Lincoln Wholesale Australian Income (ETL0324AU) Report & Performance

Accent Group (AX1) – Was the best performing stock in the portfolio, closing the month +30.67% higher. The strength in price was partly due to another solid month for Australian retail sales, but predominately related to the company’s announcement that it had agreed to acquire youth apparel retailer Glue Store for $13m. The consideration would be funded out of existing cash facilities and, in time, will be an accretive investment. Monadelphous (MND) – Following a few months of underperformance, Monadelphous (MND) experienced a shift in investor confidence, rallying +22.6% for the month. The Fund Team believes the strong month was a related to growing confidence that the capex cycle for metals mining/ oil gas will continue in the face of soaring commodity prices and analyst upgrades. On top of this, the company announced that it had settled a lawsuit filed by Rio Tinto relating to a fire incident at their iron ore facility in 2019. The lawsuit was in part acting as somewhat of a headwind for investor sentiment.

Adairs Limited (ADH) – Was another retailer buoyed by the continued strong consumer spending environment. Retailers such as Adairs, who invested in a strong omni-channel strategy have benefited enormously from the growth in online spending. On top of that Adairs are well placed to benefit from the housing market recovery

Performance contributors this month included:

RIO Ltd (RIO) – A beneficiary of the cyclical rotation driven by a global economy recovering from COVID and elevated iron ore prices, reported a strong result in February. A US$3.09 per share ordinary dividend and US$0.93 special dividend were declared for the second half, for a full year payout of US$5.57. This represented a solid 72% payout ratio, higher than the 40–60% policy. BHP Ltd – The company reported well on 17 February and closed the month +12.8%. 1H21 profitability was ahead on 1H20 due to record iron ore prices and a strong recovery in copper. The company’s willingness to pay out all the free cash flow in a fully franked US$1.01 dividend was important because, with of Net Debt marginally below their target range, management is taking the view that the global economy is on the mend and iron ore prices will support strong cashflows through the current half.

Service Stream Ltd (SSM) – (-39.6%) reported late in the month and management indicated 2H21 earnings to be in-line with its already lowered expectation due to ongoing COVID disruptions. From an income perspective, a 1H21 dividend of 2.5cps was announced (vs 4.0cps in 1H20 and below expectations). This means that forward dividend estimates are likely to decrease in-line with lower earnings expectations (from ~8.8cps to ~5cps). Although a disappointing outcome, the Fund Team sees little near term risk for further downside and as such has decided to retain the position in the portfolio until the dividend in March.

The Lincoln Australian Income Fund closed the year 5.42% higher, outperforming its benchmark index by 3.1%. Over the month, the Fund rose 0.78% which represented a small underperformance of its benchmark by 0.5%. The materials sector played an important role in the market over the month and did a lot of the heavy lifting.

Performance contributors this month: Accent Group Ltd (AX1) – (+30.7%) Was the strongest performing stock in the Fund for the month after a trading update reported a continuation of strong sales in the first 20 weeks of FY21. Digital sales were strong as were like for like sales despite the impact of lockdowns on the Victorian stores.

Nanosonics Ltd (NAN) – (+29.3) Continued October’s strength retracing roughly five months of losses. Positives come from a recent 1Q21 trading update reporting the company’s sale of Trophon units, Consumables revenues, and an improvement in hospital access underscoring an operational recovery.

Growth to Value Rotation – Adairs Ltd (ADH), Rhipe Ltd (RHP) and Dominos Pizza (DMP) fell -16%, -12.6% and -11.2% respectably getting caught in the movement away from pandemic beneficiaries into cyclical stocks and previous underperformers. Gold (XAUAUD) – Gold was down 9.35% in AUD terms as money shifted from risk off assets to risk on asse

The Lincoln Australian Income Fund (Fund) rose by 0.81% during October, underperforming its benchmark by 1.13%. ResMed Inc produced a quarterly result that was well ahead of analyst expectations as the company benefitted from surging ventilator sales and solid cost controls. Adairs Ltd was also up strongly, providing the market with another robust trading update with total sales up 22%. The lift in revenues was driven by online sales which skyrocketed 134%. The Fund continues to outperform its index over 1 year, 3 years and since inception and is amongst the best performing funds in its category according to Money Management’s^^ list of high yield Australian equity funds.