CEO and Managing Director Mark Freeman and Portfolio Manager Brett McNeill discuss the FY24 half year results of Djerriwarrh Investments (ASX:DJW).
Geoff Driver: Welcome. My name’s Geoff Driver, General Manager, Business Development and Investor Relations for Djerriwarrh Investments. I have with me today Mark Freeman, the CEO and Managing Director of Djerriwarrh Investments, and Brett McNeill, the Portfolio Manager for Djerriwarrh Investments. We’re here today talk about the result for the six months to 31 December 2023. Mark, do you have any comments about the result?
Mark Freeman: Yeah, I’ll make some general observations about it and then pass over to Brett for comments on the portfolio.
So, the net operating result for the six months to 31 December, and this excludes the impact of unrealised open option positions, and therefore we think it’s a better measure of the company’s income from the investing activities, that was $21.9m, up from $21.3m in the corresponding period last year. The income from investments was $19.5m, up from $18.5m in the previous period, and the income from option activity was $9.4m, up from $8.4m in the previous period.
As a result, the interim dividend has been maintained at 7.25 cents per share, which is fully franked. And based on the interim dividend declared and the final dividend paid, the dividend yield on the current net asset backing represents an enhanced yield of 1.4 per cent higher than what you would get from being in the broader index. So, that’s achieving our objective of enhanced income. Also, the portfolio return for the six months when you include franking was 9.3, and if you compare that to the 200 index, it was up 8.3, so it’s outperformed in the total return basis over the six months.
If we also look at it on a 12-month or one-year basis for the year, the return was 17.6 for the portfolio including franking, and the return from the index was 14 per cent including franking. So, there’s some good strong outperformance also on the total return. So, the portfolio’s produced an enhanced yield and better total returns over the 12 months.
Geoff Driver: So Brett, Mark talked about the enhanced yield and also the strong portfolio performance. Do you just want to touch on the factors behind both the enhanced yield, and I guess that touches a little bit on how we use options and our option strategy, and also the performance of the portfolio. What really drove that strong performance over the six- and 12-month period?
Brett McNeill: Sure. The enhanced yield has a combination of dividend income and option income, and, pleasingly, both had a really good outcome for the six-month period, so both were up strongly. The dividend income, in particular, was driven by some increases we got from some of our big holdings, particularly in the banks, like Commonwealth Bank (ASX:CBA) and Westpac (ASX:WBC), but also higher dividend income because of our increased holdings in stocks like Macquarie Group (ASX:MQG), Telstra (ASX:TLS), and Woodside (ASX:WDS). So, the dividend income was positive.
On the option side, we positioned the options book quite well during the six-month period, and it paid off. So, a couple of points to mention in particular would be having high call-option coverage across the portfolio around September when the equity market was at a reasonably high point, and then with the market having experienced a sell-off in subsequent months, that paid off quite well. We were able to book a good amount of option income.
And then, what really worked for us was having low call-option coverage at the start of November before the market rallied into the end of the year. And that enabled us to book some good option income but particularly benefit from the capital gains that the market delivered. Hence, you saw, as Mark mentioned, good enhanced yield from option income and dividend, but also good portfolio performance through the total return.
Geoff Driver: Were there any particular stocks that drove that stronger portfolio performance through the period?
Brett McNeill: Yeah. The performance was quite broad-based, which is always pleasing, that it doesn’t just rely on one or two stocks or sectors. So, a couple of our longstanding large holdings in blue chip companies delivered some great performance for the period. In particular I’d single out Wesfarmers (ASX:WES), JB Hi-Fi (ASX:JBH), and CAR Group (ASX:CAR).
We also had a really good contribution from James Hardie (ASX:JHX), and then the banks delivered really well for us over the period, particularly given we’d added to our banks position in the first half of last calendar year with some big purchases of NAB (ASX:NAB) especially, but it was also the other major banks as well. So, quite broad-based, which was pleasing.
Geoff Driver: Thanks, Brett. And you touched a little bit on some of the adjustments you’ve made over the year. Anything particular over the last six months that sort of stands out in terms of adjustments that you did make through the portfolio? And I guess some of the sales actually do come from the exercise of call options as well over the period.
Brett McNeill: That’s right, yeah. The majority of the selling was from call option exercises from stocks whose share prices have performed extremely well. Some of those good performers, like Wesfarmers (ASX:WES), CAR Group (ASX:CAR), James Hardie (ASX:JHX) and JB Hi-Fi (ASX:JBH). Also got exercised a bit in the banks, like NAB (ASX:NAB) and Commonwealth (ASX:CBA) as well, and BHP (ASX:BHP). So, the proceeds from those option exercises we used to fund the main purchases that we made, and the biggest one for the period was Telstra (ASX:TLS).
So, we’ve had a position in Telstra (ASX:TLS) for a long period of time, but we were reluctant to build it up last year despite it being a good stock for Djerriwarrh. A good mix of income and growth, and it’s a market leader. We like the management team and the strategy. But we just struggled with the valuation. I mean, the share price was sort of up at $4.40 halfway through last year. It sold off in the second half of the year, and that’s when we started adding to the position. So, we’ve been a big buyer of Telstra (ASX:TLS) stock in the last six months, and it’s a much higher position now in Djerriwarrh. So, we think it, you know, gives the portfolio a really good combination of income and growth.
Geoff Driver: Thanks, Brett. So, we’ve just talked about the last six to 12 months period, Mark. Any thoughts about moving into this calendar year and what the market has in store for us?
Mark Freeman: Yeah. So, obviously, the market was pretty strong, particularly towards the end of that six-month period, and that really came about as markets globally were forming a view that interest rates had peaked. And, in fact, you started to get a view that interest rates were perhaps going to start to come off from here. That drove equity valuations, again globally, and it did favour what we call quality stocks, and we’re always biased towards quality companies, so the portfolio did very well in that period and, as a result, the markets had a really good run.
So, I guess we start the year a bit more cautious about market valuations. We’re certainly very comfortable with the stocks we’re holding. And we saw that with the profit results they produced back in August for the full year, and the AGM updates reinforced our view of what holding quality companies is all about — getting long-term growth in profits, and therefore earnings, and therefore dividends. But, as I said, the market’s had a good run, but the portfolio’s now positioned with some higher coverage. We’ve used that market strength to write more option premium, and so therefore we are very happy about the income prospects because of the option premium in the book. We go into this reporting season now, and interested to see how companies will go. We’re still comfortable with how our businesses will perform operationally, but, as I said, the market moves from here we’re more cautious on. But when you put that in the mix, we’ve got great companies, we’ve got a good option premium in the book, so we’re comfortable with the settings on the portfolio.
Geoff Driver: Excellent. All right, thanks Mark and Brett for your time today.
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