Antares Ex-20 Australian Equities (PPL5308AU) Report & Performance

The portfolio returned 3.1% net of fees in July, behind the benchmark which returned 3.4% during the month. Markets were strong as a series of data points has led markets to believe that a soft landing can be achieved. It appears that the market is more convinced that inflation can be curbed without a significant increase in unemployment, allowing Australia to avoid a recession – resulting in a “risk on” trade. Our strongest contributor was Block (SQ2) which despite limited stock specific news rallied 21.4% as part of the risk-on trade and more positive sentiment on the resilience of the US consumer.

Seek (SEK) also benefited from a shift in thinking about the macroeconomic environment. The market has previously been concerned about SEK’s volumes if the unemployment rate were to increase.

Judo (JDO) shares increased after providing an update which showed that it had grown its loan book by 46% to $8.91 billion in FY23.

Aurizon (AZJ) shares finished the month weaker. Late in the month the company held an investor day where it provided FY23 EBITDA guidance towards the bottom end of its previous target range of $1.42-1.47bn due to the impact of wet weather, production issues and labour shortages. In addition, the company provided FY24 EBITDA guidance of $1.59-1.68bn. At the investor day, Aurizon announced bullish FY30 targets for its Bulk business and containerised freight strategy, which the market is not yet giving the company credit for as it is early days on execution.

Tabcorp (TAH) was softer in July as the market grew concerned about the potential for regulatory change. The Standing Committee on Social Policy and Legal Affairs handed down its findings and recommendations in the prior month. Amongst the recommendations are a total ban on all forms of gambling advertising and sponsorship, a ban on all inducements and the creation of a national online regulator. Whilst we are cognisant of this risk, we believe that Tabcorp is likely to be the exclusive winner of the Victorian wagering license which could provide a significant uplift to EBITDA in the near to medium term.

IGO Limited (IGO) provided a strong Q4 production and sales update. However, the company also gave FY24 production and capex guidance, of which the latter disappointed the market as it was significantly ahead of expectations.

June was a roller coaster month with volatility in the Australian market moving up in a material fashion. The standard market benchmark index, the S&P / ASX 200 oscillated between a peak of 7,350 and a low of 7,090 points. Our benchmark, which excludes the Top 20 companies, generated a return of 0.8%. Amidst such volatility it was pleasing, that the Fund delivered a net return of 1.3% which bettered our benchmark.

The tug of war between inflation curtailing policies of central banks and resilient global economies continues, although there were clear signs that the Chinese economy has not rebounded as many had hoped in the wake of the lifting of all COVID 19 restrictions.

Our best contributor for the month was Aurizon (AZJ) which benefitted from a realisation in the market that its Central Queensland Coal Network asset is a beneficiary of the higher inflationary environment. This led to several broker upgrades which took the stock higher as investors sought inflation havens.

Ventia Services (VNT) also contributed well. In June, VNT continued to win new business and extend its existing contracts. We have liked VNT for its contract risk management processes and its exposure to contracts in relatively economically insensitive areas, such as defence.

Finally, Paladin (PDN) performed well as its share price rebounded after being sold-down in late May driven by fears of partial government intervention in its key Namibian asset, Langer Heindrich. It also benefitted from more positive sentiment towards nuclear energy as a genuine option in the global quest to drive down emissions from energy production.

Detracting from performance was Seek (SEK). There was no news released by the company, and the shares drifted lower on concerns about the outlook for job volumes in Australia and New Zealand, given market fears of a looming and significant recession in Australia.

Australian shares fell in May as lower commodity prices, higher interest rates and weak consumer spending cautioned investors.The sharpest falls were in the consumer discretionary and staples sectors given signs of a retail recession for consumer spending. The combination of higher mortgage interest rates, rising rents and stubborn inflation pressures is squeezing purchasing power.

There was also notable weakness in the resource sector given lower coal and iron ore prices on China concerns. Financials also disappointed given the prospect of lower profit margins with higher deposit interest rates and more sedate credit demand. Echoing the US market and the surge of investment interest in anything remotely related to artificial intelligence (AI), the Australian Information Technology sector posted a double-digit gain for May. The strategy generated a net return of -1.6% for the month, compared with our benchmark decline of -1.4%. Sector allocation Our best contributor was Telix (TLX). TLX held its AGM in May at which the company noted its plans to build on the success of Illuccix, which is used in the detection of prostate cancer and also on the results from its Phase III ZIRCON study of TLX250-CDx in clear cell renal cell carcinoma.

Management reiterated their strategy and confirmed $100m in R&D investment for 2023. Tabcorp Holdings (TAH) held its investor day where it outlined its progress towards its FY25 targets. The company highlighted its ongoing investment in data analytics and its new brand marketing initiatives. Worley (WOR) reiterated guidance at its investor day and put forward targets for margin expansion and double-digit growth over the medium term.

The company also highlighted that its pivot to sustainability is gaining momentum. Of stocks held in the portfolio our biggest detractor was IDP Education (IEL). IEL shares were sold off sharply on news that the Canadian government was opening the English testing in the Student Direct Stream market to other providers.

April saw markets rally on relief around signs that banking issues which flared in March had been adequately quarantined by regulators and central banks. Despite this, it was not a “risk on” month, rather one which saw outperformance of more defensive stocks. The strategy generated a net return of 3.4% for the month, in line with our benchmark. Our best contributor was Telix Pharmaceuticals (TLX). Shares in TLX enjoyed a stellar month after reporting revenue of A$100m for the first quarter of 2023.

Consensus broker estimates of revenue for the full calendar year 2023 were A$360m and following the disclosure of first quarter numbers that consensus forecast was increased to A$470m, an upgrade of 30% which in turn drove the stock price up 35%. Our decision to exit Mineral Resources (MIN) earlier in the year was rewarded as the stock provided a disappointing March quarter update and materially underperformed the market as a result, helping our relative performance. Sector allocation Finally, Northern Star (NST) rallied as gold received a fresh bid on signs that the US economy may be weakening.

This led to a weaker US dollar, thereby benefitting gold prices. Our biggest detractor was Block Inc (SQ2) which fell on the release of some research from a short seller which alleged that many of the cash app accounts on the SQ2 platform were fraudulent or used for nefarious purposes. We have read the report and following additional disclosure from SQ2, as well as a number of discussions with US based analysts and benchmarking of payment issues as disclosed by major US banks such as Bank of America, we feel the research to be unfounded and have retained our position.

The portfolio outperformed in March, delivering a net return of 0.4% which compared to the benchmark return of -0.6%. March was dominated by the uncertainty caused by the US banking crisis and an ongoing focus on central bank action in response to inflation. REITS and financial services underperformed while materials and communication services outperformed.

Of stocks held in the fund, our best contributor in March was Ventia (VNT) which saw strong share price performance after delivering a CY22 result in late February that beat consensus expectations and prospectus guidance. The result highlighted the non-discretionary nature and predictability of revenue and a business that has managed costs well in an inflationary environment. The company also provided guidance for CY23 NPATA growth of 7-10%, underpinned by strong pipeline visibility and record work-in-hand. Major shareholders Apollo and CIMIC also sold down 93 million shares in March, representing 22% of the company’s issued capital which has improved liquidity in the stock.

Northern Star (NST) shares rallied during the month as the US banking crisis saw gold prices increase by 8%. The company provided an update on its Pogo Operation in Alaska where gold production was halted in order to repair damage to the ball mill motor that was discovered during routine repairs. While the disruption is expected to impact production by 20-40k oz in FY23, the company’s production guidance remains unchanged.

Cochlear (COH) continued to perform well in March, following a strong result in February which saw earnings guidance for FY23 maintained. The post COVID recovery in elective surgeries continues and earnings are also likely to benefit from the launch of the Nucleus 8 product. We also believe COH shares may have benefitted from investors positioning in higher quality, defensive stocks given the market uncertainty in March.

February saw markets cool after a strong January. The strength of the US economy is driving expectations of higher rates for longer which is creating increasingly negative sentiments in markets. The strategy generated a net return of -1.7% for the month, which, disappointingly, trailed that of our benchmark at -1.3%. We have historically performed well in reporting periods, this time however, we think the market had a very strong macro lens and has missed some interesting developments in key holdings. Our best contributor for February was Medibank Private (MPL).

We have maintained our view that the market over-reacted to the potential impact on customer retention after its cyber security incident. This was partially vindicated in its half year result as policy numbers stabilized and began to grow again in February, whilst claims inflation, a key aspect of our thesis, was lower than expected, which helped support the stock. Sector allocation Lottery Corporation (TLC) also enjoyed a strong month on the back of a result that beat expectations. Revenue growth was ahead of market and costs were well-managed leading to upgrades, taking the share price with it. Further, TLC benefitted from being seen as a “defensive growth” stock that could deliver in a choppy market.