Information Meetings – Presentation

18 March 2019




The Manager
ASX Market Announcements
Australian Securities Exchange
Exchange Centre
Level 4
20 Bridge Street
Sydney NSW 2000


Electronic Lodgement


Australian Foundation Investment Company Limited
Information Meetings - Presentation


Dear Sir or Madam,


Please find attached the presentation to be given at the Information Meetings being
held in March 2019.


Yours faithfully




Matthew Rowe
Company Secretary

Shareholder Meeting
March 2019

Shareholder Meetings March 2019
Disclaimer
Australian Foundation Investment Company Limited and its subsidiary AICS (AFSL 303209), their related
entities and each of their respective directors, officers and agents (together the Disclosers) have prepared
the information contained in these materials in good faith. However, no warranty (express or implied) is made
as to the accuracy, completeness or reliability of any statements, estimates or opinions or other information
contained in these materials (any of which may change without notice) and to the maximum extent permitted
by law, the Disclosers disclaim all liability and responsibility (including, without limitation, any liability arising
from fault or negligence on the part of any or all of the Disclosers) for any direct or indirect loss or damage
which may be suffered by any recipient through relying on anything contained in or omitted from these materials.
This information has been prepared and provided by AICS. To the extent that it includes any financial product
advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial
situation or particular needs. Before making an investment decision an individual should assess whether it
meets their own needs and consult a financial advisor.

Shareholder Meetings March 2019
Our Investment Approach

Shareholder Meetings March 2019
AFIC is a long-term investor in a diversified portfolio
of quality companies

Shareholder Meetings March 2019
Dividends are an important part of investor returns in Australia
– 10 years to 28 February 2019

Shareholder Meetings March 2019
How the AFIC portfolio (including benefit of franking) is
tracking against the Index – 10 years to 28 February 2019
Assumes the reinvestment of AFIC dividends and an investor can take full advantage of the franking credits.

Shareholder Meetings March 2019
Financial Results

Shareholder Meetings March 2019
Half-year financial summary – 31 December 2018

Shareholder Meetings March 2019
Major components of income – half-year to 31 December 2018
Half-Year
2018
$’000
Half-Year
2017
$’000
Dividends and distributions246,708150,792
Net gains/losses on trading portfolio4,187-6,553
Includes recognition of a dividend because of Coles demerger from
Wesfarmers and Rio Tinto and BHP buybacks.
Income from trading portfolio (which includes the marking to market of open
option positions).

Shareholder Meetings March 2019
Ending refundability of franking credits – we continue to act
on shareholders behalf
• AFIC has provided a template letter on its website for shareholders to write
to their parliamentary representatives.
• We have engaged through various industry groups to lobby on your behalf.
• Publicised where appropriate through the media.
• Submission by AFIC to the House Economics Committee.
• Extensive survey of shareholders so we can better understand the issue
and the potential impact on shareholders.
• Looking at further strategies to try and influence policy makers.

Shareholder Meetings March 2019
Shareholder survey refundability of franking credits –
your response
A strong response with 14,362 replies received.
85% of respondents negatively impacted and dependent on franking
credit refunds.
79% of respondents retired or approaching retirement.

Shareholder Meetings March 2019
Market Settings

Shareholder Meetings March 2019
The total return of the ASX 200 has been volatile – 12 months
to 28 February 2019

Shareholder Meetings March 2019
With some growth sectors and commodities very strong, banks
at the other extreme – 12 month returns to 28 February 2019

Shareholder Meetings March 2019
Valuations (price/earnings ratio) have moved back toward
the top of the long-term range
Source: FactSet

Shareholder Meetings March 2019
Profit margins still well above the long-term average
ASX 200 EBIT Margin (medium)

Shareholder Meetings March 2019
Returns and the Portfolio

Shareholder Meetings March 2019
Relative portfolio and share price performance, including
franking – per annum returns to 28 February 2019

Shareholder Meetings March 2019
Share price was trading close to net asset backing at end
of February 2019, down from a large premium 10 years ago
0.2%

Shareholder Meetings March 2019
China remains important to Australia
Headwinds
• Economy slowing – GDP growth ~ 6.0% to 6.5%.
• US trade/ tariff concerns.
• Environmental pressures, impacting multiple industries.
China’s response
• Easier credit expected to drive a boost to infrastructure spend.
• Personal tax cuts.
• ‘One Belt One Road’ or OBOR initiative.
Observations on Australia’s largest trading partner

Shareholder Meetings March 2019
LNG demand: Asia driving step change
Environmental pressures are driving a switch from coal usage to gas/ LNG
Coal to gas switch is across industry,
homes and heavy transport.
Chinese gas consumption to treble
from 2010 – 2020.
China accounts for >50% of global
LNG (import) demand.
Korea and Europe also use tax
incentives to drive shift from coal.
Portfolio Holdings: OSH, WPL

Shareholder Meetings March 2019
AFIC resources: focus on quality assets
Mining investment has slowed considerably with miners focused on profits
and balance sheet
• Tier 1, long-life, low cost assets.
• Long term demand:
Iron ore, coking coal (Steel production) –
no need for new supply
Copper – need more supply
Aluminium – light weight metal, solid demand
• Brazilian tailings dam.
• Advantageous long term investments and assets.
Portfolio holdings: BHP, RIO, AWC

Shareholder Meetings March 2019
Importantly the large resource companies have changed
their approach
‘Old’
‘New’
Under ‘old’ increasing commodity prices:
Large acquisitions
Geared balance sheets
Progressive dividend policy (low dividends)
Shareholder outcomes were not optimal
Sale of non-core businesses
Value over volume
Dividend policy aligned with profits (higher
dividends)
Strong balance sheets
Off market buy-backs
Shareholder outcomes top of mind
Under ‘new’ increasing commodity prices:

Shareholder Meetings March 2019
Recent surge in iron ore price has driven share price of BHP
and Rio Tinto
BHP
Rio Tinto
Source: FactSet
Iron Ore Price

Shareholder Meetings March 2019
Terms of Trade* for Australia is rising on the back of higher
commodity prices
* The ratio of the price of exports to the price of imports.

Shareholder Meetings March 2019
House prices are weakening
Tighter lending standards
Impacting consumption
Falling consumer confidence
Lower wage growth
Compounding the uncertainty
in an election year

Shareholder Meetings March 2019
Featured holdings – National Australia Bank
(recent purchase using call options to enhance income)
Source: FactSet
purchased
purchased

Shareholder Meetings March 2019
Featured holdings – National Australia Bank
(continued)
Source: FactSet
Sector has been under pressure from
Hayne Royal Commission which has
contributed to a fall in valuations.
Quality assets, particularly in SME banking.
New Chair with strong banking
experience, change in leadership
will bring about required transformation.
Long-term valuations appealing.
Good income return even if earnings
growth is constrained.
purchased

Shareholder Meetings March 2019
Hayne Royal Commission – Banks
A better focus on customer outcomes is good for business.
Sector will have to cope with permanent step change in compliance costs.
Has led to a significant change in management across the sector.
Over time the 4 major banks are likely to emerge in a much stronger position.

Shareholder Meetings March 2019
Featured holdings – James Hardie
Source: FactSet
What we like:
Leadership position in a growing
end market.
Self help drivers delivering growth
above the market cycle.
Higher exposure to renovation market
than new housing construction.
Cash generative business model.

Shareholder Meetings March 2019
Featured holdings – Wesfarmers demerger
• Leading supermarket retailer:
• 809 Supermarket stores
• 899 Liquor stores
• 711 Convenience stores
• Challenges:
• New management
• Investment phase
• Supportive dividend yield.
• Bunnings:
Australia’s no. 1 hardware brand –
represents 60% of Group EBIT.
• Kmart:
Leading discount department store –
represents 17% of Group EBIT.
• Strong balance sheet post demerger:
• Potential acquisitions
• $2/share potential capital returns
if no acquisitions found
• Challenges – slowdown in Bunnings
sales as housing cycle turns.
The WES demerger has created two stand-alone ASX20 listed businesses.
(New)

Shareholder Meetings March 2019
Major moves upward in top 20 from February 2018
Buying, good yield,
quality long term assets,
industry leadership,
international exposure
8
th
Largest holding
Rights issue, good yield,
expanding Sydney
network, quality long-
term assets
5
th
Largest holding4
th
Largest holding
Share price appreciation,
industry leadership,
international exposure

Shareholder Meetings March 2019
Major moves upward in top 20 from February 2018
(continued)
Buying, good yield,
quality long-term
assets, monopoly
infrastructure
NZ company, share
price appreciation,
‘owner driver culture’,
well positioned in the
logistics industry
Buying, good yield,
quality long-term
assets, good
industry economics
13
th
Largest holding
New to top 20 –
16
th
Largest holding
New to top 20 –
20
th
Largest holding

Shareholder Meetings March 2019
Top 10
holdings
– 28 February 2019
Rank Company% of Portfolio
Major changes –
% as at Feb 2018
1
Commonwealth Bank of Australia*8.5%
2
BHP*7.2%6.1%
3
Westpac Banking Corporation6.0%6.7%
4
CSL 5.3%4.4%
5
Transurban Group*4.1%3.2%
6
National Australia Bank* 4.0%
7
Australia and New Zealand Banking Group 3.4%
8
Macquarie Group 3.3%1.6%
9
Wesfarmers 3.2%
10
Amcor 2.7%
* Options were outstanding against part of the holding.

Shareholder Meetings March 2019
Rank Company% of Portfolio
Major changes –
% as at Feb 2018
11
Rio Tinto 2.7%3.9%
12
Woolworths Group 2.3%
13
Woodside Petroleum* 2.2%1.5%
14
Brambles 2.0%
15
Oil Search 2.0%
16
Sydney Airport*1.8%Not in top 20
17
Telstra Corporation 1.8%2.5%
18
James Hardie Industries1.5%
19
Qube Holdings1.4%
20
Mainfreight 1.3%Not in top 20
Next 10
holdings –
28 February 2019
* Options were outstanding against part of holding.

Shareholder Meetings March 2019
Closing Remarks

Shareholder Meetings March 2019
Recent company reporting season
• CBA, bank sector: struggling for profit growth, regulatory headwinds.
• Resources: very strong cash generation, returning capital to shareholders.
• Energy sector: rising cash flows, new major projects moving forward.
• Telco’s: evolving sector, NBN, 5G, competition. TPG/Vodafone merger.
• Industrials: mixed revenue results, cost pressures rising.
• Healthcare: strong earnings growth against high expectations.
• Utilities: rising consumer bills, regulatory change, energy substitution.

Shareholder Meetings March 2019
Current issues we are focusing on
• Met with 100+ companies in recent reporting season.
• Investment team visiting portfolio holdings in UK/ Europe/ US/ China/ HK
in coming months.
• Themes:
Australian credit growth/ housing market.
Regulatory scrutiny on financial services, utilities set to rise.
Continued impact of technology on businesses, including emergence of new opportunities.
Finding value – expected long-term growth versus what you have to currently pay.
Fallout from trade disputes.
US economy has good momentum, absorbing the impact of rising interest rates to date.

Shareholder Meetings March 2019
Last 10 years and next 10 years?
An update from our view six months ago
?
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Current view

Shareholder Meetings March 2019
The US market is likely to influence the Australian market –
where the US market currently sits
Low rates –US Govt 10 Year
High debt –Total Debt/ Total Equity
High valuations –PE Ratio
%
%
Source: FactSet