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Master presentation june 2013

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  • Risks/what would make us revisit our investment thesis China does not follow the same path as what we have seen in the rest of the world with regards to migration to modern retail. Means market growth will slow and store base will mature significantly quicker (returns on each new unit will become an issue) Competition refocuses on Northern China and Beijing in particular which is a market they have mostly neglected given Wumart’s strength (I think this will only come when the overall market matures…at present there is ample room for major players to grow without encroaching into each others core markets) Significant expansion outside Beijing and surrounding areas, what attracts us to Wumart is its regional focus, the national strategy in China is a lot harder to manage (i.e. takes a lot longer to build scale/ can’t standardise offering, makes national sourcing hard) just need to compare margin and returns of Wumart v. peers. They know Beijing so that’s where we want them to stay Rapid increase in minimum wages in Beijing area or rent costs especially at a time of low inflation. National players do have the advantage that an increase in wages and or rents in one area doesn’t impact their whole business
  • A. Japanese government debt is 210% of GDP, the economy has been dormant for twenty years and the population is declining. B. Google has no debt and has grown it’s earning at 20% per annum for the last five years. Question: where should investors expect the greatest yield from their investment? Answer: the market prices the yield on Japanese debt at less than 1%; Google yields 11.0%. Go figure?
  • Risks/what would make us revisit our investment thesis Expansion out side of existing markets and impact that will have on cash flow generation. Of primary concern would be entry into China or India Breakdown in relationship between Seek and Jobstreet i.e. Seek selling its stake. To us this would be a precursor to more aggressive competition and a reduced profitability profile. Competition would be coming from a very well capitalised competitor who has the ability to outspend Jobstreet. Under the current structure, with Seek owning a stake, we do not believe the competitive environment will become irrational
  • Suz, please add in cash weighting over time – make sure the dates are in line
  • RBA = 3.5% Spreads = 1.6% Cash Yield = Bond Yield = Hybrid Yield = Total Yield
  • Transcript

    • 1. PM CAPITAL Investment insights June 2013
    • 2. 2 Who is PM CAPITAL? We are contrarian – equity investors behave poorly As at 31 May 2013 Fund Total return (inception) Index Total excess Absolute Performance Fund 167.4% 19.5% 147.9% Emerging Asia Fund 139.4% 11.6% 127.8% Australian Opportunities Fund 301.4% 177.2% 124.2% Enhanced Yield Fund 111.2% 74.4% 36.8%
    • 3. 3 Absolute Performance Fund Performance (net of fees) Months Years Since 31 May 2013 1 3 6 1 3* 5* 10* Inception* Absolute Performance Fund 15.0% 16.7% 34.7% 62.1% 10.3% 4.5% 4.1% 7.0% MSCI World ($A) 8.3% 12.8% 23.2% 29.3% 8.4% 1.4% 3.6% 1.2%
    • 4. 4 Why the Absolute Performance Fund? Selective and concentrated long-term investments into undervalued businesses, globally. A high conviction fund, likely to significantly differ in characteristic from a benchmark focused fund. A contrarian investment style – investments are purchased on the merits of their risk/reward characteristics. Investment Performance1 Total Return Absolute Performance Fund 167.4% MSCI World ($A) 19.5% Excess Return 147.9% Unit holders that have been invested in the APF since inception, have ~148% more capital than if they had invested in the index. APF Top 10 MSCI World Top 10 Lloyds Banking Group Apple ING Groep Exxon Mobil JP Morgan Microsoft Corp Bank of America General Electric Co Barclays Plc Chevron Corp Wells Fargo Google Applied Materials Johnson & Johnson Google Inc IMB Corp BB&T Corp Nestle Royal Bank of Scotland Wells Fargo GICS Sector APF allocation 1 Jan 2012 MSCI World Sector performance (1 Jan - 31 Dec 2012 - AUD) Financials 50% 27% Consumer Disc 21% 22% Industrials 3% 15% Materials 0% 10% Consumer Staples 13% 13% Health Care 4% 16% Utilities 0% 15% Information Tech 36% 14% Energy 0% 1% Telco's 0% 7%
    • 5. 5 Selected US and UK banks – recovery of major economies  Eg BB&T Corp, ING Groep, Bank of America, Wells Fargo Technology – semi-conductor, data warehousing  Eg Applied Materials, Maxim, Oracle Services – stock specific opportunities  Eg Google, NASDAQ, Comcast, CME Group Global brewers – global consolidation of industry  Eg Heineken Holdings, Anheuser-Busch Inbev Property – recovery in US housing market  Eg MGM Resorts, Howard Hughes Corp AUD (unhedged) – under pressure APF – Key investments 23/1/2013
    • 6. 6 Portfolio Guidelines – Absolute Performance Fund Description Guidelines Number of stocks 35-45 stock specific ideas Individual stock positions Max 7.5% at cost, 10% hard limit Individual short positions Max 2% market value, 3% hard limit Total short positions 30% excluding pairs/spread trades Sector weighting >2x MSCI WEI weighting or 35%, hard limit 3x MSCI WEI weighting Target net equity exposure 80% (+/- 10%) Net equity exposure Max 110% (long equity – short equity) Gross equity exposure Max 170% (long equity + short equity) Allocation to debt securities 30% (maturities > 1 year) Max net invested position 130% (equity + debt securities exposure) Max cash position 100% Options/derivatives may be used to minimise risk, enhance yields and replicate underlying positions but may not be used to leverage the portfolio.
    • 7. 7 Case Study: US/UK Banks
    • 8. Do we understand how the business works? 8 • Borrow – from depositors / wholesale funding • Depositors – cheap to borrow, stable funding source • Wholesale funding – expensive to borrow, market volatility can impact liquidity • Lend – to retail / commercial • Retail – low competition, small loan sizes, diversity reduces credit risk • Commercial – More competitive, larger loans, more rigorous credit process • Trading – for liquidity/ risk management • Liquidity management – low risk trading, improve interest spread • Risk management – Manage interest rate and market risk, minimise earnings volatility • Investment banking – Advisory / Proprietary • Advisory – Fees for advising big clients – high ROE • Proprietary – Use bank capital to bet on the market
    • 9. Borrow Lend Trading Investment Banking Deposits Wholesale ●●●●● ●● ●●●●● ● ●●●●● ●●● ●●●●● ●●● ●●●●● ●●● ●●●●● ●●● ●●●●● ●●●● ●●●●● ●● Retail Commercial ●●●●● ●● ●●●●● ●● ●●●● ●●● ●●●● ●●● ●●●●● ●●●● ●●●●● ●●●●● ●●●● ●●●●● ●●●●● ●●● Liquidity Risk Mgt ●● ●● ● ● ●●● ●●● ●●● ●●● ●● ●● ●●● ●●● ●●● ●●● ●● ●● Advisory Proprietary ● ● ●●●●● ● ●●●● ● ● ● ●●● ● Stock We Own Wells Fargo BBT JP Morgan B of A Lloyds RBS Barclays ING Deposits Wholesale ●● ●●●●● ●● ●●●●● ●●● ●●●● ●●● ●●● ●●●● ●●● Retail Commercial ● ●●●●● ● ●●●●● ●●● ●●●●● ●●● ●●●●● ●●● ●●●●● Liquidity Risk Mgt ●●●● ●●●● ●●●● ●●● ●●● ●●● ●●● ●●● ●●● ●●● Advisory Proprietary ●●●●● ●●●● ●●●●● ●●●● ●●●●● ● ●●●● ● ●●● ●●● Stock We Don’t Own Goldman Sachs Morgan Stanley Citigroup HSBC BNP TRANSPARENT INCREASINGLY COMPLEX Not all banks are the same 9
    • 10. Banks Forward P/E Current P/B Wells Fargo 9.8x 1.3x BBT 11.0x 1.2x JP Morgan 7.8x 0.8x B of A 10.7x 0.4x Goldman Sachs 9.6x 0.8x Morgan Stanley 10.3x 0.5x Lloyds 12.5x 0.6x RBS 10.7x 0.2x Barclays 6.2x 0.5x BNP 7.1x 0.6x So what can a well run bank earn when the economies normalise? Environment Recession Normal Expansionary Net Interest Spread High funding costs = 2.50% spread 3.00% spread in normal economy Higher demand for loans = 3.25% spread Net Interest Revenue $2.50 $3.00 $3.25 Fee Income Low fees when people stop using banks = 2% 2.50% of Assets 2.50% of Assets Non Interest Revenue $2.00 $2.50 $2.50 Total Revenues $4.50 $5.50 $5.75 Operating costs ($2.75) ($2.75) ($2.75) Pre Provision Profit $1.75 $2.75 $3.00 Loan loss rate 1.50% as recession leads to higher consumer losses 1.00% in normal environment 0.75% as consumers are cashed up Loan loss expense (1.50) (1.00) (0.75) Pre tax profit $0.25 $1.75 $2.25 • Assume a simple bank like Wells Fargo , BBT or Lloyds • For every $100 in loans/Assets what will the bank earn Significant earnings upside for banks when moving from recession to a normal economic environment… But valuations imply they are 10
    • 11. If earnings normalise US banks P/E’s look cheap  S&P Banks are currently trading at a forward P/E of 11.1x, or at 0.2x discount to historical levels. This is: • Narrower than where the broad market is trading vs. historical levels, and; • Narrower than 6 out of the 10 S&P Sectors discount to historical  In this rate environment banks are under- earning. Adjusting EPS for a +200bp move in the short end and +100bp on the long end, banks would be trading at a 4.4x discount to historical levels.  We are selective and sticking to banks that not only offer EPS upside in a higher rate environment, but are also rationally valued on current forward P/Es 11
    • 12. Aust banks (CBA) v US banks (Wells Fargo) Operational metrics comparison Credit Costs/Loans Pre GFC Average Current CBA 0.40% 0.31% WFC 0.92% 0.92% Pre Tax Earnings/Credit Costs 1993-2003 Average Current CBA 10.5 10.1 WFC 5.9 4.9 Valuation metrics comparison Price/book Pre GFC Average Current CBA 2.1 2.7 WFC 2.9 1.3  WFC is a higher margin business than CBA – 3.75% v 2.20% respectively.  Credit costs (loan loss provisions) are more likely to increase for CBA than WFC.  WFC is more likely to improve its operating performance than CBA (WFC PTE/CC peak was 8x).  WFC is still trading at a significant discounted P/B, but CBA trading at a premium.  Risk is greater for CBA, potential reward is greater for WFC.  WFC has “re-calibrated” for post GFC life, CBA has not…priced for perfection! 12
    • 13. Banks in summary… • We believe the current economic environment may provide a unique and rare opportunity to generate returns from some US and UK banking stocks. • It is vital to understand each bank’s operating model and key inputs to valuation before deciding where to invest. • Our view is that the banks that are largely focused on retail borrowing and lending will benefit most in a transition from a recessionary to a normal environment. 13
    • 14. Australia versus Global Summary Commodity sweet spot has passed – China’s hard asset investment slowing Australian banks fully valued – significant premium to global peers Materials and Financials combined = 60% of index Narrow subset of opportunities remaining Currency Overlay + $A at all time high v most currencies Consideration Would suggest highly correlated ASX 200 funds to be avoided Would suggest favouring offshore opportunities 14
    • 15. 15 Emerging Asia Fund Performance (net of fees) Months Years Since 31 May 2013 1 3 6 1 3* 5* 10* Inception* Emerging Asia Fund 13.2% 12.8% 19.6% 24.5% 7.7% n/a n/a 18.7% MSCI Asia (Ex Japan) 6.5% 4.5% 11.3% 17.6% 1.5% n/a n/a 2.2%
    • 16. 16 Why the Emerging Asia Fund? Selective and concentrated long-term investments into undervalued Asian businesses. A high conviction fund, likely to significantly differ in characteristic from a benchmark focused fund. A contrarian investment style – investments are purchased on the merits of their risk/reward characteristics. EAF Top 10 MSCI Asia ex Jap Top 10 MSCI Asia Pac ex Jap Top 10 SJM Holdings Samsung Electronics BHP Billiton WuMart Taiwan Semiconductor Commonwealth Bank Jobstreet Corp China Mobile Westpac Banking Carlsberg Malaysia China Construction BK H ANZ Banking Group Baidu ICBC H National Australia Bank Turquoise Hill Resources Gazprom OAO AIA Group Limited Beijing Capital Int'l Airport Tencent Holdings Ltf Woolworths Limited iProperty China Petro & Chem H Wesfarmers Limited Puregold Price Club ITAU Unibanco CSL Limited Dallan Port Co American Movil Singaport Telecom Limited
    • 17. 17 Infrastructure  Eg Dalian Port, Beijing Capital Int’l Airport, China Merchants Internet  Eg iProperty Group, Jobstreet Corp, 104 Corp Retail  Eg Wumart Stores, Puregold Price Club, SunArt Retail Group Gaming  Eg SJM Holdings Consumer  Eg Carlsberg Malaysia, China Resources Enterprise EAF – Key investments
    • 18. EAF Portfolio Guidelines Description Guidelines Number of stocks 15-35 stock specific ideas Individual stock positions Max 7.5% at cost, 10% hard limit Total short positions N/A – long only portfolio Net equity exposure 0 – 100% Max cash position 100% Options/derivatives may be used to minimise risk, enhance yields and replicate underlying positions but may not be used to leverage the portfolio. 18
    • 19. 19 Case Study: Wumart Stores
    • 20. Case study: Non discretionary retail (Wumart Stores) 20 Secular change underway High barriers to entry Regional strategy/#1 market share in Beijing Modern retail in infancy Strong management Locals with operational expertise World class margins and returns Triggers for mis-pricing:  Initial trigger was investigation into founder.  Now the challenges with integration of Tianjin operations. What the market is missing:  Long term earnings growth – myopic focus on short term earnings.  Expansion opportunities in Hebei not being considered. Will double target market, but leverage existing supply chain.  CNY appreciation. Considerations for valuation:  Focus on long term earnings growth potential.  Target market is 90 mill people/rev less than 5% of Woolworths.  20x P/E on 2012 estimate. Earnings growth 25%pa for last 5 yrs and forecast to continue for next 5 yrs. Wumart Stores…the business model Potential risks:  Migration to modern retail stalls.  Increase in competition. over the longer term.  Significant expansion outside of Beijing.  Rapid increase in input costs ie wages, rent. As at January 2013
    • 21. 21 Australian Opportunities Fund Performance (net of fees) Months Years Since 31 May 2013 1 3 6 1 3* 5* 10* Inception* Australian Opportunities Fund 1.4% 8.3% 24.8% 36.5% 13.3% 6.9% 10.3% 10.9% ASX 200 Accumulation Index -4.5% -2.4% 11.6% 26.5% 8.5% 1.8% 9.8% 7.9%
    • 22. 22 Why the Australian Opportunities Fund? Selective and concentrated long-term investments into undervalued Australian businesses. A high conviction fund, likely to significantly differ in characteristic from a benchmark focused fund. A contrarian investment style – investments are purchased on the merits of their risk/reward characteristics. AOF Top 10 ASX Top 10 QBE Insurance Group Limited Commonwealth Bank Australia Asia Pacific Data Centre Group BHP Billiton Limited Macquarie Group Limited Westpac Banking Corp Echo Entertainment Group ANZ Banking Group JB Hi Fi Ltd National Australia Bank Transpacific SPS Trust Telstra Corp Limited Wotif.com Wesfarmers Limited Suncorp Metway Woolworths Limited Rio Tinto Limited CSL Limited Tabcorp Holdings Limited Rio Tinto Limited Sonic Health Care Investment Performance Total Return Australian Opportunities Fund 301.4% S&P / ASX 200 177.2% Excess Return 124.2% Unit holders that have been invested in the AOF since inception, have ~105% more capital than if they had invested in the index.
    • 23. 23 Financials – underweight this sector  Eg Macquarie Group, NAB Property  Eg Asia Pacific Data Centre, Lend Lease, 360 Industrial Corporate debt – taking advantage of favourable spreads Significantly underweight resources  we seek low cost operators at distressed commodity prices (as per 2001). AOF – Key investments Source: ASX; Feb 03 – Jan 13
    • 24. 24 Portfolio Guidelines – Australian Opportunities Fund Description Guidelines Number of stocks 15-25 stock specific ideas Individual stock positions Max 7.5% at cost, 10% hard limit Individual short positions Max 2% market value, 3% hard limit Total short positions 30% (excluding pairs/spread trades) Sector weighting >2x ASX200 weighting or 35%, hard limit 3x ASX200 weighting Target net equity exposure 80% (+/- 10%) Net equity exposure Max 110% (long equity – short equity excl. pairs trades/futures) Gross equity exposure Max 170% (long equity + short equity excl. pairs trades/futures) Allocation to debt securities 30% (maturities > 1 year) Max net invested position 130% (equity + debt securities exposure) Max cash position 100% Options/derivatives may be used to minimise risk, enhance yields and replicate underlying positions but may not be used to leverage the portfolio.
    • 25. 25 Case Study: Sonic Healthcare
    • 26. Case study: Sonic Healthcare 26 High barriers to entry Clean balance sheet Growth through acquisition Dominant local presence Strong management CEO in play since IPO Low cost operator Triggers for mis-pricing:  Govt cuts to regulated pricing.  QLD co-pay structure not implemented by key competitor.  Profit warning May 2010 – stock down 20% next day.  Increased business cost due to deregulation of collection centres. What the market was missing:  Govt regulated pricing would hit smaller players hardest – opening the door for bolt-on acquisition.  Increasing volumes would offset margin contraction.  5 year deal with Govt to guarantee 5% rev growth.  FX masking underlying offshore earnings.  Seen as a “buyer of choice” by potential vendors. Considerations for valuation:  Path volume growth at 6-8% over last 15 years.  Valuations were set at $10.10 on 13.4x FY10/11.7x FY11/ 10.6x FY12.  Expected return $10.10 › $13.78 = 36% re-rating + 5% div = 41% Sonic Healthcare…the business model Considered risks:  No tangible assets as a service company with long term relationships/strong industry reputation.  Large fixed cost business leveraged to volume. Dilution risk – capital raisings to partly fund future acquisitions. As at January 2013
    • 27. Case study: Sonic Healthcare  The price chart demonstrates the dramatic sell-off post the profit warning in 2010.  At $10.10, we forecast 36% growth to fair value of $13.78.  Approaching $13.78, we have been trimming our position.  This is a text-book example of mis-pricing on short-term earnings issues or technical factors. It provided an opportunity to take a core position in a “good business at a good price”. Ave buy price $10.10 Buying period: May 21 – Jul 23 Trimmed position $11.67 Trimmed position $13.82 27As at January 2013
    • 28. 28 Enhanced Yield Fund Performance (net of fees) Months Years Since 31 May 2013 1 3 6 1 3* 5* 10* Inception* Enhanced Yield Fund 0.5% 1.6% 3.3% 6.7% 6.3% 6.3% 6.3% 6.9% RBA Cash Rate 0.2% 0.7% 1.5% 3.3% 4.2% 4.3% 5.7% 5.1%
    • 29. 29 Guiding principles Always start with “cash”… Capital preservation is our first priority, so depending on investment opportunities in debt securities, our cash position can be anywhere between 20 – 100%. Focus on the anomalies… A carefully selected portfolio of what we believe to be the best opportunities in global debt markets – typically there are only 40-50 securities in the portfolio. Broad universe mandate with a strong research focus… This enables broad access to global credit markets, utilising our vigorous research process to identify mis-priced assets. No surprises… We seek to deliver RBA Cash Rate plus 2%, over the medium term with minimal volatility.
    • 30. 30 Outcomes at a glance…  Income provider o The fund has returned 6.9% pa after fees, since inception (2002).  Low volatility of returns o Annualised standard deviation of 2.3%, since inception. o 90% positive monthly returns, since inception.  Capital preservation o Delivered positive returns during the depths of the GFC. o Sufficient cash to take advantage of significant pricing anomaly's in 2009. As at 31 May 2013 -60% -50% -40% -30% -20% -10% 0% 10% 20% 07/2007 01/2008 07/2008 01/2009 07/2009 01/2010 PM CAPITAL EYF versus Lonsec peers
    • 31. 31 March 09: “a once in a generation opportunity to invest in yield securities.” Quote from our March 2009Quarterly Report. Cash Allocation: an output of investment opportunities June 11: “This decision to hold a meaningful amount of the fund in cash will also give us ample capital up our sleeve to take advantage of further attractive investment opportunities that materialise over the next 6-12 months.” Quote from our July 2011 Quarterly Report. Enhanced Yield Fund’s monthly cash position Please note that his chart is used for internal PM Capital purposes and is indicative only.
    • 32. 32 Recent purchases Issuer Investment Duration Current Yield ALE Property Trust Senior Debt 1.5 years Bills + 275bps Asciano Senior Debt (USD) 2.5 years Bills + 200bps Mirvac Senior Debt 3.5 years Bills + 200bps IAG Subordinated Debt (GBP) 3.5 years Bills + 475bps Westpac Subordinated Debt (USD) 4.0 years Bills + 425bps CBA Hybrid (USD) 2.0 years Bills + 350bps Tabcorp Senior Debt 1.0 years Bills + 185bps
    • 33. 33 EYF Portfolio As at 31 May 2013 Top 10 Holdings CFS Westpac ANZ CBA NAB Mirvac ALE Dexus Wesfarmers IAG Asset allocation Cash 36.3% Corporate Bonds 39.9% Hybrids 22.4% Buy & Writes 1.4% Regional allocation Australia 94% US 5% UK 1% Duration Interest rate 0.15 years Avg term to maturity 2.50 years
    • 34. Summary Our investment approach is based on: Selective and concentrated long-term investments into undervalued businesses. High conviction funds, likely to significantly differ in characteristic from benchmark focused funds. A contrarian investment style – investments are purchased on the merits of their risk/reward characteristics. In executing our investment philosophy we would also note that the stock market is far more volatile than the underlying business it represents. Thus, the key to being a successful investor requires both good business judgement and the ability to control your emotions, thereby avoiding the irrational behaviour of crowds or consensus thinking. 34
    • 35. 35 Investment Presentation - Disclaimer Statement PM CAPITAL Limited ABN 69 083 644 731 Australian Financial Services Licence 230222 Level 24, 400 George Street Sydney NSW 2000 Ph: 02 8243 0888 www.pmcapital.com.au This presentation is intended solely for the information of the person to whom it was provided by PM Capital Limited. It is intended to provide information and does not purport to give investment advice. While the information contained in this presentation has been prepared with all reasonable care, PM Capital Limited accepts no responsibility or liability for any errors or omissions or misstatements however caused. Except insofar as liability under any statute cannot be excluded, PM Capital Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this presentation or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this presentation or any other person. Past performance is not necessarily a guide for future performance. Opinions constitute our judgement at the time of issue and are subject to change.

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