2021 investment opportunities with Roger Montgomery

Navigating Infected Economies 2021 investment opportunities with Roger Montgomery 10 February 2021

Your host

Your presenter

Sarah Wolfe

Roger Montgomery

Netwealth Marketing

Founder & CIO Montgomery Investment Management

2

| netwealth

Portfolio Construction Webinar Series

Before we get started The views expressed in this presentation are those of the author and presenter and do not necessarily reflect those of Netwealth Investments Limited’s. It is a general summary only and contains opinions on public available information and services. It is not advice nor an endorsement of any product or service.

Netwealth Investments Limited (Netwealth) who is a provider of superannuation and investment products and services, and information contained within this presentation about Netwealth’s services is of a general nature which does not take into account your individual objectives, financial situation or needs. Any person considering a financial product or service from Netwealth should obtain the relevant disclosure document at www.netwealth.com.au and consider consulting a financial adviser before making a decision before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

This document is for general use. Modification of content is prohibited unless you have Netwealth’s express prior written consent.

3

| netwealth

General use

Housekeeping

1 CPD point available

This webinar is being recorded

Enter your questions in the chat

• Must have attended for >50 minutes

• Slides will be sent to you after the webinar via email

• We will get to them at the end of the webinar

• CPD details will be included in the post-webinar email

4

| netwealth

A little bit about Netwealth Suitable for investors of all types

Best in class technology and service

• Buy, sell and track super and nonsuper investments in one place

• Market leading, home grown platform

• Multiple account options to suit your different needs

• Award winning, nimble and highly responsive

• A wide range of investment options, such as ASX & international securities, 400 + managed funds, managed accounts and TDs

• Comprehensive suite of reports and charts • Mobile app • Investment Trends Winner • Chant West Best Advised Product • Forbes Asia’s 200 Best Under $1b

5

| netwealth

Portfolio Construction Webinar Series

2021 OPPORTUNITIES

NAVIGATING INFECTED ECONOMIES

WEBINAR FOR NETWEALTH INVESTMENTS FEBRUARY 2021 ROGER MONTGOMERY

Disclaimer

7

NAVIGATING INFECTED MARKETS • Overview & Performance.

• Are we in a bubble?

• Themes and Companies

MONTGOMERY SMALL COMPANIES FUND

MONTGOMERY SMALL COMPANIES FUND

NAVIGATING INFECTED MARKETS • Overview & Performance.

• Are we in a bubble?

• Themes and Companies

WHAT’S INFECTED MARKETS? • Covid19: Pandemic

• Jerome Powell: Unconventional Monetary Policy

• Roaring Kitty: Rampant Speculation(?)

ARE WE IN A BUBBLE? THE BEAR CASE 1) MARKETS ARE OVERVALUED •

Shillers CAPE Ratio

•

2nd highest ever

•

Doesn’t predict crash

•

Implied 10yr fwd returns

-0.58%

-1.45% 3.87%

7.95%

14.26%

18.23%

16.25%

17.94%

“When something works, people follow the herd, chase the gains, and bid it up to the point where future returns are paltry.” Howard Marks, 2021

2) SPECULATIVE EXCESS “Revenue is vanity, profit is sanity”

•

FY20 (year end is January) revenue $265 million.

•

Loss of $349 million.

•

IPO price was 3x last capital raising round just six months ago.

•

IPO pricing started at $75-85 per share.

•

Raised to US$100-110, and; •

Finally priced at US$120 per share, (75 times current revenue run rate).

•

Upon listing the share prices nearly doubled and the company now trades at more than 130 times revenue.

US$170 IPO price

14

2) SPECULATIVE EXCESS • At US$4.00 was arguably ‘value’ • Reducing store footprint • Next gen game consoles all with disc drives • Shorters didn’t update their thesis. Caught with more stock short than issued!

• This type of bubble can expand and collapse in isolation 15

2) SPECULATIVE EXCESS

Was US$394,000 per car delivered.

Roger Montgomery October ’18

•

Does transforming a car’s drive train from petrol to electric also transform the economics of making, delivering and servicing cars?

•

2020 revenue up 177% on 2017.

2020 market cap up 1600% on 2017.

•

Market cap greater than combined value of nine largest car makers

EXTREME PRICE MOVES

657%

1075%

2) DOMESTIC SPECULATIVE EXCESS “Revenue is vanity, profit is sanity” •

APT up 2204% in three years and up 1122% since March ‘20.

•

$44bn market cap. Greater than Telstra, Transurban, Cochlear, Woodside.

•

62% of ANZ’s Market Cap.

•

Revenue of $519mln.

85 x revenue)

•

FY20 EBITDA $44.4 1000 x EBITDA)

•

Founders sold $270 mln in most recent of second sell down in 12 months.

•

Must raise capital to fund book growth.

(= (=

POCKETS OF INSANE EXUBERANCE? Buy Now Pay Later companies

Company

Market Cap $M

Afterpay 37,643 FSA Group 135

Expected profit in 2021 $M +26 +16

Dividend Yield N/A 3%

Humm Group Laybye Money 3 Openpay Quick Fee Splitit Sezzle Zip Co

540

+67

2%

242 580 200 82 512 748 3,103

-16 +3 -22 -4 -45 -46 -60

N/A N/A N/A N/A N/A N/A N/A

Total

40,681

Loss of $82m

0.04%

Source: Macquarie

$40.7bn for a group of companies losing $82mln.

SUMMARY OF INFECTED MARKETS • Expensive markets & Pockets of Extreme Behaviour.

• High priced IPO’s frequently doubling on first day • 30-40x sales not uncommon • Easy Monetary Policy …but…

DOMINANT & EXTRAORDINARY Source of Sustainably High Return on Equity.

• Competitive Advantage is everything.

“Most powerful competitive advantage is the ability to raise prices without a detrimental • Reputation • Geographic Location • Scale • Technology/Patents/IP • Innovation • Network Effect • Barriers to Entry

impact on unit sales volume.”

Roger Montgomery

SCARCE ASSETS

• Scarce Assets – long runways for growth, monopolists, pricing power. Revenue growth, profit growth, margin structure, volatility, and corporate leverage superior • Extreme multiples for scarce assets is common during periods of low interest rates (particularly when rates are lower than economic growth rate).

DOMINANT AND EXTRAORDINARY

In 1998 there were 150 million Internet users globally; today there are more than that in Indonesia alone.

POCKETS OF INSANE EXUBERANCE PAST

…So, provided bubbles are in assets off the balance sheets of systemically important financial institutions, they can inflate and collapse in isolation, without disrupting the entire market nor the financial system.

ARE WE IN A BUBBLE? THE BULL CASE

Many still think there is a broad based disconnect with the real economy.

However, equities tend to rebound after a deep recession...

Source: Macquarie

ARE WE IN A BUBBLE? THE BULL CASE …when Real US 10yr bond bond yields were higher than stock market earnings yields (A, 1929) and (B, 1999), a crash shortly followed.

(A)

(B)

Note corrections also occurred in 1987, 1990, 2008 and 2020 but with real bond yields lower than equities

ARE WE IN A BUBBLE? THE BULL CASE • 37 Years of declining yields • Bull market attributed to yields • Especially longer duration assets

ARE WE IN A BUBBLE?

1.17%

(10 Year Bond Yield)

100% 5.17%

(Earnings Yield)

4%

+

(Equity Risk Premium)

=

=

19.34

5.17%

(Earnings Yield)

(Price Earnings Ratio)

EXOGENOUS CONSIDERATIONS • Trump lost US Election (consequences for fiscal policy) • Vaccine is now underway • Short term fiscal support is still necessary (low growth, low inflation has been in place for years) • Trump didn’t spend much on infrastructure (populist) • Rates to stay low

NAVIGATING INFECTED MARKETS

• Overview & Performance.

• Are we in a bubble?

• Themes & Companies

THEMES & COMPANIES

THEME #1 REOPENING

Cyclical Recovery: AQZ, BIN, CWP, CTD, GEM, IEL, INA, SIQ, TYR, WEB

GROWTH THEME 2: CLOUD – IT’S STILL EARLY…

PENETRATION / ADOPTION RATES

Music Streaming

Smartphon es

Laptops Cloud

Source: Morgan Stanley CIO Survey 1Q19

33

GROWTH THEME 2: CLOUD & TECH •

Vaughan Bowen; one of Australia’s great telecommunications entrepreneurs.

•

Was the founder of M2 Telecoms, which proved exceptionally rewarding for its long-term shareholders. 25c - $11.00 in a decade.

•

CEO Michael Simmons, who had worked closely with Vaughan at M2 brought him in.

•

Installs fixed wireless antennae and picks customers off the NBN with an expanded fixed wireless product.

•

fixed wireless bypass market, while not a systematic threat to the NBN, is offering “some reasonably compelling opportunities.” + private fibre infrastructure business operating wholesale access services across a large, growing national footprint of connected premises.

34

GROWTH THEME 3: EV’S

o BIGGEST DRIVER IS INTERNATIONAL CAPITAL FLOWS o JURISIDICTIONAL IMPOSITIONS OF ZERO EMMISSIONS o END OF COVID MEANS ATTENTION WILL TURN TOWARDS EV

35

GROWTH THEME 4: INCOME AND M&A

o Massive demand from international pension funds for income o Yields elsewhere close to, or zero o Aussie annuity income producers on yields of 3.5 - 5% o Evidence includes Telstra spinning off towers and NSW Government proposed sale of gambling taxation revenue stream.

36

SELECT SMALL CAPS TOP HOLIDNGS ALLIANCE AVIATION SERVICES (AQZ AU): Cyclical C19 winner & post C19 a winner MACQUARIE TELECOM GROUP LTD (MAQ AU): Core, cloud, estimated $70 valuation UNITI GROUP LTD (UWL AU): Bottom drawer, Structural winner.

CITY CHIC COLLECTIVE LTD (CCX AU): Long growth runway INGENIA COMMUNITIES GROUP (INA AU): Holidays, housing and ageing demographic EML PAYMENTS LTD (EML AU): Reopener SEVEN GROUP HOLDINGS LTD (SVW AU): Cyclical portfolio assets, Mining Services, Infra & Oil BAPCOR LTD (BAP AU): domestic travel beneficiary NATIONAL STORAGE REIT NSR AU: Steady income producer. Prized asset.

KEY TAKEOUTS 1) Market is expensive but driven by quality high growth companies 2) Pockets of exuberance exist but they can inflate and deflate in isolation 3) The market is not stretched compared to bonds and the difference between stock earnings yields and bond yields do not signal a major catastrophe.

4) There are themes with long runways for growth and reasonable valuations

CONTACT

States – VIC, SA & TAS

States – QLD

States – NSW, ACT & WA

E – sphillips@montinvest.com

E – ddenby@montinvest.com

E – mgollagher@montinvest.com

E – dcurnow@montinvest.com

M – 0417 529 890

M – 0455 086 484

M – 0409 771 306

M – 0405 033 849

States – National

MONTINVEST.COM ROGERMONTGOMERY.COM ASK A QUESTION

39

Questions and answers

Thank you

1 CPD point available

Webinar recording and slides

• Must have attended for >30 mins

• These will be included in the webinar resources email

• CPD details will be included in the webinar resources email

Podcast series on the investing landscape • Roger Montgomery • Magellan • T. Rowe Price • Ausbil • Schroders; and more

41

| netwealth

Disclaimer

This information has been prepared and issued by Netwealth Investments Limited (netwealth), ABN 85 090 569 109, AFSL 230975, RSE L0000192). It contains factual information and general financial product advice only and has been prepared without taking into account your individual objectives, financial situation or needs. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to your particular circumstances and seek any independent financial or other professional advice you may require. The relevant disclosure document should be obtained from netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any netwealth product.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Unless specified, all information in this document is as at 04/08/2020.

42

| netwealth