Perpetual Wholesale Concentrated Equity (PER0102AU) Report & Performance

The Fund’s largest overweight positions include Insurance Australia Group Ltd, Orica Limited, and Santos Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, Macquarie Group Ltd (not held) and ANZ Group Holdings Limited.

The potfolio’s overweight to Costa Group contributed to performance over the month as the stock rose 21.7% during July following a bid from private equity. This certainly vindicated our view that there was substantial value in this agricultural name. We had noted that Paine Schwartz had been creeping up the register and that its attractive asset base made it a potential target for private equity. Costa is the leading producer in several categories including mushrooms, tomatoes and best-in-class genetics in the berries segment (especially blueberries). We had recently visited China where we believe Costa has substantial growth prospects, especially in the blueberry market where consumption per capita is a fraction of US and Australian levels and where its IP gave it superior product versus peers. The portfolio’s overweight to Orica contributed to performance over the month as the company rose 6.2% over the month. We have been bullish on the stock with the company trading at a significant discount to previous peaks. Our favourable view of the worlds biggest supplier of commercial explosives is driven by our analysis that they would be able to drive contract re-pricing to more than offset inflation. Indeed we saw this in May when the company reported a 31% increase in first revenue to $4 billion. Earnings rose 32% to $323 million, topping forecasts of a 25% lift. We also think that lower gas and ammonia costs are helping to improve margins. Orica is also looking to benefit from Digital Solutions through the acquisition of Axis Mining Technology and growth in the number of Electronic Blasting Systems (EBS) sold as miners look for productivity gains.

Iluka Resources fell -8% during July, although this comes after an exceptional rise in the share price over the past few years. Iluka is the worlds largest producer of rutile and zircon. These minerals generate the cashflow underpinning the bulk of the current valuation of the company. Iluka also owns a valuable stake in Deterra Royalties, which was spun-off in an IPO, as well as a substantial amount of cash. Iluka is also the recipient of a non-recourse loan of more than $1 billion from the federal government to develop a fully integrated rare earths refinery, making it one of only two outside of China. We believe that this will be the key driver of future value for the company in the decade ahead. Healius fell -9.8% in July as the market speculated that the bid by smaller rival ACL could be blocked by the ACCC. Healius’ assets have attracted interest from private equity and there are activist investors on the register. With the combined value of Healius’ radiology and pathology businesses estimated to be around $2.6 billion this represents a substantial uplift from the current market capitalisation of $1.7 billion.

The Fund’s largest overweight positions include Insurance Australia Group Limited, Orica Limited, and Iluka Resources Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, Commonwealth Bank of Australia, and Macquarie Group Ltd (not held).

The overweight position in insurance provider Insurance Australia Group Ltd (+4.2%) contributed to relative performance. The stock finished higher after being upgraded to ‘overweight’ from ‘neutral’ at JPMorgan, with its target price increased to A$5.75 from A$5, representing a 20% upside to its price at the time of the upgrade.

The overweight position in oil and gas producer Santos (+3.1%) contributed to relative performance. During the month, the company announced that its Moomba CCS project was 60% complete and is on track to start storing CO2 next year. Once complete, the project is said to support Santos in reducing its own emissions, in addition to working with other hard-to-abate sectors to look at ways of using Moomba CCS to help reduce their emissions as well. According to the company, in the next six weeks, there will be a direct air capture facility being installed at the project and that will work for nine months trialling the company’s new technology for direct air capture.

The overweight position in mineral sands miner Iluka Resources (+2.5%) contributed to relative performance. The stock price rose sharply after being upgraded to ‘outperform’ from ‘neutral’ by Macquarie analysts, with its target price increasing to A$12.30 from A$12, representing a 12% upside to its price at the time of the upgrade.

The overweight position in gold and copper miner Newcrest Mining (-11.7%) detracted from relative performance. The stock was hampered after announcing that its Cadia mine was under investigation regarding its management of emissions of dust and other pollutants. Newcrest’s Cadia Holdings mine in Central West NSW has been issued with a draft pollution Prevention Notice and a draft licence variation regarding the management of the emissions of dust and other pollutants as part of a new investigation commenced by the NSW Environment Protection Authority. The EPA has also written to the NSW Chief Health Officer requesting a full health risk analysis to determine if mine dust is impacting the health of the community.

The Fund’s largest overweight positions include Insurance Australia Group Limited, Orica Limited, and Santos Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, Commonwealth Bank of Australia, and Macquarie Group Ltd (not held).

The underweight position in iron ore miner BHP Group (-6.0%) contributed to relative performance. A March-quarter production report shows it missed consensus estimates for copper production but produced slightly more iron ore than expected. Its nickel, met coal, and energy coal production was also lower than expected. Despite this, production guidance for FY23 remains unchanged for iron ore, metallurgical coal, and energy coal, while total copper production guidance remains unchanged, and its full-year unit cost guidance remains unchanged.

The overweight position in insurance provider Insurance Australia Group Ltd (+6.2%) contributed to relative performance. The stock finished higher on speculation that IAG is in talks to acquire RACQ’s insurance business. The Australian notes that RACQ’s insurance operations were purchased for ~A$500M. However, sources indicate that RACQ may offload the division for ~A$200M. The overweight position in building and construction materials provider Boral (+17.0%) contributed to relative performance. On Thursday, 20 April, Boral was reinstated as a ‘buy’ recommendation by sell-side analyst Bank of America, with a target price of A$4.41 per share, representing a 13% potential upside.

The overweight position in healthcare technology solutions provider Healius (-5.4%) detracted from relative performance. The stock ended the month lower following denial by The Takeovers Panel to conduct proceedings on an application from Healius relating to its takeover bid by Australian Clinical Labs. Healius alleged in its submission to the panel that ACL’s letter of offer to merge the two ASX-listed diagnostic companies was “misleading, including by omission, and inadequate in a number of respects”.

The overweight position in mining royalty firm Deterra Royalties Ltd (-4.2%) detracted from relative performance. Deterra Royalties ended the month lower after acknowledging BHP’s Q3 operational review, which reported that its Mining Area C royalty achieved production for the March quarter of 29.7 million wet metric tonnes, a decrease of 3.9% compared to the prior quarter. The company receives an ongoing royalty of 1.232% of Australian dollar-denominated quarterly FOB revenue from the MAC royalty area.

The overweight position in dairy producer a2 Milk Company (-6.5%) detracted from relative performance. In light of NZ milk company Synlait’s guidance downgrade, a2 Milk has confirmed that its FY23 outlook remains largely unchanged. The company still expects around 10% revenue growth, aligning with their previous low double-digit growth projection. While the IMF revenue for the English market is estimated to decrease by mid-single digits, a2 anticipates double-digit growth in China.

The Fund’s largest overweight positions include Insurance Australia Group Limited, Orica Limited, and Iluka Resources Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, Commonwealth Bank of Australia (not held), and Macquarie Group Ltd (not held).

The overweight position in gold and copper miner Newcrest Mining (+33.0%) contributed to relative performance. Newcrest and Newmont Mining have reportedly agreed to terms for talks after Newcrest rejected the latter’s $22.4B takeover offer. Reports indicated that Newmont has decided to engage in talks and standstill agreements during the quarter, allowing the two companies to meet and better understand why Newcrest rejected the prior acquisition proposal. The agreements also facilitated discussions about the potential price that Newcrest and its Board might be willing to consider proceeding with official due diligence. The overweight position in supply chain services provider Brambles (+12.8%) contributed to relative performance. Brambles reported an underlying first-half NPAT (from continuing operations) of $334.5M (vs consensus $321.9M), and an underlying profit of $548.8M (vs consensus $511.4M). Management guided full-year sales revenue (to June 2023) of 12% to 14% year-on-year (at constant currency) and underlying profit guidance of 15% to 18% year-on-year at constant currency. Free cash flow after dividends is expected to improve in FY22 but remain a net outflow with a dividend payout ratio of 45-60% of underlying profit after finance costs and tax. The overweight position in Iluka Resources (+13.5%) contributed to relative performance. The mineral sands miner announcing a December-quarter combined zircon, rutile, and synthetic rutile production of 157Kt (vs consensus estimate of 155kt). Specifically, zircon production of 76.3kt beat consensus of 70kt, and rutile production of 16.6kt beat consensus of 14kt. Synthetic rutile production of 63.9kt, however, missed consensus of 67kt, whereas ilmenite production came in at 151.1kt (vs consensus estimate of 130kt). Mineral sands revenue of $415.2M fell short of a $423M consensus, however, its full-year unit cash production costs fell in line with previous guidance.

The Fund’s largest overweight positions include Santos Limited, Insurance Australia Group Limited, and Orica Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, CSL Limited, and ANZ Bank. The underweight position in iron ore miner BHP Group (-3.0%) contributed to relative performance. The stock price came under pressure during October, with headwinds coming from falling iron ore prices (down 5.4% over the month) and sinking to a two-year low. The iron ore weakness was primarily driven by falling demand from China, which struggled with renewed lockdowns due to its COVID-zero strategy and waning real estate market.

The overweight position in Entertainment, hospitality and leisure company EVT Ltd. (+15.2%) contributed to relative performance. The stock was boosted by its first-quarter trading update, reporting normalised EBITDA (ex-AASB 16 leases) of A$70.6M (vs a $15.5M loss from a year-ago). Normalised EBITDA from its Entertainment businesses (including CineStar Germany) increased to A$10.0M from A$5.3M in Q1 FY19, Thredbo normalised EBITDA rose +41.7% from Q1 FY19, and Hotels EBITDA rose +5.7% from Q1 FY19. Consolidated revenue was down (0.3%) on the pre-COVID FY19 year, and Thredbo revenue was up +27.7% vs Q1 FY19.

Not holding Iron ore miner Fortescue (-12.6%) contributed to relative performance. The stock also fell on the back of weakening iron ore prices over the month as demand for the steel-making ingredient from China slowed. Increasingly bearish sentiment from the broker community also impacted the stock after Fortescue released its decarbonisation plans for the Pilbara and aims to reach net zero emissions by 2030, which is considered to impact its dividend payments over the coming years.

The Fund’s largest overweight positions include Santos Limited, Insurance Australia Group Limited, and Orica Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, CSL Limited, and ANZ Bank.

The overweight position in copper and gold miner Oz Minerals (+45.6%) contributed to relative performance. The stock rose sharply after receiving an unsolicited, conditional, and non-binding indicative proposal from BHP Group to acquire 100% of its shares for $25.00 per share in cash via a scheme of arrangement. The Oz Minerals board, however, has unanimously determined that the Indicative Proposal significantly undervalues the company and is not in the best interests of its shareholders. The company noted that it has a unique set of copper and nickel assets, all with strong long-term growth potential in quality locations and that it does not consider that the proposal from BHP sufficiently recognises these attributes.

The overweight position in insurance provider Insurance Australia Group Ltd (+6.7%) contributed to relative performance. The stock rallied hard late in the quarter to recover most of its earlier losses incurred leading up to the release of its preliminary full-year financial results. While IAG’s growth of 5.7% was in line with its mid-single digit growth guidance, its reported insurance profit margin came in at 7.4%, down 6.1% year-on-year and missing its 10% to 12% guidance. Management blamed the miss on its net natural peril costs of $1.119B, which were $354M above the original allowance of $765M.

The overweight position in dairy producer A2 Milk Company (+23.0%) contributed to relative performance. During the quarter, the company reported a 19.8% increase in its full-year FY2022 revenue to NZ$1.446.2M, leading to a 42.3% jump in net profit after tax to NZ$114.7M and beating the market consensus estimate of NZ$113.9M. This was driven mainly by double-digit infant formula sales growth from both its China and English label products, reflecting A2’s significant increase in marketing investment, which prompted further gains in brand health metrics and record market shares. Investors were further pleased with the announcement of a NZ$150M on-market share buyback.