BRM - June 2024 Quarterly Newsletter

Wide dispersion of share price moves provided us with attractive
investment opportunities in Q2
After a strong Q1, Barramundi’s gross performance fell modestly in
Q2, returning –2.1% and underperforming the benchmark index
which fell –0.9%. Barramundi’s Adjusted NAV return was down
–2.3%.
There was wide dispersion of returns across the market, and within
market sectors as well as across our portfolio during Q2. There
were some broad themes which weighed modestly on the broader
equity market. However, this dispersion of returns speaks largely
to company specific factors rather than because of these broader
economic trends. We elaborate on these below, and have been
excited by the opportunities that some of these share price moves
have presented us with.
The ’higher for longer’ interest rate environment
weighed on equities in Q2
Inflation registered a 4% increase in May in Australia, stubbornly
above the Reserve Bank of Australia’s target band. Coupled with low
unemployment (4.1%), and rising house prices, this has pushed out
market expectations of an interest rate cut in Australia into 2025.
This contributed to softness in sectors of the equity market linked to
the domestic economy such as Real Estate (-7%), Communication
Services (-5%) and the Consumer Discretionary sectors (-3%). In
contrast, Financials, which benefit from higher rates, rose +2.7%.
The Information Technology (+2.8%) and Healthcare sectors
(+1.9%), which are not tied as much to the domestic economy also
performed better.
In line with these trends, our investments in financials performed well
overall. National Australia Bank (+7.1%), CBA (+5.9%) and ANZ
(-1.1%) delivered pleasing earnings results in the period. Modest
credit growth and low levels of bad debts bolstered earnings for the
banks. After a period of softer financial performance, Macquarie
Group (+4.6%) highlighted at its financial result that FY24 is likely a
trough year for earnings in its more cyclical divisions. Its earnings are
expected to grow in FY25.
Long term earnings growth – a key driver of
share price returns
Our investment process is focussed on investing in companies that
can grow their earnings. As part of our research, we specifically focus
on how prudently companies are either reinvesting profits or raising
money (through either equity or debt issuance) in order to fund this
growth. We have a preference for investing in companies that can
grow through investing capital in their core, existing business. We
will also back companies that acquire other businesses to bolster
earnings growth, but only if those acquisitions are sensible and
provide an adequate return on the cost of the investment.
During Q2 we participated in equity raisings for three of our
companies in order to support them in accelerating their earnings
growth. Pleasingly the equity raisings were well received by the
market with the shares trading well above the issuance price in each
case.
In April, glove manufacturer, Ansell (+8.0%) raised A$465m to
fund the acquisition at a reasonable price of a business designing
and marketing differentiated safety products including gloves, and
protective apparel and eyewear. With a focus on the US market, this
business bolsters Ansell’s presence in the Life Sciences industry which
is a growth category for Ansell.
Data centre operator NEXT DC (+0.2% in Q2 but +14% from the
issuance price) raised A$1.3 billion to accelerate the development
and fitout of existing and new data centres across Asia. NEXT DC is
seizing the opportunity to take advantage of the exponential growth
in demand from its customers for data centres partly in response to
the rise of artificial intelligence.
In May, insurance broker AUB Group (+6.6%) raised A$200m to
partly fund the acquisition of a majority stake in an underwriting
agency business in Australia that focussed on specialty financial lines
of insurance. Although the acquisition price looked relatively full,
this acquisition aligns with AUB’s stated intention to add scale in
speciality agencies. It adds to the strength of the overall business.
In raising this capital, Ansell, NEXT DC and AUB have all added to
their longer-term earnings potential and we think this will benefit us
as shareholders.
Share price weakness can be an opportunity for
investors
We invest in companies with a view of being business owners. As
such, we’re much more interested in what a business can achieve
for its shareholders over 5-10 years than we are in what might affect
it over the next 2-3 months. Part of our competitive advantage in
investing is ‘time’. We constantly cross-check our investment theses
underpinning our investment in a company. If this remains sound and
we believe the underlying business is able to deliver good returns for
shareholders over the long term, then gyrations in the share price
predicated on shorter term market concerns can prove to be good
buying opportunities.
In this vein, Audinate (-24.4%), fibre cement siding manufacturer,
James Hardie (-23.2%), employment classified advertising business,
SEEK (-14.7%) and insurance repair business Johns Lyng (-11.1%)
all provided us with attractive buying opportunities in Q2.
»Networked audio products company, Audinate, had seen its
share price rise sharply during Q1 as the company was added
as a constituent to well followed share market indices. As the
incremental buying from index inclusion subsided, the share price
pulled back. It also fell sharply following the resignation of their
CFO. He will hand over the reins to his successor later this year.
We do not see anything sinister in the CFO’s decision and think
Audinate will do a good job transitioning to a new CFO in coming
months.
During Q2 we attended Audinate’s investor day in Sydney. The
company showcased a number of new software products that are
currently in development which will enhance its earnings potential
in both the networked audio and video markets. This adds to its
long-term earnings potential.
»James Hardie provided lower near term FY25 earnings guidance
than the market expected given a cyclical slowdown in the US
housing market. Yet it continues to invest heavily in its distribution
channel and growing its market share across its customer base.
When the housing market rebounds, it will do well.
1
¹ Share price discount to NAV (including warrant price on a pro-rated basis and using the net asset value per share, after expenses, fees and tax, to four decimal places).
1 April 2024 – 30 June 2024
$
0.6 9
Share Price
as at 30 June 2024
QUARTERLY NEWSLETTER
BRM NAVDISCOUNT
1
$
0.7 68.3
%
Warrant Price
$
0.0 4

»Investors are concerned that employment advertising will suffer
for SEEK as unemployment in Australia edges higher. Well run,
SEEK continues to improve its product and service offering for its
customers (businesses & recruiters), and should grow earnings
strongly in time.
»Johns Lyng’s earnings are being negatively impacted by a lower
level of ‘catastrophe’ weather events in Australia this year.
Investors have also dampened expectations of how rapidly it can
grow earnings in the US – a key growth market for the company.
We visited Johns Lyng’s management team in the US. We are
PERFORMANCE
as at 30 June 2024
3 Months
3 Years
(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder
Return
(4.4%)(6.7%)+12.6%
Adjusted NAV Return (2.2%)+5.7%+12.4%
Portfolio Performance
Gross Performance
Return
(2.1%)+7.9%+15.1%
Benchmark Index¹(0.9%)+7.1%+8.0%
1
Benchmark Index: S&P/ASX 200 Index (hedged 70% to NZD)
Non-GAAP Financial Information
Barramundi uses non-GAAP measures, including adjusted net asset value, adjusted NAV return, gross performance
return and total shareholder return. The rationale for using such non-GAAP measures is as follows:
»adjusted net asset value – the underlying value of the investment portfolio adjusted for capital allocation
decisions after expenses, fees and tax,
»adjusted NAV return – the percentage change in the adjusted NAV value,
»gross performance return – the Manager’s portfolio performance in terms of stock selection and currency
hedging before expenses, fees and tax, and
»total shareholder return – the return combines the share price performance, the warrant price
performance, the net value of converting any warrants into shares, and the dividends paid to
shareholders. It assumes all dividends are reinvested in the company’s dividend reinvestment plan, and
that shareholders exercise their warrants, (if they were in the money), at warrant expiry date..
All references to adjusted net asset value, adjusted NAV return, gross performance return and total shareholder
return in this newsletter are to such non-GAAP measures. The calculations applied to non-GAAP measures are
described in the Barramundi Non-GAAP Financial Information Policy. A copy of the policy is available at
barramundi.co.nz/about-barramundi/barramundi-policies.
Company% Holdings
Ansell2.5%
ANZ Banking Group2.4%
AUB Group5.5%
Audinate Group1.9%
Brambles4.1%
CAR Group4.9%
Commonwealth Bank5.1%
Credit Corp3.4%
CSL10.6%
Domino's Pizza3.2%
Fineos Corporation Holdings2.4%
James Hardies Industries Plc3.1%
Johns Lyng Group3.5%
Macquarie Group5.2%
Nanosonics0.8%
National Australia Bank3.4%
NEXTDC3.9%
oOh! Media2.4%
PWR Holdings2.1%
REA Group3.2%
ResMed4.0%
SEEK4.6%
WiseTech Global8.3%
Woolworths Group1.6%
Xero Limited5.4%
Equity Total97.5%
Australian cash2.4%
New Zealand cash0.2%
Total cash2.6%
Forward foreign exchange contracts (0.1%)
Total 100.0%
PORTFOLIO HOLDINGS
SUMMARY
as at 30 June 2024
COMPANY NEWS
Dividend Paid 27 June 2024
A dividend of 1.55 cents per share was paid to Barramundi
shareholders on 27 June 2024, under the quarterly
distribution policy. Interest in Barramundi’s dividend
reinvestment plan (DRP) remains high with 36% of
shareholders participating in the plan. Shares issued to DRP
participants are at a 3% discount to market price. If you
would like to participate in the DRP, please contact our share
registrar, Computershare on 09 488 8777.
Disclaimer: The information in this newsletter has been prepared as at the date noted on the front page. The information has been prepared as a general summary of the matters covered
only, and it is by necessity brief. The information and opinions are based upon sources which are believed to be reliable, but Barramundi Limited and its officers and directors make no
representation as to its accuracy or completeness. The newsletter is not intended to constitute professional or investment advice and should not be relied upon in making any investment
decisions. Professional financial advice from a financial adviser should be taken before making an investment. To the extent that the newsletter contains data relating to the historical
performance of Barramundi Limited or its portfolio companies, please note that fund performance can and will vary and that future results may have no correlation with results historically
achieved.
Barramundi Limited
Private Bag 93 502, Takapuna, Auckland 0740, New Zealand
Phone: +64 9 489 7074
Email: enquire@barramundi.co.nz | www.barramundi.co.nz
If you would like to receive future
newsletters electronically please email
us at enquire@barramundi.co.nz
SIGNIFICANT RETURNS IMPACTING
THE PORTFOLIO DURING THE
QUARTER IN AUSTRALIAN DOLLARS
AUDINATE
GROUP
-24
%
oOH!MEDIA
-24
%
JAMES
HARDIE
-23
%
CREDIT CORP
GROUP
-19
%
DOMINO’S
PIZZA
-17
%
impressed by the robust, methodical nature of their investment in
that market and how they’re resourcing that team. This positions
them to grow strongly in the US in coming years.
The long-term potential in each of these businesses
remains sound, and we added to our positions in
each of them during Q2.
Robbie Urquhart
Senior Portfolio Manager
Fisher Funds Management Limited
12 July 2024