For personal use only

Transcription

1 29 March 2017 The Manager ASX Market Announcements Australian Securities Exchange Exchange Centre Level 4, 20 Bridge Street SYDNEY NSW 2000 Investor Presentation Arowana Australasian Value Opportunities Fund Limited (AWQ) is pleased to provide the attached presentation update for investors, outlining the Fund s key investment themes and portfolio update information. On behalf of the Board of AWQ Tom Bloomfield Company Secretary AROWANA AUSTRALASIAN VALUE OPPORTUNITIES FUND LIMITED ABN Level 11, 153 Walker Street North Sydney NSW 2060 Tel: +61 (0) Fax: +61 (0) Level 11, 110 Mary Street, Brisbane QLD 4000 PO Box 15575, City East QLD 4002 Tel: +61 (0) Fax: +61 (0)

2 AROWANA AUSTRALASIAN VALUE OPPORTUNITIES FUND LIMITED ( AWQ ) Investor Presentation March 2017

3 DISCLAIMER The information contained in this Presentation or subsequently provided to the recipient whether orally or in writing by, or on behalf of Arowana Australasian Value Opportunities Fund Limited (AWQ) or any of its directors, officers, employees, agents, representatives and advisers (the Parties) is provided to the recipient on the terms and conditions set out in this notice. The information contained in this Presentation has been furnished by the Parties and other sources deemed reliable but no assurance can be given by the Parties as to the accuracy or completeness of this information. To the full extent permitted by law: (a) no representation or warranty (express or implied) is given; and (b) no responsibility or liability (including in negligence) is accepted, by the Parties as to the truth, accuracy or completeness of any statement, opinion, forecast, information or other matter (whether express or implied) contained in this Presentation or as to any other matter concerning them. To the full extent permitted by law, no responsibility or liability (including in negligence) is accepted by the Parties: (a) for or in connection with any act or omission, directly or indirectly in reliance upon; and (b) for any cost, expense, loss or other liability, directly or indirectly, arising from, or in connection with, any omission from or defects in, or any failure to correct any information, in this Presentation or any other communication (oral or written) about or concerning them. The delivery of this Presentation does not under any circumstances imply that the affairs or prospects of AWQ or any information have been fully or correctly stated in this Presentation or have not changed since the date at which the information is expressed to be applicable. Except as required by law and the ASX listing rules, no responsibility or liability (including in negligence) is assumed by the Parties for updating any such information or to inform the recipient of any new information of which the Parties may become aware. Notwithstanding the above, no condition, warranty or right is excluded if its exclusion would contravene the Competition and Consumer Act 2010 or any other applicable law or cause an exclusion to be void. The provision of this Presentation is not and should not be considered as a recommendation in relation to an investment in AWQ or that an investment in AWQ is a suitable investment for the recipient. The information in this presentation is general only, and has been prepared without taking into account your particular circumstances and needs. Before acting on any information from this presentation you should assess or seek advice on whether it is appropriate for your needs, financial situation and investment objectives. References to normalised information are to non-ifrs financial information. Non-IFRS financial information has not been subject to audit or review. 2

4 AWQ: DATA DRIVEN INVESTMENT PROCESS IDEA GENERATION Screening overlays of fundamental data Identification of market inefficiency or mispricing QUANTIFICATION Derivation of upside/downside Quantification through P&L and balance sheet SIZING & IMPLEMENTATION Risk asymmetry drives sizing Execution HYPOTHESIS TESTING Scientific approach; avoiding confirmation and other biases Testing nulls/counter factual PROPRIETARY DATA Identify areas of critical data Acquire key high frequency data MONITOR & EXIT Guard against thesis drift Update price target for new data; exit post PT MOSAIC BUILDING Build sector knowledge Global perspective Proprietary research FRAMING & RETESTING Refine hypothesis Explore nulls/opposite views Explore modifications ERROR ANALYSIS & LEARNING What key data was missed What framing error occurred Guard against recidivism NO VIEWS ONLY DATA! 3

5 THEMATIC: RENEWABLE ENERGY Cost advantage Fuel is Free. Renewables are a technology good Technology Relentless process driving improvement in efficiency & cost Increased Investment Now cheaper than fossil fuels without subsidies in many locations

6 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan IT S HAPPENING NOW DEMAND INFLEXION Silicon Solar Module Spot Price ($/Watt) 500, , , , , , , , ,000 50,000 Wind and Solar - Cumulative installed capacity (MW) - - Source: Bloomberg, AWQ Source: Bloomberg, AWQ Solar Wind 5

7 RENEWABLE ENERGY: CARBON S NEMESIS Australian Electricity Generation (GWh) 200,000 20, , ,000 Coal (LHS) 18,000 16, ,000 14, , ,000 80,000 Wind + Solar (RHS) 12,000 10,000 8,000 60,000 6,000 40,000 4,000 20,000 2,000-0 Source: Office of the Chief Economist 6

8 EXPOSURE TO RENEWABLES: INFIGEN ENERGY Opportunity was good company, bad balance sheet Very strong revenue and earnings growth Exceptionally strong cash generation Debt levels are falling rapidly, expanding equity value in the process Strong future growth in production Operating assets 100% Australian Cheap Infigen Energy overview Ticker IFN Price 1 A$0.99 Mkt cap 1 A$773m Enterprise Value 1 A$1,338m EV/EBITDA (FY17F) 2 9.1x FCFF yield (FY17F) % AWQ position size 1 11% 1. As at 28 February Based on available Bloomberg consensus forecast 7

9 INFIGEN CASH FLOW MACHINE IFN s free cashflow yield is very strong at ~11%, or ~2x the industry average Pre-tax FCFF yield (FY17) - IFN vs Comparables 12.00% 10.7% 10.00% 8.00% 8.6% 8.9% 6.00% Average 5.2% 6.5% 4.00% 2.00% 0.00% -0.3% Spark Infrastructure DUET Group AGL Energy Origin Energy Tilt Renewables Infigen Energy (2.00%) Source: Bloomberg & AWQ analysis 8

10 WHICH DRIVES INCREASING VALUE TO EQUITY OVER TIME Strong FCF is being used to pay down debt. Very accretive to equity $2.50 IFN Enterprise Value (A$/share) $2.00 $1.50 $1.00 $0.50 $ a 2016a 2017e 2018e 2019e 2020e Enterprise Value Equity Net Debt Source: Bloomberg & AWQ analysis 9

11 Mar-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Jan-17 Feb-17 INFIGEN ENERGY $1.40 IFN Share Price (AUD) $1.20 AWQ trims position $1.00 $0.80 AWQ initiates position $0.60 $0.40 $0.20 Source: Bloomberg; AWQ 10

12 THEME: FINANCIAL INCLUSION In the early 1980s, prior to financial deregulation, it was difficult to get a mortgage Post deregulation of Australia s financial sector, credit growth and bank profits boomed as large unmet demand was finally able to access financing capacity We have seen this movie play out many times: PayPal, Klarna, Visa, Mastercard, Indonesian banks, Australian banks Finance is a key enabler in allowing consumption to be shifted in time Whenever a clever business model is able to provide financial capacity to an underserved segment there is the potential for large profits provided the credit costs of doing so can be controlled 11

13 SILVER CHEF Silver Chef does what the banks typically avoid Uncollateralised leasing What do the banks think of this? 3 of the Big 4 have loan facilities with SIV Silver Chef has lower cost to serve as a result; significant barrier to entry Higher RoE through the cycle Silver Chef overview Ticker SIV Price 1 A$7.20 Mkt cap 1 A$266m P/E (FY18F) 2 7.6x RoE (FY17F) % Yield (FY17F) 3 6.6% AWQ position size 1 9.7% 1. As at 28 February Based on AWQ forecasts 3. Based on available Bloomberg consensus forecasts

14 Mar-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Jan-17 Feb-17 For personal use only SILVER CHEF: FEAR IS ALWAYS THE OPPORTUNITY Recent earnings pressure stems from the lower quality general equipment business GoGetta - driving a bad debt cycle Credit costs / NPL influx has peaked, provision coverage has never been stronger Short tenor leases...npl formation occurs quickly...bad news flushes out fast Earnings into 2H-2017 and 2018 are a coiled spring $13.00 $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 SIV Share Price (AUD) Source: Bloomberg

15 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 For personal use only Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 SILVER CHEF: A COILED SPRING 1H-2017 earnings were impacted by large credit related charges These charges were significantly in excess of write off levels and credit influx A$m Receivables provisioning: Strong Expensed Written off Resulting in significant buffering of provisions carried on the balance sheet 0.0 Meanwhile, book value continues to grow Source: Company disclosures; AWQ With no impairment to book value, there is significant downside margin of safety Because in 1H-17 the credit expense rate was well ahead of actual credit cost experience, 2H-17 and 2018 earnings will rebound...very sharply A$m PPE Impairment provisioning: Strong Expensed Written off Source: Company disclosures; AWQ 14

16 SILVER CHEF October 2016 GoGetta underwriting standards tightened materially leading to materially lower payment arrears As book mix tilts toward recent originations, credit quality will improve, leading to lower credit charges and better earnings By June 2017 >50% of GoGetta rental assets will have been originated after October 2016 Earnings risk will subside; stock should re-rate Stylised GoGetta Rental Asset Mix % 90.0 % 80.0 % 70.0 % 60.0 % 50.0 % 40.0 % 30.0 % 20.0 % 10.0 % - % Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Source: AWQ analysis Good book Bad book 15

17 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 SILVER CHEF: FUNDAMENTALS, NOT FEAR DRIVE OUR INVESTMENT DECISIONS $14.00 $12.00 SIV Share Price (AUD) AWQ sells 35% of position Sell 3.0x P/BV $10.00 $8.00 $6.00 Buy 1.7x P/BV $4.00 $2.00 AWQ doubles position size $0.00 Source: Bloomberg; AWQ 16

18 STOCK UPDATE: ELDERS SHARES ( COMMON ) In 2013 Elders was nearly a broken business 5 years of consecutive losses $1.3bn of accumulated losses from disastrous diversification Nearing final phase of three year recovery story Completion of Hybrid security restructure Paves the way for resumption of dividends Remains fundamentally cheap...iconic Australian brand Elders overview Ticker ELD Price 1 A$4.35 Mkt cap 1 A$495m P/E (FY17F) x RoE (FY17F) % Yield (FY17F) 2 2.4% AAVOF position size 1 6.1% 1. As at 28 February Based on available Bloomberg consensus forecasts

19 Mar-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Jan-17 Feb-17 STOCK UPDATE: ELDERS $5.00 ELD Share Price (AUD) $4.50 $4.00 AWQ initiates position $3.50 $3.00 $2.50 $2.00 $1.50 Source: Bloomberg; AWQ 18

20 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 EXTREMELY FAST GROWTH MAKES ONLINE RETAIL HIGHLY ATTRACTIVE TO MERCHANTS 1,200,000 1,000,000 US Quarterly Retail Sales ($m) 3% CAGR 120, , ,000 80, , ,000 22% CAGR 60,000 40, ,000 20, Source: US Census Bureau Offline (LHS) Online (RHS) 19

21 BUT AN UNFORTUNATE COROLLARY ARE RAPIDLY RISING FRAUD COSTS Australian payment fraud rates (cents per $1,000) Australian card fraud by type (A$m) % CAGR % CAGR Cards CNP Counterfeit / skim Lost / stolen Not received Other Source: Australian Payments Clearing Association 20

22 WHICH IN A TYPICAL 3 OR 4 PARTY CARD SYSTEM HITS MERCHANTS When a consumer disputes a transaction within card scheme rules: Issuing bank is required to claim the chargeback acquiring bank is obliged to process it to the Merchants account Disputing chargebacks is difficult and costly for merchants CNP (Card Not Present) fraud costs are effectively transferred to the merchant s account Chargeback cost can be a multiple of card interchange fees Card Issuing Bank Consumer Card Scheme Operator Acquiring Bank Merchant 21

23 AFTERPAY SOLVES THIS PROBLEM FOR MERCHANTS No chargebacks! Merchant paid by Afterpay within 48 hours Much closer relationship with customer than via 3 or 4 party card system Key to solution is unique credit approval engine Every transaction approved by tiered algorithm that mines an association data base Data quality improves as more transactions are processed Credit costs trend down Merchant Consumer 22

24 RETAIL FINANCIAL INNOVATION Remember Bankcard? Started in 1974 First mass market credit product introduced into Australia Within 18 months had > 1 million members By 1984 had 5 million members Afterpay is clearly not an identical analogue (more a retail than credit) However Afterpay has demonstrated a staggering rate of growth in unique customer numbers and GMV (gross merchandise value) Similar unique new product that facilitates a stimulation of sales for merchants and convenience for consumers Afterpay unique customers are now over 500,000 after IPO ing in May 2016 Augurs for very large total addressable market before product breadth is considered 23

25 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 WIN-WIN OUTCOME FOR USERS AND MERCHANTS Merchants sales increase dramatically 400,000 Customers and GMV (gross merchandise value annualized $000's) 450,000 Product has gone viral 350, , , ,000 Delivering Value Illustrative Results Average order Value Conversion Rate Total Online Sales +25% +22% +19% +20% +28% +17% +18% +22% +21% 250, , , ,000 50, , , , , ,000 50, % NOT DISCLOSED % +19% +31% Customers (LHS) GMV (AR), RHS 24

26 EXCEPTIONALLY HIGH RETURN MODEL Crucial to high commission rate is that merchants bear no chargebacks Afterpay charges more but saves the merchant money! Crucial to high gross margin is very low credit costs Business model generates exceptionally high product returns Excellent fixed cost leverage, business is at the point of profit inflexion High returns provide significant business model flexibility Gross commission on GMV 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Debit card Credit card Afterpay Net product margin 2.50% Cycles p.a x Unlevered product return 30.0 % Product RoE 54.0 % Assumes 50% leverage, 6% debt rate 25

27 AFTERPAY: UNICORN POTENTIAL IN AN ASX LISTED SMALL CAP Afterpay offers a unique online payment system Proven to materially increase merchants sales Proven to materially reduce merchants payment fraud costs Provides consumers faster and more secure purchase method Customer acquisition, merchant acquisition and GMV (Gross Merchandise Volume) growth rates are going viral Structural growth story...extremely large TAM (total addressable market) Secret sauce is the credit engine Business has significant positive operating leverage Earnings are at point of inflexion Afterpay overview Ticker Price 1 Mkt cap 1 AFY A$2.23 A$402m P/E (FY18F) x EV/EBITDA (FY18F) x Position Size 1 5.9% 1. As at 28 February Based on available Bloomberg consensus forecasts (ie not AWQ forecasts) 26

28 May-16 Jun-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 AFTERPAY $3.50 $3.00 $2.50 AFY Share Price (AUD) AWQ initiates position AWQ adds to position $2.00 $1.50 $1.00 $0.50 $0.00 Source: Bloomberg; AWQ 27

29 AWQ: OUR CORE OBJECTIVES Strong Performance 11% net return since Jan Sustainability Attractive Dividend 6.6% 3 High Payout Ratio 70%-100% payout ratio 2 1. As at 28 February 2017; net return after all fees and other costs and before providing for estimated tax on unrealised gains. Many LIC managers quote returns before fees which may grossly overstate returns over long periods of time 2. Policy of distributing 70%-100% of post tax income as dividends 3. Annualised yield based off 4 cents per share dividend for half year ending 30 June 2016, and 2 cents per share for half year 31 December 2016 and stock price of $0.91 as at 28 February

30 PORTFOLIO AT 28 FEBRUARY 2017 AAVOF Asset Allocation Asset class A$m %** Australian Equities % AUD cash and equivalent % USD cash and equivalent 4.1 6% Australian Hybrids & Bonds - 0% International Equities 1.2 2% Hedges (1.0) (2)% Top 5 Holdings Ticker %** IFN Infigen Energy 11% SIV Silver Chef Limited 10% USD USD ETF 6% ELD Elders Limited 6% AFY Afterpay Holdings 6% Top 5 as a % of gross portfolio 39% Portfolio value* % * Total may not sum due to rounding ** Percentage of gross portfolio value 29

31 AWQ: OUR PERFORMANCE (TO 28 FEBRUARY 2017) Average cash holding since inception 57%; below returns achieved on <50% of capital 25.00% 22.1 % 20.00% 17.0 % 16.3 % 15.00% 11.0 % 10.00% 5.00% 1.6 % 2.3 % 5.9 % 5.0 % 5.1 % 7.2 % 5.7 % 5.6 % 0.00% -5.00% (3.2)% (4.0)% (4.9)% % 1 month 3 months 6 months 12 months Since inception S&P/ASX200 Index S&P/ASX200 Accum. Index AWQ 1 1. Returns are post fees & company taxes and pre taxes on unrealized gains. Fund inception 5 January