Merlon Australian Share Income Fund

Webinar – 31 January 2019

Hamish Carlisle and Adrian Lemme

The information contained in this presentation is current as at December 31 2018 unless otherwise specified and is provided by Fidante Partners Limited ABN 94 002 835 592 AFSL 234668(Fidante Partners). It is intended solely for holders of an Australian Financial Services License or other wholesale clients (as defined in the Corporations Act 2001 (Cth)). It must not be passedon to retail clients. Any information provided or conclusions made, whether express or implied, do not take into account of any person’s objectives, financial situation or needs. Because ofthat, each person should, before acting on any this information, consider its appropriateness, having regard to their objectives, financial situation and needs. Past performance is not areliable indicator of future performance.

Fidante Partners Limited ABN 94 002 835 592 AFSL 234668 (Fidante Partners) is the responsible entity of the Merlon Australian Share Income Fund ARSN 090 578 171 (Fund) and issues theinterests in the Fund. Offers of interests in the Fund are contained in the current relevant product disclosure statement (PDS) provided by Fidante Partners which is available on the FidantePartners’ website www.fidante.com.au. The PDS should be considered before making any decision whether to acquire or continue to hold units in the Fund.

In preparing this presentation, Fidante Partners has relied on publicly available information and sources believed to be reliable, however, the information has not been independentlyverified by Fidante Partners. While due care and attention has been exercised in the preparation of the presentation, Fidante Partners gives no representation, warranty (express or implied)as to the accuracy, completeness or reliability of the information. The information in this presentation is also not intended to be a complete statement or summary of the industry, markets,securities or developments referred to in the presentation. Fidante Partners is not licensed or authorised to provide tax advice. We strongly recommend that an investor seek professionaltaxation and social security advice for their individual circumstances. Any examples used are for illustration purposes only. Any opinions expressed in this presentation, including as to futurematters, may be subject to change. Opinions as to future matters are predictive in nature and may be affected by inaccurate assumptions or by known or unknown risks and uncertaintiesand may differ materially from results ultimately achieved.

Disclaimer

2

3

Fundamental Research

Focused on sustainable cash flow

Portfolio Diversification

No reference to ASX200 weights

Downside Protection

Through research & hedge overlay

This focus on capital preservation and growth delivers

Sustainable IncomePaid monthly and majority franked

How Merlon Approach is Different

❑ Housing cracks present material opportunities

❑ Asaleo divestment well received

❑ Fund positioning and performance

4

Outline

4

5

Building materials stocks have sold off

5

Source: Bloomberg. Analysis: Merlon. Boral, James Hardie, Adelaide Brighton, Fletcher Building and CSR performance is relative to the ASX 200. Trex, Owens Corning and Masco is relative to the S&P 500

1 Last reported Financial year FCF divided by current enterprise value2 Current refers to current estimated FCF divided by current enterprise value

Source: Company reports. Analysis: Merlon. Fletcher Building free cash flow yield excludes cash outflows associated with their loss-making building projects given this business is being exited.

Share price performance relative to respective index Free cash flow yield

0%

2%

4%

6%

8%

10%

12%

Ad

elai

de

Bri

ghto

n

Bo

ral

CSR

Fle

tch

er B

uild

ing

Jam

es

Har

die

ASX

20

0

Last Current

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1/0

9/1

88

/09

/18

15

/09

/18

22

/09

/18

29

/09

/18

6/1

0/1

81

3/1

0/1

82

0/1

0/1

82

7/1

0/1

83

/11

/18

10

/11

/18

17

/11

/18

24

/11

/18

1/1

2/1

88

/12

/18

Boral

James Hardie

Adelaide Brighton

Fletcher Building

CSR

Trex (US)

Owens Corning (US)

Masco (US)

1 2

6

Mid-cycle housing starts a key driver of sustainable free cash flow

6

Source: Company reports. Analysis: Merlon. Source: ABS, Company reports. Analysis: Merlon.

Revenue exposure by end market Australian housing starts and CSR’s Building Products EBIT margin

6%

7%

8%

9%

10%

11%

12%

13%

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

Australia Housing Starts

CSR Building Products EBIT Margin

31%55%

75%

41%

95%24%

14%

25%

30%

5%

34%28% 18%

11%3%

11%

0%

20%

40%

60%

80%

100%

Ad

elai

de

Bri

ghto

n

Bo

ral

CSR

Fle

tch

er B

uild

ing

Jam

es

Har

die

Residential Non-residential Engineering Other

7

Sector offers strong value given forecast housing starts per capita

7

Source: ABS, Stats NZ, US Census Bureau. Analysis: Merlon. 1 As at 31 December 2018. Past performance is not a reliable indicator of future performanceSource: Company reports. Analysis: Merlon.

Housing starts per 1,000 persons Expected returns (Merlon valuations)1

-10%

0%

10%

20%

30%

40%

50%

Ad

elai

de

Bri

ghto

n

Bo

ral

CSR

Fle

tch

er B

uild

ing

Jam

es

Har

die

ASX

20

0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY6

8A

FY7

3A

FY7

8A

FY8

3A

FY8

8A

FY9

3A

FY9

8A

FY0

3A

FY0

8A

FY1

3A

FY1

8A

Australia US NZ

8

Australian cycle turning down, NZ also peaking

8

Source: ABS, Stats NZ. Analysis: Merlon. Source: ABS, Company reports. Analysis: Merlon.

Australian housing starts and NZ housing approvals Rolling annual growth in Australian housing finance and housing approvals

10,000

15,000

20,000

25,000

30,000

35,000

90,000

120,000

150,000

180,000

210,000

240,000

FY6

8A

FY7

3A

FY7

8A

FY8

3A

FY8

8A

FY9

3A

FY9

8A

FY0

3A

FY0

8A

FY1

3A

FY1

8A

Australia NZ (RHS)

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

No

v-2

00

8

No

v-2

00

9

No

v-2

01

0

No

v-2

01

1

No

v-2

01

2

No

v-2

01

3

No

v-2

01

4

No

v-2

01

5

No

v-2

01

6

No

v-2

01

7

No

v-2

01

8

New Dwelling and Construction Finance Housing Approvals

9

US cycle below trend but might peak below mid-cycle this time

9

Source: US Census Bureau. Analysis: Merlon Source: US Census Bureau. Analysis: Merlon.

US housing starts US annualised housing starts (seasonally adjusted)

500,000

900,000

1,300,000

1,700,000

2,100,000

2,500,000

FY6

8A

FY7

3A

FY7

8A

FY8

3A

FY8

8A

FY9

3A

FY9

8A

FY0

3A

FY0

8A

FY1

3A

FY1

8A

US

10

US leading indicators are bearish

10

Source: Bloomberg. Analysis: Merlon. Source: Bloomberg. Analysis: Merlon.* The National Association of Home Builders (a measure of US homebuilder’s activity)

US 30 year mortgage rate US NAHB* and US new home sales

3.03.23.43.63.84.04.24.44.64.85.0

De

c-1

5

Mar

-16

Jun

-16

Sep

-16

De

c-1

6

Mar

-17

Jun

-17

Sep

-17

De

c-1

7

Mar

-18

Jun

-18

Sep

-18

De

c-1

8

%

US 30 year mortgage rate

500

550

600

650

700

750

50

55

60

65

70

75

No

v-2

01

5

Feb

-20

16

May

-20

16

Au

g-2

01

6

No

v-2

01

6

Feb

-20

17

May

-20

17

Au

g-2

01

7

No

v-2

01

7

Feb

-20

18

May

-20

18

Au

g-2

01

8

No

v-2

01

8

00

0's

NAHB US New Home Sales (RHS)

11

Room to increase our holdings in the sector

11

❑ Maintain position in Fletcher Building

❑ Recently acquired a position in Boral

❑ While the remaining stocks look also to offer value, we need increased conviction

Outline

❑ Housing cracks present material opportunities

❑ Asaleo divestment well received

❑ Fund positioning and performance

12

13

No tears over consumer tissue sale

13

Source: Bloomberg, share price reaction relative to all ordinaries accumulation index Asaleo Care reaction as at 2pm on day of announcement. Note that Asaleo Care is not an ASX100 company.

Share Price Reaction on Day of Divestment Announcement (ASX100 Companies, 2000 to Today, Proceeds > 10% of Enterprise Value)

14

Outline

❑ Housing cracks present material opportunities

❑ Asaleo divestment well received

❑ Fund positioning and performance

14

15

Portfolio Analytics Portfolio ASX200

Number of Equity Positions 36 200

Net Market Exposure 71% 100%

Active Share 74% 0%

Valuation Upside1 +37% -6%

Trailing Free Cash Yield 7.1% 5.1%

Gross Distribution Yield 7.8% 6.2%

Price / Earnings Ratio 13.7x 15.6x

Current Fund Positioning

Portfolio as at 31 December 2018, 1Valuation Upside based on Merlon proprietary valuations as at 31 December 2018.

0%

1%

2%

3%

4%

5%

CBA QBE BEN WOW WBC AMP AZJ NWS CTX MFG

-10%

0%

10%

20%

30%

40% Fundamental Equity Portfolio Hedge Overlay ASX200

Outcomes

16

Total Return vs Risk (7 Years) Monthly Distribution Detail: Cents per Unit

Preliminary returns for the Fund and ASX200 grossed up for accrued franking credits and the Fund return is stated as at 31 December 2018.Merlon Australian Share Income Fund franking 1.9% p.a., ASX200 franking 1.5% p.a.* % of ASX200 Risk represents the Fund’s statistical beta relative to the ASX200. Past performance is not an indication of future performance.

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Total Franking

FY2013 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 1.29 6.79 2.26

FY2014 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.52 6.13 1.98

FY2015 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 0.52 6.24 2.20

FY2016 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.52 6.35 1.92

FY2017 0.53 0.53 0.53 0.53 0.53 0.3 0.53 0.53 0.53 0.53 0.53 0.53 6.36 2.02

FY2018 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.52 6.35 1.84

FY2019 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 0.53 6.36 1.90

Highlighted data are estimates at the date of this presentation

Cash

ASX200

(Net)

Merlon Share Portfolio (Gross)

Merlon ASIF (Gross)

0%

2%

4%

6%

8%

10%

12%

14%

0% 20% 40% 60% 80% 100%

An

nu

alis

ed

Ret

urn

% of ASX200 Risk*

17

Merlon Australian Share Income Fund Performance

Returns for the Fund and ASX200 grossed up for accrued franking credits and the Fund return is stated as at 31 December 2018. Past performance is not an indication of future performance.

FY19TD(%)

FY2018(%)

FY2017(%)

FY2016(%)

FY2015(%)

FY2014(%)

FY2013(%)

FY2012(%)

3 Years(%pa)

5 Years (% pa)

7 Years (% pa)

ASX200 Return -6.1 14.5 15.5 2.2 7.2 18.9 24.3 -5.1 8.1 7.1 11.1

Share Portfolio Excess Return 0.2 -6.9 8.0 4.8 2.3 -2.7 11.7 1.7 1.3 1.4 2.2

Hedge Overlay 1.9 -2.4 -5.6 -0.9 -1.7 -3.5 -9.3 2.6 -2.0 -1.6 -2.8

Portfolio Return (before fees) -4.0 5.1 17.9 6.1 7.8 12.8 26.7 -0.8 7.4 6.9 10.5

Portfolio Return (net of fees) -4.5 4.2 16.8 5.1 6.8 11.8 25.5 -1.7 6.4 5.9 9.5

Gross Yield 0.5 7.0 7.8 7.5 7.6 7.6 9.8 10.1 7.4 7.4 8.1

Average Daily Market Exposure 70% 68% 68% 70% 70% 69% 69% 69% 69% 69% 70%

18

Fundamental Research

Focused on sustainable cash flow

Portfolio Diversification

No reference to ASX200 weights

Downside Protection

Through research & hedge overlay

This focus on capital preservation and growth delivers

Sustainable IncomePaid monthly and majority franked

How Merlon Approach is Different

Adrian LemmeAnalyst/Portfolio Manager

Adrian joined Merlon Capital Partners as a Principal in May 2012 from AMP Capital where he was a Portfolio Manager/Analyst, responsible for investments in retail, food and beverage, transport and chemical sectors. Having commenced his career with Commonwealth Bank in 2003, Adrian was the lead transport analyst with CBA Equities Research prior to joining AMP Capital in 2010. Adrian holds a BMathFin (Hons) and CFA.

A bit more about your presenters

19

Hamish CarlisleAnalyst/Portfolio Manager

Hamish joined Merlon Capital Partners as a Principal in July 2010. Hamish was previously Head of Research, Asia Pacific Equities at AMP Capital Investors. Prior to AMP, Hamish was a Senior Director and Head of Australian Banks Research at Merrill Lynch Equities. He has also held positions at Burdett, Buckeridge, Young and National Australia Bank. Hamish holds a MBA with honours from The Wharton School, University of Pennsylvania. Hamish holds a B.Comm (Hons) and an MBA (Hons).

Thank you

20