoken to this a number of times. As most of you would now, we're very much -- we don't like to pigeonhole ourselves as value or growth investors. We look to businesses that represent value, that obviously, we expect them to grow over the longer term. It's very much a concentrated strategy, so 10 to 15 stocks per portfolio generally. We invest for the long term, so some investments have been in the funds for over 6 years now. As an LIC, we don't need to invest in liquid businesses. We tend to invest in businesses that represent value, even if they are illiquid. We don't follow the index. We only follow really or look at industrial-type businesses generally, so profitable business, businesses with revenue.

The ESG overlay I've mentioned and you can see there what we screen out, so what we can't invest in. And we tend to invest in a number of business that have a lot of management alignment, just like our own LIC. So we look to -- a lot of our investments you'll find are entrepreneurs that have started these businesses and listed them. And they clearly have a lot of skin in the game and very much tied to the share price and they have the same, I suppose, considerations as any ordinary shareholder.

On Slide 5, just to wrap up as far as the general information on NAOS. So we really breakdown our investment mandate into 2 parts. First and foremost, we seek to protect invested capital, while providing sustainable growing stream of fully franked dividends and just as importantly, growth above the benchmark over the long term. We then look to do this by investing in micro to small- to mid-cap companies with an industrial focus regardless of size and/or liquidity, that's what NAOS does. We're very much true to that label and we won't be deviating from that mandate anytime soon.

On Slide 6, we get a lot of questions about how the LICs are different. This is just a visual interpretation of how they are different. NCC very much a micro-cap LIC, so you can see on the bottom axis there, invest in businesses between $10 million to $150 million. NSC invest in businesses between $100 to $1 billion and NAC is really around, I don't know, it's $400 million to $6 billion mark, but they're all outside the top 50. We leave investing in the top 50 to yourselves or other fund managers.

Slide 7. This is a new slide, but I think really does highlight the struggles that we found in FY '19. Just importantly, we don't shy away from that. This is our portfolio performance for each of the LICs over the past 6 and a bit years. Now what I really wanted to highlight is, this is the first negative year we've had for both NCC and NAC, just as importantly for the NAC shareholders who I very much appreciate have not had the best experience to date. So I'm just reading some of the comment about my microphone.

You can see obviously for the past 6 years, we go through periods of extreme, obviously, outperformance and then I suppose more moderate performance, but clearly in FY '19, we went through a period where we struggled for a number of reasons that I'll go through. And I think what it really highlights is, it's really our investment strategy I would say and philosophy that has simply not been in vogue. Clearly, we've made some mistakes. We don't shy away from that. They're very much our strategy and philosophy is not -- it has not been a right philosophy and strategy to be investing in these type of markets as many of you would be aware of.

On Slide 8, this really just breaks down our performance over the long-term relative to our standard deviation. So you can see that in regard to NCC, our performance has been a bit over 11% per annum. Yet, even though we run a very concentrated portfolio, our volatility is lower than the market and it's significantly lower than the market in down months. So when the market is down, we tend not to be down anywhere near as much as the market. The same applies to NAC. The performance obviously has bettered in the market at a bit over 11%. But the standard deviation and downside deviations are very much comparable to the market.

So obviously as a fund manager, not only we're trying; to produce returns, we're trying to produce better risk-adjusted returns at the end of the day as well.

Moving on to the market commentary and there's a number of ways you can really cut all this information. I know a lot of other fund managers have been touching on it. So I really wanted to keep it quite simple. This table here looks at a number of high growth in technology stocks that really continue to outperform in FY '19. There were big performers in FY '18 and they continued, once again, to -- into FY '19, where I suppose many investors, including ourselves probably didn't expect it, a, to consider to continue at that rate.

So you can see the stocks that we mentioned are Afterpay, WiseTech, Appen, IDP Education. In some way, shape, or form, they would be considered technology stocks, but obviously there's a subsector of that Afterpay would be considered a fintech, I suppose. IDP Education is very much an education. Why -- whereby, me and (inaudible) are now very much technology stocks.

You can see there in regards to index point to the small ordinaries that added a 125 points to the index over FY '19. So to put that in context, that's about, off the top of my head, is about 5% -- 4% to 5% they added to the index movement over FY '19. So if you look out these movements or you assume they had a 0 return, the index would have returned negative 5.25%. So it shows you how poorly the rest of the market really did in respect of the return for FY '19.

More importantly, we get a lot of comment and I'll probably get a comment every month about why you don't invest in Afterpay. And there's a number of reasons why we haven't invested in Afterpay, but I think from a valuation perspective, if you look at it at this level, Afterpay is expected to earn $17 million at the EBITDA line before depreciation, amortization and tax. And If you look at the market cap and what the market is valuing in that business, you're applying a 380x multiple to that EBITDA level. If you then look at all of those businesses, you can see they're all at EBITDA multiples of greater than 30x. So it gives you an average of 110x EBITDA for all of those businesses.

I think obviously that's a very simplistic way to look at it because if you go to the next slide, people are willing to pay big multiples for businesses that are willing to grow. That doesn't make them bad businesses and I don't think we can close our eyes to these statistics and say well just because they have an expensive FY '19 multiple and we shouldn't invest in them because it comes down to the growth rate of these businesses.

And then to highlight this and to try and get this point across, if I made up a little table that really looks at an imaginary business. And it assumes that this business earned $100 this year. And then I say, all right, we'll far assume that business today is valued at 110x EBITDA as per the table previously and that gives you a share price obviously of $11. Obviously, there's a number of shares that I have divided that by.

So if I'm to say, well, if I believe that business can grow over the next 5 years, then obviously there's a growth rate that needs to be assumed for me just to maintain that share price. So the 2-ish assumptions are that we believe that multiple will reduce from 110 to 15 over the next 5 years. It's a fact that businesses, as they grow and as they mature, think BHP, think CBA, some of these big -- bigger industrial-type businesses multiple to reduce, because the mature businesses find it harder to grow as they get bigger and more cumbersome.

So we believe that 15x multiple is fair. That's above the market, but still fair. So to maintain an $11 share price over the next 5 years, that business we need to grow its earnings each year at 50% per annum for the next 5 years, just to maintain an $11 share price, in this case $11.39. That may well be possible, but we believe when you look at some of these businesses, there will be some businesses that can probably grow at that rates, but there will be others that will not be able to grow at that rate. And I think when you apply sensitivity analysis and say well, with that EBITDA growth, it only grows at 20x, the effect on the share price and considering the multiple will come down a lot because the growth rates aren't there and the market will be disappointed, you will lose an awful lot of your capital. It won't be 10% or 20%, it could be 70% to 80%. And we're simply not willing to take that risk for our investors and that's not how we invest, considering a lot these businesses in the markets they operate in, they move at a very rapid pace, at a pace that I would argue very few investors can understand in the depth that they really need to, to make these sort of investments at these levels.

On Slide 11, this is more -- I suppose it looks at more the NAC universe, that I was interesting nevertheless to show that in regards to the returns of the index of the ASX 300 industrials index, that includes the banks, Transurban and businesses like that, they were very few businesses that produced any returns. So what it's telling you is, for a fund manager or any investor for that matter to produce a significant return over the last year, you really had -- it really had to come down to stock selection and you had to have 2 or 3 businesses that outperform significantly.

You can see further to the right, they're the type of businesses that added more basis points to the index. They are the businesses that you really need to have. And for a fund manager, clearly, that was quite difficult and even more difficult. But the fact that many of these businesses are businesses that you wouldn't expect to outperform, that the way they did.

So in this market, with a lot of the businesses that have some relation to interest rates, so as interest rates have come down recently, rates are being one of the best performers in the markets over the past 12 months. A good growth infrastructure businesses like Transurban for example, even Telstra has been a significant outperformer. And it's not necessarily in relation to their business and how they're growing their earnings, it's more of a relative valuation of saying, well, I'm only getting 2% of the term deposit, so I can go and buy Transurban share and get a 3.5% yield, so I believe that's a better risk/return trade-off, so I'll go and buy a Transurban share. And then the next person doesn't push the share price up, again.

On Slide 12, we obviously put this in all our slides and it's really what NAOS does and what we look for in any business. But as a team, I always try to focus on -- I'll try to get the team to focus on just looking at a business that we can understand and focusing on what we can control. So we invest in businesses that have revenue and can drive margin growth, that got balance sheet flexibility, they're valued on today's earnings and not necessarily factoring any growth into the future. They've got proven management teams. They focus on a core competency that they do well and they understand well. And then, obviously, we're ESG aware as well. So obviously, we believe that plays into the business risk over the longer term, and creates much more of a sustainable business over the longer term.

So with that, I'm going to pass on to Portfolio Manager, Rob Miller to touch on some of the key events in NCC and also NSC and then I'll return to finish off the presentation.

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Robert Miller, NAOS Emerging Opportunities Company Limited - Portfolio Manager [3]

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Thanks very much, Sebastian. So just firstly I'll touch on NCC here and obviously, 2 key events within the portfolio that occurred during the fourth quarter of FY '19. Firstly, BTC Health, which is our medical supplies and distribution business made a pretty key acquisition in which they raised money, raised about $8 million and we participated in that raise. They bought an infusion pumps business out of another listed company, the stock code is AHZ on that business, through which they bought the business out of. What it kind of does for BTC is it gives them a key platform from which to grow their business in many different areas. And what we would say would be only accretive over the medium- to longer-term.

Firstly, it gives them a core sales team and base throughout Australia and New Zealand, which they can -- which in our opinion are slightly underutilized at the moment. They're only in about 20% of their target market, so we think there's upside within the existing market they operate within. Furthermore, we think that sales force has the ability to sell additional products on top of what they're already doing. So that cross-sell opportunity into the same customer base.

It's a very -- as I mentioned, it's a very much a building block for this business to, I guess, grow over the medium- to longer-term. What is also pleasing is this being directed buying on market subsequent to the event and the capital raising. So we're much aligned with Directors on this one.

Secondly, Wingara, which is our hay processing and meat processing business based out of Victoria. They released their full year FY '19 results. They run a March year-end, which is relatively typical of agricultural businesses. The key kind of points from those results were an EBITDA of circa $5 million for the year, which was significant growth on the previous year. What is really kind of pleasing for us is they've completed the Raywood's hay processing site. And this has pretty much all been funded through reinvesting cash flow that the business has generated from the other areas.

So we see now going into FY '20, they've got a clean year to be able to launch into this new Raywood facility, so I would expect further earnings growth there. 1 casing as well, which was probably the main catalyst late in the quarter for this business, has been the sale and leaseback of a property that they hold within their Austco [indiscernible] raising business. So they bought that business circa 2 years ago now for about $18-odd million, of which, $ 15-odd million was the actual value of the land. So that's been sold. And they've generated a profit on that. And the sale and leaseback is effectively a mechanism to pay down debt and also reinvest the capital and the excess cash back into the business in areas, which we believe would provide a higher return on equity over time.

Just coming to the NCC dividend profile here on this next page. I guess, the casing to point out here is that we are true to label in terms of being a market cap specialist within this portfolio. And as you can see, we see average market cap there. The share prices have appreciated since the end of June, now circa $1.05, $1.06 And I guess, the casing here -- when we first setup this LIC in 2013, one of the objectives was to pay a growing stream of dividends trying to the maximum extent possible. We've been able to deliver upon that today. And as you can see there we paid circa $0.40 of cumulative dividends and if you gross that up, it's about $0.56, so you compare that to a share price of $1.05, we're close to half way there in terms of what we've actually paid back to shareholders.

Coming on to NSC now. I might spend a little bit of time here taking about a new position that we've got in Experience Co. Experience Co., for those who haven't heard of it before is a -- it's a skydiving business that also has other tourism assets up in Queensland. This business is one we've known since at IPO, call it, probably 4 or 5 years ago now as a pure-play skydiving business. Since then, we've always kind of watched it, never really invested in. And since then the business in our opinion has gone astray making noncore acquisitions. And I think you've seen that reflected in where the current share price is.

So we're looking at this business now essentially fresh and we've met the management team and we've done quite a bit of work kind of looking at the industry check and backgrounding the Board and management team. The new CEO I believe starts on Monday. So I must stress it's a small position at this point in time. The new management team needs to put runs on the board for us to be comfortable but the pedigree they have, particularly the Chairman, who is the ex-CEO of Mantra and is the current Chairman of Tourism Australia and the new CEO coming into the job is the -- was the ex-CEO of Tourism Australia, so they've got a working relationship already, which we like.

The key reasons for the investment. Obviously, management is important. The business is lowly geared and we believe the risk/return profile at circa 5x EBITDA on consensus. We're not paying much for our potential upside versus the downside that probably has already occurred in our opinion in this business.

The core business here is skydiving assets. The rest for us is noncore to the large extent and we would be of the opinion that capital management initiatives may happen in time for the noncore assets. And the core assets being skydiving in both Australia and New Zealand. This business has circa 70% market share across both markets. It's a variable cost base on skydiving, which is good if the weather is obviously not up to scratch to be able to skydive. And the industry data suggest long-term consistent growth has occurred in the past for this, so it's a relatively stable growth business and you've pretty much got pricing power because by providing the best quality operations, you can charge a premium for that.

So we think if the company goes back to its core objectives there and then puts runs on the board, there's opportunities overseas to effectively consolidate what our cottage industry is, particularly inside the U.S., which is a very big skydiving market and is ripe for consolidation. And we feel that Experience Co. could do that over time.

Secondly, Big River, which is our building supplies and distribution business. This business is over 100 years old. It's obviously had a long track record of going through cycles and we've seen a bit of a cycle of life across the industry whereby, there's been pressure. However, coming back to Sebastian's earlier point about investing in businesses that can control what they can control, we believe Big River has done a good job with that despite that kind of macro headwinds, which we think will turn into tailwinds in due course.

We're big believers in the strategy of the management there, which is to build out a building distributions business. And the casing here in the quarter was 2 acquisitions they made in New Zealand. They raised money for this and paid circa $18 million. We participated in those raisings and now we have Big River, I should say, have an opportunity to sell into a new market, being New Zealand, and cross-sell products both out of New Zealand into their existing market and customer base in Australia, and vice versa back into New Zealand.

The key here as well circa 90% of the EBITDA now is in building supplies and distribution. And we believe the market is still very fragmented, despite bondings and net cash. And there is a very much a real opportunity for a third player within that market to grow and consolidate.

And just finally, before I hand back to Sebastian just on the NSC overview there. The share prices ticked up, which is pleasing from that kind of $0.56 level to where it is now. And it grows up the dividend profile from $0.09, it's about $0.13. And as you can see there, we switched to quarterly dividends about 3 quarters ago.

And with that, I'll hand back to Sebastian.

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Sebastian Evans, Naos Asset Management Limited - CIO [4]

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Thanks, Rob. I'll finish off now with NAC and then a couple of slides after that.

So in regards to NAC, the fourth quarter of '19, it was reasonably active as per the other 2 LICs. So the first point was we had -- we initiated or entered into a new position being AP Eagers. So for you -- for those of you that don't know, AP Eagers is a listed business and is the largest owner of car dealerships and also truck dealerships in Australia. Very much dominating in I suppose the Eastern Seaboard and they entered into an agreement to acquire another very large business that's dominant in Western Australia being Automotive Holdings Group. 2 very different businesses and the fact that AP Eagers to put in context, even against the very core backdrop for car sales over the last year, were still able to maintain their earnings profile, predominantly due to obviously efficiencies, but also truck sales held up reasonably well with a lot of the infrastructure spending going on.

And at AHG, they had a very, very poor year. It was an overgeared business. Also have the logistics business that's noncore, which will be sold. And then obviously, today some of you may have seen that the ACCC have let this deal go through, subject to some minor divestments. So for us, we believe the opportunity lies obviously not in the macro backdrop changing, but more importantly, the AP Eagers management team getting their hands on these assets and that we think there's a lot of synergy. So in regards to property, some of the rents they're paying, their buying power, just being smarter business operated. So we think there's a lot of earning upside in regards to the synergies that they can obviously get out of AHG.

And then the second part of that is how much earnings potential they can grow out of growing their direct finance business. So prior to a lot of the changes that have come through, post the Royal Commission, and some of the changes made in regard to getting finance for your car dealership. Obviously, that model has now changed significantly and that's hurt a lot of car dealerships that in AP Eagers' view, there's a significant opportunity for them to obviously do it well and offer a strong finance product and service offerings to their clients. And if they can build this up through their network and, say, get a reasonable level of penetration, say, 1/3, for example, of all cars sold is financed through AP Eagers, then there's a significant earnings uplift as well.

And importantly, and the most important thing for us is, that's a strong management team, great balance sheet and a lot of their own land and property. And we think that gives them a lot of flexibility to continue to grow in the future.

Secondly, People Infrastructure Group. It's been a real stellar performer for the NAC portfolio. They completed a $20 million equity raising and finalized 2 acquisitions. Obviously both within the health care staffing industry. And pleasingly, they also started the second half of '19 being stronger than first half of '19, which is pleasing considering that the first half of '19 was a stellar half.

We continue to like this business. Obviously it's run by an excellent management team. But most importantly, the dynamics and the thematics around health care, the NDIS scheme and aging population, there's going to be more requirements to find qualified staff who could fill the voids and the opportunities that come up from these large service providers. You need to be nimble. You need to have quality staff. And if you don't, obviously you won't get a repeat business. But if you do, you will get a lot of repeat business from very large operators in a market that is growing at a significant and very steady clip.

So that's why we think that's an excellent business in an industry and, I suppose, the thematic, it's actually very hard to get a pure exposure to it. It's not that easy to get an exposure to health care, the aging demographic.

Moving on to Slide 18. As per the other slides, this just touches on the overview. So you can see the share price was $0.825. I think today it's about $0.85 or $0.86. The businesses in NAC are much larger. They're around $400 million when you weigh them by their weight in the portfolio. It's not just a simple average. And you can see there's a dividend profile grown -- or has grown every year so far up until this year. Clearly we still got to declare our fourth quarter dividend yet. So we paid out a total of $0.21 of fully franked dividend, which is almost $0.30 when you gross it up over the last 5 years.

Slide 19 just looks at capital management initiatives that we've -- I suppose we talk about it at NAOS across all 3 of the LICs. And I think it's important to speak about considering the LIC market has gone through a lot of volatility and change over the past 6 months.

So obviously, firstly, the NAC buyback. We commenced a buyback in the fourth quarter of '19. You can see we've given you a chart there of how many shares we bought back. And as we said all along, this buyback was not here to be a buyback by name. It's more to be a buyback by action. And you can see that we've grown the number of shares that we bought back over each of the past 3 months. And we'll continue to do so as long as it represents the best use of shareholder capital in the sense that, obviously, we want to close the discount to NTA. But more importantly, if we can buy shares at a discount to NTA then that obviously increases our NTA higher as we cancel them. So we believe that's the best use of shareholders' capital.

NAC, the same applies there. Obviously it was more recent. It was only announced in the 30th of June, but people can say that's been reasonably active as well. In regards to NCC, we issued a 1 for 4 Bonus Option Issue, something that probably hasn't been done a whole lot in the LIC space. And I just want to make it clear, the reason why we did it, and I'm very open about this, is it's probably a few key points. The first thing, we believe there's a lot of inherent value in the NCC portfolio, in all our portfolios, but specifically NCC. So we believe it was a good time to obviously issue a small amount of options to our very loyal shareholder base, which provides them the upside, should the NTA increase over time.

Most importantly though, and I've said this since day dot, we would like to close this fund at a bit over $100 million. So we believe if we can perform over the next 2 years and get those options exercised then that fund will be over $100 million and we'll close the 20 external future capital raisings and just manage that pot of money because we believe that's all we can manage in that micro window of the market.

And then dividends. Importantly, I get a lot of feedback on dividends. Some people like them. Some people don't like them. Some people prefer buybacks. But I think we've found that it provides a level of sustainability and transparency for all of our shareholders. All of our dividends pay fully franked dividends to date. Obviously, we would like to grow that over time, assuming the performance is there, because we understand people do require a level of income. And at the same time, we do state that our dividend reinvestment plan buy shares on market. So we don't issue shares in a DRP if the shares are below NTA.

So in NAC, for example, you can see we bought back 2 million shares through the buyback. I think the DRP is bought back in equivalent amount as well. So you probably say we bought almost 4 million shares back between the dividend, or the DRP and the buyback.

Just moving onto the last slide. As some of you may or may not be aware, it's that time of the year again when we do our National Investor Roadshow. It's not till September, but obviously if you would like to register, you can send an e-mail to enquiries@naos and just state the city you'd like to attend and obviously the number of attendees. Otherwise, you would have received an e-mail, and I think there's an invitation on our website as well that you can click on and you can just register there. But as you can see, we'll be presenting in 6 of the major cities across Australia.

Before I get to questions, I've been e-mailed a couple of questions, so I'm going to just touch on those. Just give me a moment while I try and find them on my phone again.

The first one related to our investment universe. So the question was, as you kind of invest in resources as an example, A, how big is your investment universe and obviously what does that mean for your opportunity set? I suppose the question is, is it too small? And obviously, there's Afterpay and the other example was Zip Money. So good question. There's actually a slide on Page 24. So if you go to Slide 24, we updated these statistics recently.

So there's 2,568 businesses listed on the stock market. When you get rid of the ones in the top 50 or below $10 million, you remove over 1,100, there's 500 businesses that don't have any revenue. And there's 200 businesses in industries that we can't invest in, so coal mining, gambling, nuclear and uranium production and gas -- oil and gas production. And there's unfortunately another 400 that just have unsustainable debt levels, in our view. So it only leaves 296. We then go through our own investment criteria and then based on management culture, valuation and ESG factors, that leaves us 50 to 80.

In regards to APT and Zip Money, we actually also have a -- and it ties into ESG a little bit, but a bit of a blanket rule. Clearly we do invest in finance businesses, so we've got big holdings in COG, Consolidated Operations Group, which is the finance broking business; and in CGR, which is invoice financing, invoice discounting business.

The key difference between those businesses and Afterpay is, one, operates in under the, I suppose, office product retail clients. The other 2 that we invest in only operate in the SME space. We just believe the regulatory framework and the risk associated with giving retail people credit is just too significant. And then obviously Afterpay has been looked at before. Zip Money does the same thing. But in fairness, Zip Money probably has a more stringent license. They've actually got a credit license, whereby, Afterpay doesn't. But it's more of a blanket rule. We just steer clear of any financial business that operates in that retail space than giving credit to retail clients rightly -- or wrongly. But as you can see there, that gives you an idea of how big our universe is.

The second question was -- it was twofold. So one is obviously about value investing and, why do you think value investing has been under the pump for the past 12 months? And the second question was, A, why do you think -- look straight at a discount to NTA more recently and what can be done to change that. So a good question.

Value investing and why it's been under the, I suppose, the [car or the bus] over the past 12 months. I think when you look at value investing, I think people probably pigeonhole it too much. Value investors like us, we need to invest in businesses that are growing. I think the reason why value investing is being called out is because management investors are invested in businesses that are hypergrowth businesses that are growing at 100% to 300% of the revenue line and they're real outliers.

Value investors, the macro backdrop over the past 12 months have been very benign. So hedging of, say, any earnings growth, we haven't seen a lot of earnings growth. And you've seen multiples contract. That's the big thing that's caught us out. In our roadshow presentation I'll give you an idea of what businesses grew their earnings in our portfolio, so therefore, should equal a higher share price, but you haven't seen that. You've seen valuation multiples go from 16x to 12x. So we've lost 35% in what the market is willing to pay to some of our businesses, and we're not too sure why. And that's why just a level of uncertainty.

I would say in the small-cap space though, there's a very much a move towards, I would say, high-growth businesses. They're very much liquid businesses as well. We've seen 10 fund managers, off the top of my head, closed down in the past 6 months, with a lot of those being small-cap or large-cap value managers. There's a big push to ETFs. There's a big push to big liquid stocks regardless of valuation. I think that's made value investing very tough because there's been a big exodus out of that space. But as the NCC started 6.5 years ago, we were almost the only player in the space, and it provided us with a lot of opportunities. So we think we're going back to a similar playing field over the next 6 months.

In regards to LICs and discount to NTAs, yes, it has been a challenging market. But I'll highlight, we've seen NCC go from $0.88 to -- got to $1.10 yesterday in the space of 2 months. Why has that changed? I think there's a bit of certainly around our franking credits back on the table. So people feel safe that they're getting a fully franked dividend and they can gross it up as franking credits are worth a significant amount to certain investors. I think that's one thing.

The other thing is, as a LIC investor, I think dividends make a big difference. So sustainable dividend stream that's reasonably consistent is important. And the third point is you've got to be -- you've got to perform. So I think performance, dividends and transparency is the key to any LIC. And probably the fourth point is alignment. I think if you can mix all of those 4 points together, LICs can trade at a premium or at NTA.

And I use the analogy that, in theory, NCC is a micro-cap LIC. And the reason being -- it's somewhat of a small LIC. Some people would say it shouldn't trade at NTA. But it trades at a premium. And it's only 1 or 4 LICs to do that. And I think a lot of it comes down to the track record. It comes down to the dividend profile. And it comes down to the fact that directors own an awful lot of that stock as well. But I think there are some other LICs out there that don't do that. They're more of a poor second cousin compared to their managed funds, and they don't do a lot of marketing. And they're not that transparent with their marketing and information. Even if you have a bad year, I think it's very important to be on the front foot about why you've had a poor year, what you're doing about it and why you believe the performance can change over the longer term.

So they are the 2 questions I got by e-mail. So later, if there's any other questions, I'll be more than happy to answer them.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Thanks, Sebastian. Our first question is from [Brandon Harrington].

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Unidentified Analyst, [2]

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Just wanted to know, some of those more concentrated positions, are you guys sort of getting a bit more active and working collaboratively with the management board there?

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Sebastian Evans, Naos Asset Management Limited - CIO [3]

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Yes. Now that's a good question. Yes. I mean obviously it's a bit like our shareholders who puts -- give us their feedback and put pressure on us. And I think as management team -- especially when we're a very large shareholder, we tend to be a very large supportive shareholder, it's just something you could probably work out. But at the end of the day, boards and management teams need to understand that they're running a business for their shareholders.

So there's probably been 3 or 4 examples off the top of my head where we push hard for even basic changes in just marketing material. So transparency, figures, guidance, capital managements, things like that, dividends, even board makeup is a big one for us as well. Obviously we're not looking to go on forward with any particular business, but if we feel we can find someone that can add value and has a good proven track record, then we'll be more than happy to do that. But we're not here to be an activist. We're here to get an outcome that works for everyone and deliver a much bigger, better, more sustainable business and, therefore, hopefully a higher multiple and a much higher share price. So that's what we're trying to do with a few of our businesses.

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Unidentified Analyst, [4]

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Okay. No, I'm assuming you're finding they're fairly receptive?

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Sebastian Evans, Naos Asset Management Limited - CIO [5]

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Yes. Look, without a doubt, some have been very receptive, to be honest. And you've got to remember, running a -- in my view, running a listed business is hard work because a lot of people get very defensive and get very afraid. So therefore, they don't like to put out guidance. They don't like to market. They don't like to see shareholders especially when times are tough. But as I tell, a lot of these businesses probably -- and I do a lot of it, it can work the other way.

If you can show the market what you're doing and why and get some runs on the board, when you obviously you get more capital you can grow, it can go the other way. And some businesses, you look at Enero for example, who've done a magnificent job of doing that, I think there are some other ones around the corner that you'll probably see more recently. You'll see some significant changes that -- they might be subtle, but they will make a difference. And hopefully that delivers a good outcome for our shareholders.

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Operator [6]

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The next question is from [Damien Hunt].

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Unidentified Analyst, [7]

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Yes. I've read in a number of your monthly reports and MNF seems to feature quite prominently when we've had down days, would you -- or down months. Would you like to comment on, one, MNF? And then I'd also like a comment on your concentration in that stock when the owners have 35% of the stock as well.

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Sebastian Evans, Naos Asset Management Limited - CIO [8]

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Yes. A good question. So I deliberately left it out of this presentation, I think people get sick of me talking about that particular business, but as you've brought it up, I'm more than happy to talk about it. So MNF is the business that we've -- say we've followed for years. So 6 or 7 years, we had a good investment in NCC, we made a lot of money out of it and then we reentered into it's -- I can't remember now, be it a couple of years ago, when the share price fell back initially.

So we like the MNF business because we believe it's sort of -- it is misunderstood by the market. So for your sake, it provides managed services or voice services to a number of very large players that offers voice products. So I can give you an example, Uber for example. Your Uber driver calls you. They have provided a number that comes off the MNF network. Skype use MNF for certain services in Australia and other very notable players that are top, I don't know, top 30 or 40 in the U.S. as an example. Because if you think about it, they want to provide a voice offering but they don't have the infrastructure to do it. So they can go to Telstra , Telstra can't do it because they don't have the engineering capability and I suppose the network to do it. So they need someone like an MNF that has 200 engineers down in George Street in Sydney who can be nimble enough and work with these businesses to provide them with the software and capabilities that they need to offer their voice products in a timely manner, but most importantly, with a quality that stacks up so their customers don't get annoyed with them.

What that means with the MNF business is that I think you'll find when results come out, you'll see that 80% of their earnings now or gross profit, we believe, 70% to 80% will be recurring. So they get billed monthly, both from the numbers of services that are used, and that doesn't change. And if anything, it changes and it goes up because these businesses, you have Microsofts and even Googles, they're getting bigger.

What MNF's done a very poor job of doing is they probably complicated the business with some parts that are noncore. So they've got a retail mobile offering that would be a minuscule part of their business. It might be 2% of their earnings, but the market continues to focus on that, be it as a telco as opposed to a software business.

We think at the result, you'll see a presentation that'll be much simpler and people will understand what this business does and where the inherent value is. They provide a guidance to FY '19, they provide a guidance to next year as well. So you can see they've got a level of transparency that not many other businesses have. But what's cost us, too, like I said on the call, is the multiple. This business used to trade on 15x EBITDA. If you assume next year's guidance stacks up, then it's only trading on 8x. So the multiple is almost half, that's why it's in the share price down by almost half as well, I suppose.

In regards to the concentration, yes, it is a big holding for us. Yes, the shares are relative illiquid. But in the scheme of things, it's actually -- it's a $300 million business. So actually for us, it's actually quite big for what we invest in. And also from a risk perspective, we also think it's one of the lower-risk businesses in our portfolio because of its clients and its recurring nature.

So we think from a risk perspective, it is one of our lower-risk businesses, hence, why it is the largest position in one of our portfolios. And that's why we believe it's a very sound solid investment. But obviously, in hindsight, we clearly underestimated the multiple pullback that you would see in this business as they went through somewhat of a hiccup. But clearly a relatively large investment here and now they really need to show the investment community what's under the hood, how they can grow organically or continue to grow organically, and what that looks like.

I think a lot of people forget that this business only listed for $0.11 10 years ago or something and at one state got to $6. So we think that people in it can do a very good job out of it. They're very aligned and, hopefully, it will really come down to how they can get the story out there and then really show what this business does.

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Unidentified Analyst, [9]

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Okay. I've got a couple of other questions, if I may, on transparency. What I did was, I went through your various investments and then I look on the websites of the companies and I'm finding the ASX announcements at least the size of the NAOS investment. Why don't you...

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Sebastian Evans, Naos Asset Management Limited - CIO [10]

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You're not the only one.

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Unidentified Analyst, [11]

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Well, like your NTA -- just what I'm asking is why you don't publish those announcements on the NAOS newswire, on the...

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Sebastian Evans, Naos Asset Management Limited - CIO [12]

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The substantials?

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Unidentified Analyst, [13]

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Yes.

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Sebastian Evans, Naos Asset Management Limited - CIO [14]

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Yes...

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Unidentified Analyst, [15]

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Because for me as an investor, I was actually quite surprised to see the level of concentration. And I think that would be very helpful to your investors.

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Sebastian Evans, Naos Asset Management Limited - CIO [16]

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Yes. It's -- look, it's a hard one. We get a lot of feedback. So I was reading an NTA report from a, what I would consider a, peer of ours. I won't say who it is. And they put out an NTA report yesterday saying that going forward we're not going to release any of our holdings. We're actually not even going to talk about them because we think it's to the detriment of our shareholders and it removes our competitive advantage, right? And they are micro-cap fund manager.

With our material, yes, as you've said, clearly we talk about the stocks a lot so you can work it out. We don't give the weighting away. And the reason being is we do tell you how many holdings we've had. So we've got 10 holdings, you could work out -- the average would be 10 or some of them, there might be -- one will be -- might be 20 or one might be 5 or whatever it is. So we believe it's...

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Unidentified Analyst, [17]

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But it's publicly released information. You're just making it difficult to your own shareholders to find it.

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Sebastian Evans, Naos Asset Management Limited - CIO [18]

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Yes. I think we found a level playing field that probably works for everyone. We're always looking at ways to increase transparency and make people comfortable. But at the same time, this is something that we've done -- if you look at NCC, for example, this is the same we've done for NCC for 6.5 years. And we released their attribution. We released the number of shareholders and things like this. So we do release a lot more than some others. But when it comes to holdings and the weighting, that's something that we don't do.

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Unidentified Analyst, [19]

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Okay. I find it unsatisfactory because as I say, if it's publicly available information, why not make it available?

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Sebastian Evans, Naos Asset Management Limited - CIO [20]

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Fair enough. Fair enough. But it's not all public, unfortunately.

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Unidentified Analyst, [21]

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Well, what's been released on the ASX is public. So it's...

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Sebastian Evans, Naos Asset Management Limited - CIO [22]

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Yes, sure. But some of them, obviously answer to that...

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Unidentified Analyst, [23]

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It's difficult decision but in fact I could find that information now.

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Sebastian Evans, Naos Asset Management Limited - CIO [24]

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Yes. No, look I appreciate it. I'm more than happy for you to do it, but we won't be putting it in our report with weightings anytime soon.

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Unidentified Analyst, [25]

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I don't know. I don't expect a report. If you just release the announcement on -- under the ASX website for your company.

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Sebastian Evans, Naos Asset Management Limited - CIO [26]

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Oh, yes. I mean that -- we could set up a tab that's...

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Unidentified Analyst, [27]

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Because other LICs do it all the time. It's not a -- other LICs do this. So it is a transparency issue.

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Sebastian Evans, Naos Asset Management Limited - CIO [28]

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Yes. Look, to be honest, if you can show me another LIC that puts up their substantial notices for their holdings on their website, if you could send that through, I'd really appreciate it.

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Unidentified Analyst, [29]

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Well, WAM does it, for example.

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Sebastian Evans, Naos Asset Management Limited - CIO [30]

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Yes. No, look, if you could share that through I'd be -- I haven't seen it. Actually we look pretty hard for these things, so if you could share that, I'd appreciate it.

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Operator [31]

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Sebastian, we don't have any further questions in the queue.

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Sebastian Evans, Naos Asset Management Limited - CIO [32]

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Now as always, I get plenty of calls, plenty of e-mails from people who don't wish to ask on the conference call. So if you do want to chat with me or Rob or any other member of the investment team, please don't hesitate to give me a call. Shoot me an e-mail. No matter how big or small a shareholder you are, more than happy to talk to you about the portfolios and the structure going forward. But thanks for your time, and look forward to seeing some of you at the Investor Roadshow in September. Thanks, again.