CEO and Managing Director Mark Freeman and Portfolio Manager David Grace discuss the FY24 full-year results of Australian Foundation Investment Company (ASX:AFI).
Geoff Driver: My name is Geoff Driver, General Manager of Business Development and Investor Relations for Australian Foundation Investment Company (ASX:AFI). I have with me this morning Mark Freeman, who’s the CEO and Managing Director, and David Grace, who’s actually the Portfolio Manager for AFIC.
So, Mark, we’ve just announced our full-year results for 2023 to ’24. Perhaps you could just take us through some of the highlights of the result.
Mark Freeman: Sure. So, thinking about the year that we’ve just gone through, I’ll pick out some of the highlights. The full-year profit was $296 million, down from $310 million in the previous corresponding period. The decrease in the profit from last year was the outcome of lower dividends, as we expected, received from BHP (ASX:BHP), Rio (ASX:RIO), and Woodside (ASX:WDS). The extent of this decline was offset by adjustments made to the portfolio throughout the year and improved income from a number of companies in the portfolio, including the four major banks. The final dividend was increased to 14.50 cents per share, fully franked, bringing total fully franked dividends applicable for the year to 26 cents per share, which is an increase of 4 per cent from the previous financial year’s total of 25 cents per share. The portfolio returned 15.1 per cent for the year in a very strong market. This compares to the ASX 200 accumulation index of 13.5 per cent when we include franking for both the index and for AFIC’s performance. The management expense ratio remains very low at 0.15 per cent with no additional costs.
Geoff Driver: Thanks, Mark. So, David, the portfolio, as Mark touched on, outperformed the index over the year when you include the benefit of franking. Perhaps you could just take us through some of the key aspects of why the portfolio did so well this year.
David Grace: Yeah. Thanks, Geoff. So, there were two main drivers of the outperformance over the ASX 200. So, the first of those was a number of companies that we own in the portfolio, all of which are meaningful holdings. So, that’s the likes of CAR Group (ASX:CAR), Goodman Group (ASX:GMG), Reece (ASX:REH), ARB group (ASX:ARB) and Netwealth (ASX:NWL). And these all hold market leadership positions, and all were able to deliver meaningful earnings growth in a pretty subdued economic environment.
And the second main driver was just our underweight to the resources sector. So, we saw quite soft demand out of China, who’s the largest commodity buyer, and that lasted throughout the full 12 months. So, being underweight that sector added to our performance.
I think the other interesting thing, just in terms of the market performance, was just that two sectors really drove the majority of that. So, it’s quite concentrated within the banks and within information technology, and we speak to see that broaden over the next 12 months.
Geoff Driver: Thanks, David. So, what sort of changes did you make within the portfolio this year given the market was so strong?
David Grace: Yeah, so starting point is that we look to hold quality companies over the long term, look to benefit from the power of compounding returns over that long-term ownership. So, we’re not looking to sell stocks primarily. But when we see valuations get to extreme levels, we do look to recycle some of that capital into better buying opportunities as and when they present.
So, the last 12 months, we reduced our holdings in the banks and Wesfarmers (ASX:WES) primarily. And that’s following a strong run for all of those companies. And then, the buy-in was really some of the existing holdings within the portfolio, and we also added four new stocks to the portfolio. Now, if you think about the way we’re managing the portfolio is to get a mix of growth and income attributes, just to be able to meet the investment objectives we’ve got for shareholders.
So, on the growth side, we added two owner-driver companies, being Macquarie Technology (ASX:MAQ) and Mineral Resources (ASX:MIN). And both of these companies have owner drivers. So, the founder of both of those businesses are still heavily involved today and still maintains a meaningful ownership stake. So, it’s given us that unique opportunity to co-invest with the founder of the business.
And, on the income side, we added two holdings as well. And the first of those was Ampol (ASX:ALD), which is a large integrated energy player, and that’s really from refining through to the distribution of fuels. And we were able to buy that at a dividend yield slightly over 6 per cent. And the second was Region Group (ASX:RGN). So, Region own a diversified portfolio of neighbourhood shopping centers. So, that’s more the non-discretionary retail end of the market anchored by Coles and Woolworths. And the purchase price on that was a dividend yield of around 6.5 per cent.
Geoff Driver: Thanks, David. So, the question going forward, Mark, markets move forward relatively quickly, what do you think the outlook is, particularly over the next six to 12 months?
Mark Freeman: Yeah. Well, I mean we’ve been pretty consistent in that we don’t have a strong view of where markets are going, and trying to pick market movements in the shorter term is a very difficult thing to do. It’s not what we try and do. We certainly look for significant market moves, particularly if we are looking to add stocks. Periods of market weakness, we want to be a buyer.
But from here on, we do look at some valuation charts. So, if you take a longer term view, look at the Australian market either on a price to sales or price to book, it is trading more of its upper end. So, that just makes us a little bit cautious. Again, we’re not predicting, but it just means we’re a bit careful going into this reporting season about where valuations are.
And there’s a lot going on in the world at the moment. We’ve got an election coming up in the US. But what we tend to think markets eventually more move around where value is rather than particular events. So, as per usual, going into reporting season, sharpen the pencil on which stocks we want to add more to, taking that longer-term view, and just be patient on looking for opportunities.
But from where we sit at the moment… You know, I always look back and reflect and say, “Are we holding good companies?” Because our responsibility is to put our shareholders into good businesses. And certainly I look through the AFIC portfolio and I just see a whole lot of great companies, which gives me great comfort, and we’re ready to buy more.
Probably the only surprising thing at the moment is just the discount that the share price is trading at. It’s touched 10 per cent a couple of times. And I always got told, “If you can buy a dollar’s worth of assets for 90 cents, as long as you like the assets, that’s pretty good buying at the moment.”
So, that is a thing that intrigues us at the moment is the extent of the discount, and obviously the yield you get as an investor, it’s off the share price rather than the NTA. So, we always talk about what the yield is on the NTA. But, in fact, on the share price, it’s much higher than that again.
Geoff Driver: All right. Thanks, Mark, and thanks, David, for your time.
Ends