BKI held an online briefing from 1130 AEST on Thursday 22 July 2021.
I had to (for me!) quickly type so hope I have correctly transcribed everything.
Mr Tom Millner said 'we have done better over (some previous) years' in speaking about the FY 21 results, but said 'there was a lot to like about the last six months', with evidence of dividends having begun to strongly rise. He was optimistic about the future.
The dividend declared of three cents a share is up 29 per cent on last year, so pleasing. Dividends should return to 'more normalised' levels.
Income generation for holders was down, but remained attractive compared with 'the cash rate'. While the TSR of 23.3 per cent was 'fair', the longer term record is better.
The recently initiated BKI weekly NTA announcement has helped to narrow the share price/NTA discount from 10 per cent in January 2021 to about four per cent.
The 'screening' of BKI's portfolio for ESG considerations has been valuable. (See the BKI slides).
Large stocks in which BKI is underweight have typically paid 'sub-par yields' (so implied not attractive to BKI given its dividend focus).
BKI is underweight in banks as it doesn't own ANZ/WBC.
Exited positions such as ING were due to a 'pretty poor dividend outlook'.
It added FMG and RIO plus others, plus of course the demerged EDV from WOW.
5.5 per cent (approx.) of the portfolio is in cash.
Mr Will Culbert then spoke. On a long term view, BKI remains 'very optimistic' given the re-rating in earnings outlooks during teh last 12 months, particularly from major resource companies.
He said the banks have dealt better than expected with the pandemic, with probable lower than expected bad debts. There's not the amount of capital raisings that there were during the (2008, 2009) global financial crisis.
BKI is very confident of 'better income going forward'.
The supply chain issues affect many industrials. Via BKI's networks including via SOL, it's a major business concern. Some is to do with with semiconductors, but also freight rates and what the container situation is. On a short term view, the container freight rates become a 'bit of an issue' re inflation.
Demand means some companies such as ARB (a great performer) are busy for the next few months even if no orders came in today.
The increasing size of the superannuation sector adds money 'looking for a home', so it adds optimism to BKI's view re Australian equities.
BKI no longer owns SYD (given poor passenger numbers) but it received a bid in excess of the share price. This highlights TCL's worth.
Mr Culbert said 'APA's valuation could double' if on a similar multiple, so that explains why BKI recently purchased a fair sized stake.
HVN has 'an enormous land bank' through its stores.
Mr Tom Millner then answered questions after saying 'it was a good, solid, diversified portfolio'.
Mr Culbert said BKI has not been approached regarding a merger (as per the SOL-MLT proposed merger).
Inflation: global markets wanted inflation - it's getting high and will kick-start economies across the globe. Consumers are continuing to spend, including online (bringing that subsector forward by five to seven years). Inflation 'does come and go' Mr Millner said.
Mr Culbert said the slide re the freight rates highlights short term pressures. Lumber in the USA spiked but it's come back down.
Re holding REH ($12 million) - it's a quality growth stock, a clear number one in their markets, good expansion into the USA underpinned by money from the Wilson family. Similarly, IVC, HVN, SHL are growth stocks that have done well so it's good that BKI holds typically between five and ten such growth stocks.
Re HVN, many of the big-box sites it's had are becoming with urban renewal more valued as these suburbs becoming 'more inner', and hence over time they can be gentrified. Good upside there!
A holder asked 'if there's a 25 per cent market correction, what are expectations?' Mr Millner said it'd be a good buying opportunity, but as noted above, balance sheets tend to be in a better state than during the GFC. Some resource stocks would then drop to PEs of 4-5x.
Mr Culbert said what would drive a 25 per cent correction would be 'major concerns with the vaccine(s)'.
He said it was important to have ESG as part of its modelling, although it's not an ESG-focused fund.
A holder asked re environmental/ESG risks re APA Group. Mr Culbert said BKI subscribes to the MSCI Index that has 38 'deep dives' into ESG. It gives stocks in the ASX 300 a rating from AAA down to CCC.
RIO has an 'A' rating', rating reasonably well on some corporate and governance issues.
Discount rates are a 'penalty' BKI adds if a low ESG valuation. For instance BKI likes HVN but others are concerned about governance issues, so BKI may mark it down a little.
TPG is another from an ESG point of view that doesn't rate very well, but BKI still invests because of its potential.
A holder asked if it had JLG? Mr Culbert said 'it's attractive' in some ways and BKI has looked at it but so far, lacks a holding.
Renewables if difficult to invest in, Mr Millner said, because of a lack of dividends.
The 'spider tracker' ASX ETF performed at about 25 per cent v BKI at c.20 per cent, but BKI doesn't want to own every stock in the index. Mr Millner said that one has to consider the higher grossed-up franking credits of BKI.
SYD was sold on average at A$5.50. The lack of income made it hard for BKI to hold.
NHC was sold for A$1.50. Mr Millner said the 'spot price' for NEWC (Newcastle NSW thermal coal) was 'unbelievable' but not all coal is sold at that price, due to differences in coal quality and other factors. Going forward, NHC's PE may get down to 4-5x (very l@10
BKI thinks interest rates will stay low for a long time if I heard Mr Millner correctly. The cash position at about five to seven per cent was 'about right'. 'Keeping powder dry' when a correction occurs is 'always wise.'
The newly acquired APA (becoming 5.5 per cent of BKI's portfolio) has an 'AAA' (MCSI Index?) ESG rating: health and safety is very high - only seven per cent of global companies have an 'AAA' rating' so it's a high quality business.
The profit reserve, Mr Millner said, was there 'for a rainy day' and over time allows special dividend payments. BKI can fully frank dividends up to about 5-5.5 cents a share that is 'comfortable for us'. There is scope to lift dividends 'provided we keep investing in high quality companies'.
BKI has a different strategy from the market. It doesn't own APT or CSL (given low dividend yields). Stocks owned that grow will improve the Net tangible assets over time.
Mr Millner said '(mainland) China was difficult, it's all political, but better quality companies have diversified'.
He mentioned how ARB, REH and others were in the United States now, with longer term presence there from TCL et al.
BKI doesn't track the index but it concentrates on dividends. Many investors are of retiree/pension age.
Interestingly in this oral presentation, current lockdowns in Greater Sydney et al plus Victoria and South Australia did not rate a mention. (BKI like other ASX LICs has a longer term focus, even if these restrictions on our social and economic freedoms seem infinite in duration).
This webcast will be available on the BKI website.
Overall this was an excellent presentation, concluding at 1216 hours.
(20min delay)
