CEO and Managing Director Mark Freeman and Portfolio Manager Kieran Kennedy discuss the FY24 half year results of Mirrabooka Investments (ASX:MIR).
Geoff Driver: Welcome. My name is Geoff Driver, General Manager, Business Development and Investor Relations for Mirrabooka Investments Limited. I have with me today Mark Freeman, who’s the CEO and Manager Director of Mirrabooka Investments Limited, and also have Kieran Kennedy, who’s the Portfolio Manager for Mirrabooka Investments Limited.
We’re here to discuss today the result for the six months to 31 December 2023. So, Mark, I’ll throw over to you just to perhaps outline some of the key highlights of the result.
Mark Freeman: Thanks, Geoff. So, I’ll just make some general observations on that result, and then I’ll pass back to Kieran to give some observations on the portfolio and markets. So, the half-year profit was $4.6m, down from $5.7m in the prior corresponding period. While dividend income from investments increased, the large contribution from the trading portfolio and option activity in the prior corresponding period was not repeated this half-year. Interim dividend has been increased to 4 cents per share, up from 3.5 in the same period as last year, and they are fully franked dividends.
For the six-month period, Mirrabooka’s portfolio return, including the benefit of franking, was 10.7 per cent. The benchmark, which is the combined small ordinaries and mid-cap sector, increased 5.1 per cent over the same period. And if we actually reflect on the 12-month period, or the full year, the return from Mirrabooka including franking was 22.2 per cent. The benchmark, again, the combined small, mid-cap index, increased 8.6 per cent, including franking as well. So, some good, strong portfolio performance over both periods.
Geoff Driver: So, Kieran, Mark talked about the performance over the six-month period and also the very strong performance over the 12-month period. Can you outline some of the factors that drove those very strong increases?
Kieran Kennedy: Yeah, sure, Geoff. So, there’s two real key factors driving that significant outperformance, and the first one really relates to the year we had before. So, in that calendar year 2022, we had some significant underperformance in companies that we think are really well-placed for the long term, but just had a valuation correction in that year. Coming into 2023, we’ve seen the reverse of that. They’ve had very strong rebounds, and there’s a number of companies in this category. There’s some long-term holdings that we’ve had in the portfolio, great businesses like James Hardie (ASX:JHX), ARB (ASX:ARB), Reece (ASX:REH), the digital classifieds businesses Carsales (ASX:CAR), and RealEstate.com (ASX:REA). They all strongly recovered through the year, and because they’re large holdings in the portfolio, we really benefited quite well from that.
Also in that recovery category is some newer companies to the portfolio, some earlier-stage businesses that shareholders might not be as familiar with, but have also seen significant volatility in their share price fortunes over the last few years. So, in that category, we have Temple & Webster (ASX:TPW), the furniture and homewares online retail business. We have Chrysos (ASX:C79), which is a company we bought recently which does assaying of mineral samples. And we have Audinate (ASX:AD8), a digital and audio networking business, again had a very strong 2023.
The other key contributor has been two holdings that we bought within the last two years that, remarkably, both of them are up 400 per cent since when we bought them. So, incredible returns that are possible in this part of the market, not something you see all the time of course, but they’ve been really healthy for the portfolio. And as they get larger in the portfolio, we haven’t sold them materially. So, their continued appreciation has had bigger impacts on the portfolio performance. So, those two companies are IPD Group (ASX:IPG), which is an electrical distributor of products into the Australian market, and Gentrack (ASX:GTK), a software business that does billing and utilities and also airports sectors. And they’ve both been very strong performers for the portfolio.
Geoff Driver: Thanks, Kieran. Over the last six months, have you made any other or made some changes to the portfolio through that period?
Kieran Kennedy: Yeah. So, I guess, following on from what I was just saying, some of those larger holdings in the portfolio, so those mainstays of the portfolio, are now pretty well valued, and some of them quite fully valued. So, we make sure that we’re managing the risk for the portfolio and not resting on our laurels and thinking about future returns, again with a long-term lens. But, in doing that, we’ve just been trimming some of those positions, companies like RealEstate.com (ASX:REA), Reece (ASX:REH), Netwealth (ASX:NWL), where we just think the valuations are getting fuller and those position sizes were getting quite large.
And, in doing so, because we’ve actually performed so well in the portfolio, it’s been hard to find really good value in things that we already own. A number of them have, you know, returned very well in the 2023 year. So, we’ve been just searching out in the market, making sure we’re still sticking to quality companies, but finding those businesses we think have got better relative value for the long term. One of those areas we looked, we’ve been a bit early, we’ve been burnt a little bit to date in the resources space, buying some IGO (ASX:IGO), the large lithium business which has got the best asset in the lithium market in Greenbushes, a part ownership in that, and Lynas (ASX:LYC), the rare earths business, which we think has got a strategic asset base for its supply outside of China. We think there’s good prospects for those medium- to long-term, but again we bought them a bit early. So, we’ll now see this tough cycle through, and we think they’ll be good for the portfolio in the future cycles.
And then there’s been a couple of other smaller positions we’ve picked up. A little transport business called Lindsay Australia (ASX:LAU), which we followed for a long period of time. We think that’s got good prospects going forward. Telix Pharmaceuticals (ASX:TLX), they’ve done a fantastic job launching a prostate imaging product into the US market, which generates very significant revenue. We think they’ve got some great R&D they’re adding to that which could set them up very well for the future. So, they’re a couple of the things that we’ve been adding to the portfolio.
Geoff Driver: Okay, excellent. Thanks, Kieran. So, Mark, we’ve just spoken about the last six to 12 months. Any thoughts on the market in general in the next upcoming calendar year?
Mark Freeman: Kieran’s touched on the performance of some of our larger holdings, and we will tend to generally classify those as quality businesses. They are growth businesses, and they probably benefited from two things. Certainly, there’s been a view that interest rates have peaked and potentially are going to come off, and that tends to favour the valuation of quality companies, but also some of the profit results they produce during the year. And the AGM updates really highlighted why they are such big positions in the portfolio. These are companies that we think have great prospects to continue to grow their profit and earnings and therefore dividends over many years.
So, again, it’s usually profit updates, and we’re going into another period now where that tends to get reinforced. So, we’re still happy with big positions in those, but we are conscious they’ve run really hard, certainly over the last couple of months.
So, going forward, we’re more cautious on that area of the market. We still are not expecting any big changes in terms of the profit results, but the market has been expecting consumer to slow down as a result of the interest rate rises. It’s been pretty resilient so far, but we’ll probably proceed with some caution. But I’ll pass back to Kieran perhaps to make some observations about, when you actually dig into the market, what’s actually happening within the mid-sector and the small sector.
Kieran Kennedy: Yeah, that’s right, Mark. It’s a really interesting time to be an investor in both mid- and small-cap companies because, I guess, the outlook and the recent performance has been quite divergent. So, as Mark mentioned, in the quality mid-cap industrial companies, they’re really well-founded at the moment. They’re still great businesses, but they look quite fully valued. But if you go down to the small cap end of the market, there’s a number of small cap managers rightly pointing out the underperformance we’ve seen in that sector of the market versus the larger end of the Australian market. We see that as well. There’s been a real lack of liquidity. People have moved away from that area of the market.
So, we do think there’s some good opportunities there, but we also think you wouldn’t say that’s a widespread fortune across all those companies because you’ve got to be very selective. You know, as you go down into smaller companies, the risks are real, and if you get them wrong, the performance impacts can be real.
So, we’re out there just again looking for the best long-term value. We’re finding it in some areas of the market like real estate and resources, which we don’t typically invest a lot in, but also looking at those up-and-coming companies we think that the market hasn’t been looking at, where the liquidity’s been a bit lacking off late.
Geoff Driver: All right. Thanks, Mark, and thanks, Kieran, for your time today.
Kieran Kennedy: Thanks, Geoff.
Mark Freeman: Thanks.
Ends