Simon Conn and Marc Whittaker discuss the performance of the QVE portfolio and key stocks over the quarter including Ampol, GUD and TPG Telecom..

Edited transcript

Simon: Welcome everyone to the QVE September quarter video with Marc Whittaker my co-portfolio manager and myself, Simon Conn. We’re talking about the September quarter, which was obviously quite a tumultuous quarter for global markets. We always say there’s never dull moment in markets, but really, September was really all about the bond market sell off at the end of the quarter. Massive move up in US bond yields as markets adjust to the rally that inflation would stay higher and longer. But not helped by the fact that the oil price was up 30% for the quarter. You know, and I think that’s really fed into global equity markets. So we saw the MSCI down 2.5%. The NASDAQ which is more interest rate sensitive was down 4%. Though, you know, locally, I suppose you are going to talk about that market, but it was a bit more resilient.

Marc: Luckily a little bit more resilient or the main index down in 0.8%, which was which was relatively resilient compared to global markets. The QVE benchmark itself down almost 2.5% though. So, really that’s more exposed to more of the materials and and resource names that we saw come off over the period. Whereas we saw Iron ore and those bulk resources hold up a lot better and that really impacts at the top 20 of of the ASX. Everything else is off a little bit more.

Simon: But our caution to those more speculative ends of the market, and the resources sector in particular, particularly lithium, and the base metal plays, I think really played through in the quarter.

Marc: It certainly helped.

Simon: It helped in our relative performance. As did some strong performances from some of the core holdings over at the quarter.

Marc: We had reporting season in August of course, which is really the main headline for the local market over the quarter and I think it’s fair to say, QVE had a very good performance over the reporting period. A number of the names that we own in the portfolio actually delivered quite nicely. Certainly in my view, and we can go through a few of those now, but Ampol was certainly one of those.

Simon: Ampol was up 16% for the quarter, which was pleasing. You know, strong business position, their refining continues to generate good cash and margins look more resilient than was feared. In their core fuel infrastructure business, again, margins pretty robust. The industry become much more disciplined. And so we’ve got good cash flow out of the business. So a good dividend from the company, and the company continues to generate good cash. So hopefully we can look forward to a slightly higher dividend again in December.

Marc: That would be nice to see wouldn’t it.

Simon: And a P/E of 10, it looks very cheap, Marc, and a yield well over 6%

Marc: And GUD that’s one we’ve spoken about a number of times in several of our videos. Good to see it deliver very strongly over that August reporting season. Up over 36% for the quarter and really the main news being the reporting season outcome there. A very good balance sheet out of that result. Maintained margins in its core automotive business and division there, which was a touch of a concern for the market, but they proved that up is really strong. And then we saw their APG acquisition, which they bought back in the late calendar 2022.

It’s actually starting to deliver now. So, as we get automotive supply start to normalize and even supply improve, the earnings are coming through. So really a very great outcome for the fund over that period and continuing to deliver reasonably cheap, but we have been trimming a little bit of that into that strength as well.

Simon: Another strong result was TPG Telecom, which is the number 3 Telco in the country, had 6% growth in their ARPU (average revenue per user). Which was a strong outcome, really reflecting the new discipline that we’re seeing in the mobile market. You know, how the metrics were positive. But also following that result, we saw that the company announced that they’re in discussions with Vocus about selling potentially, for a very attractive price, their enterprise, government, and wholesale business. Which I think really isn’t reflected in the share price and that saw the share price trade up over the quarter as well. So, that potential sale could be a real catalyst to potentially see the company return capital to shareholders and after paying down some debt.

Marc: More on the disappointing side of things, the Australian Clinical Labs, which is one of our health care exposures that we own. Consistent with the sector in general across that quarter, health care was one of the worst performing sectors and ACL sort of a followed trend there. What we really saw over reporting season in particular was that we get to see a normalisation of GP and patient activity in that healthcare space.

Simon: It’s fair to say it’s taking a lot longer to normalise.

Marc: It is. And if you’re ACL, you’re saying COVID volumes of have basically left the business. But those business as usual volumes have yet to return to where they were pre COVID. So, we’re seeing that operating deleverage have a little bit of an impact still. We’d expect that to improve over time. The stock still looks very cheap. Trading on 11 to 12 times P/E, A dividend yield of well over 5% fully franked, so, a lot to like about it. We just need to wait for that normalisation to come back really.

Simon: And in terms of activity for the quarter, Marc.

Marc: Well, we topped up on ACL, it’s a good long-term story, we like it.

Simon: As we did with Sonic.

Marc: Yes, that’s correct. We we trimmed some GUD on that strength. We trimmed some IAG, which was also a very good performer. New Hope Coal was also one that we trimmed and we added to the likes of Sky City and Tabcorp. Again, stocks that we really like from a fundamental point of view, look very well priced and attractively priced, and we’re happy to add to those positions as well.

Simon: So in terms of the outlook. I think, you know, fair to say people who know us well, have followed QVE for some time, always been in a fairly cautious position. Which I think relative to the index has hurt us over the last 12 to 18 months to 2 years. I think really, you know, that positioning now is coming to the fore. That focus on good quality industrials trading at reasonable prices. Companies like Ampol, on 10 times, and ACL and 13-14 times. You know, I think those sort of solid industrial businesses where we can generate some good income, plus a little bit of growth through initiatives under their own steam, really positions the portfolio for what I think has continued to be a very volatile market.

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