Australian equities: identifying opportunities and winners/losers from the reporting season

Our first speaker tonight has joined the call.

Alan Huang is the Senior Portfolio Manager at Australian Eagle Asset Management.

He is the principal analyst for many of the portfolio stocks, particularly medium-cap companies.

The team also managed the Australian large-cap portfolio for Montgomery Investment Management, including the Montgomery Fund.

Today, Alan will share his insights on Australian equities, identifying opportunities and winners and losers from the reporting season.

Welcome to the presentation, Alan.

Thank you very much, Angelina.

I will talk a little bit about Australian Ego Asset Management, who we are, because most people have not heard about us.

We were principally an institutional only asset manager for Australian equities for quite a number of years.

until we more recently partnered with Montgomery who are distributing our products to the wider retail and financial advice market.

Whenever I talk about companies that this is not providing financial advice for you to go out to buy or sell any of these shares, it's not a, I will put my talk in context a bit later.

what I'm going to talk about, about our business, how we go about picking stocks in the Australian market and some winners and losers that we've seen from a really busy February reporting season so far.

As you can see, in Montgomery, our investment partner in Australia distributes quite a suite of products.

We are on the left hand side, we're looking after Australian equities, large caps, and we sit right, Sean and I, the two guys on the left, sit right next to the small cap team.

And of course, Montgomery have a global

team and a private credit team as well who they distribute products for.

Now who are Australian Eagle?

We have actually been around for quite a long time.

Most people have not heard about us.

Sean and myself in the middle there.

We're actually a second generation team.

The first generation team has

and the founders as well on the left hand side.

And Albert on the bottom left was the original chief investment officer.

Sean took over in 2015.

And the team is very stable.

The founders and the second generation are all pretty much still here.

All I can say is that we have a lot of experience and that's part of our process.

And we currently manage the Montgomery fund

Uh, for retail investors and we also manage, um, other products or wholesale and retail investors and some of the awards that we have won.

in the past on the bottom there.

How do we do things?

How do we pick stocks?

Underlying our philosophy is that if you invest in a portfolio of higher or improving quality companies, you should be able to outperform the market over the long term.

And we have been doing this for a very long time, 18, 19 years.

And our experience suggests that

our process works if we continue to apply in an efficient manner.

The idea is that we want to identify companies that are changing materially their businesses.

And I'll give you a certain example so that it could be, the example of a change could be they're launching a new product or they're

entering into a new market or new geography and we want to find evidence of that change that is coming that is not recognized by the market as yet and therefore is being undervalued.

And that's how we outperform the market.

And we were doing that by identifying

Evidence that this change is occurring and we're basically taking advantage of reporting season to look for these change drivers that are happening.

And similarly, we are also basically putting together a high conviction portfolio of such, um, change 25 to 35 stocks where there is emerging change happening.

And we apply a diligent risk overlay process as well to make sure that these change drivers are happening.

And if they are not, then we need to consider managing the stocks out of our portfolio.

Following that, I will go through a couple of companies where we have identified winners and losers through the reporting season.

First one I want to talk about is

LTM, we have held LTM in our portfolio since about, I think about 2017.

LTM, not many people may know about it.

It's basically a developer of software.

It sells its software, enables electronics companies to design printed circuit board

for simple things like phones all the way up.

For example, a Tesla car and another company we're talking later is Cochlear and Cochlear also uses LTM software to design its cochlear implants.

LTM has a leading position in this market and it

A few years ago, the reason why we got interested in LTM was because it also bought a company called Octopark, which is basically, if you think about it, it was basically like an Amazon for electronic parts.

You're able to search the web for these parts and actually transact and buy these parts to put together your electronic components.

There's a picture of the printed circuit board

that LTM software helps produce on the bottom right-hand side for that.

And that was the change driver that were identified in LTM that they were accelerating their growth from about 10% a year to 20% per annum.

And how they were doing that was basically enabling the users of their software to go from the usual software where you installed it on your computers to a cloud-based

solution and Altium was able to make more money out of their customers and grow the market.

And you can see the evidence of that, that we bought Altium at about $11 and it was recently announced a few weeks ago that a large Japanese company had made a takeover bid for Altium at $68.50.

So that has been a winner for our portfolio during reporting season.

The second stock I want to talk about, I mentioned Cochlear as well.

Cochlear has been around for quite a number of years.

I think they produced their first cochlear implant, a well-known Australian technology company.

They produced their first cochlear implant in

the mid 1980s and they actually came out of of university where there was a lot of research and design on that.

Professor Graham Clark and he's basically been helping severely hearing impaired people regain their hearing.

And there's a great society, societal benefit to be able to to hear again, especially if you're born deaf or

you become deaf because of illness or injury.

Cochlear is the market leader.

They're about 70% market share in this space.

And the great thing about Cochlear is that they've been around for 40, 50 years, and they still have penetrated the available market with 5%.

That means that there's a long runway for them to be able to grow their business without reaching saturation point.

And that's why you look at that long-term chart.

Yes, there have been ups and downs, bumps along the way, but it is a great share price chart.

If you look at that, our in price is $28 and it's currently about $330.

The other thing that I want to say about Cochlear is that they also, a few years ago, they created a new service division to basically sell upgrades for external sound processors.

Sometimes you see at the back of people's ears, there's a sound processor.

Some of these implants were put in, people had surgically implanted

maybe 10, 15 years ago, but the technology improves.

So you're not going to replace the implant, but what you are able to do is have a newer, better, smaller sound processor behind your ear.

And that's what the services division does.

It basically allows them to upgrade, sell upgrades to the existing customer base.

The third stuff I wanted to talk about, it's not a winner yet.

um it's maybe it's a maybe because we see potential uh in this company we all know treasury treasury wines um mainly because of the portfolio branch that they have on the bottom right hand corner everyone knows Penfels and the Chinese

love Penfels, partly because they've been in the China market for a long time.

The Chinese love the red wine, but also the name Penfels can be translated to Benfu in Mandarin, and it has meanings of wealth for them.

And we liked Penfels.

We originally had Penfels way back in 2013 after the merger from Fosters,

because they're growing rapidly in the Asian market.

And we sold out the last holding after COVID came in.

And we re-entered the stock in 2022, a few years ago, because it looked like they were fixing the operations in the US, which has been problematic for them.

More recently,

there are signs that the Chinese market would reopen to Australian wine, and that would definitely be a benefit to Treasury wines and to Penfolds.

And secondly, there are also signs that they're creating a portfolio of luxury wine brands, not just Penfolds, and by concentrating on these luxury brands, they will be able to make more money

and potentially be able to smooth out the cycles that you get from a consumer wine brand.

Lastly, I want to talk about one of the disappointments during reporting season.

That's Lend-Lease.

Lend-Lease has had a very long history in Australia, a great construction and real estate business.

Unfortunately, they haven't been able to manage the property cycle too well.

They sold out of MLC, a superannuation investment company.

and GPT about 20 years ago and focused their business on large-scale urbanization projects such as Barangaroo.

Everyone knows that they built the Crown Sydney Casino and quite a number of apartments and office buildings down there.

And they've made money from that.

Unfortunately,

the core profits from the urbanization projects has been diluted by cyclicality and just basic engineering construction.

And we got interested when they won a Google urbanization project in San Francisco.

That's worth about $20 billion, but they recently lost that as well, partly because the US commercial property market is not going so well.

And secondly, there's a lot of this work from home that everyone knows about.

And Google obviously decided they didn't need so many new office buildings.

And Lenny's has been a disappointment for investors.

That's what I want to talk about in terms of winners and losers this reporting season.

Thank you for your presentation, Alan.

Do you have time for a few questions?

Sure.

Happy to take some.

Alan, you have mentioned Australian Eagle's investment strategy is to invest in high quality companies.

In your view, what makes an exceptional company?

The ideal company for us is actually Cochlear.

We talked a bit about that.

It's actually rated our highest quality in the Australian universe.

A couple of things because it's a great product.

I mentioned it's only five percent penetrated in this market and they have significant market share so they're able to continue to grow.

They're continually investing in R&D to create new products and they've recently

created, sorry, built a new factory in China to expand the potential market size.

But most important for us in terms of Cochlear, you will, some people may recall that they had a product recall about 10, 15 years ago, and it's the way management handled the difficult times and come true.

That reinforces our confidence in the ability to grow and to manage shareholders' money.

If stated, your long-only equity strategy has outperformed the market over the last 18 years.

What do you put this down to?

We're actually very proud of our track record.

We basically put it down to a disciplined execution of our investment process.

We want to catch those

early winners that are displaying a positive change in the underlying business that will drive shareholder value creation for a number of years, an ideal scenario, something like a cochlear or an LTM.

But it's also the basic risk management and portfolio construction where if we get our ideas wrong, hopefully we have

only a small position in the ones that we get wrong, and we exit those positions very, very quickly.

So it's discipline, execution of our process, looking for positive change drivers, and hopefully getting out of small mistakes quickly as well.

That has helped us deliver our performance over 18 years.

Thank you, Alan.

It's great to see you.

Bye-bye.

Thank you very much.