QV Equities Limited
Annual Report 2018

Download report
Bookmark report

More annual reports from QV Equities Limited:

2023 Report
2022 Report
2021 Report
2020 Report
2019 Report

Peers and competitors of QV Equities Limited:

Jupai Holdings Limited
Pendal Group Limited
Olympia Financial Group Inc.
Kingswood Holdings Limited
Riverfort Global Opportunities

Plain-text annual report

Q V E Q U I T I E S A N N U A L R E P O R T 2 0 1 8 QV Equities Limited ABN 64 169 154 858 Level 24, 25 Bligh Street, Sydney NSW 2000 Corporate Enquiries: 1300 552 895 Investment and General Enquiries: 1800 868 464 info@qvequities.com qvequities.com Annual Report Year ended 30 June 2018 Corporate Directory Directors Peter McKillop (Independent Director, Chairman) John McBain (Independent Director) Jennifer Horrigan (Independent Director) Anton Tagliaferro (Non-independent Director) Simon Conn (Non-independent Director) Secretary Zac Azzi Investment Manager Investors Mutual Limited Level 24, 25 Bligh Street Sydney NSW 2000 (AFSL 229988) Registered Office Level 24, 25 Bligh Street Sydney NSW 2000 Telephone: (02) 9232 7500 Fax: (02) 9232 7511 Email: info@qvequities.com Website: www.qvequities.com ABN 64 169 154 858 Share Registrar Link Market Services Limited 1A Homebush Bay Drive Rhodes NSW 2138 Telephone: 1800 868 464 Auditor Pitcher Partners Level 22 MLC Centre, 19 Martin Place Sydney NSW 2000 Stock Exchange Australian Securities Exchange (ASX) ASX code: QVE Ordinary shares 2 | QV Equities Limited Annual Report 2018 Contents Contents Financial Highlights Chairman’s Letter Investment Manager’s Report Directors’ Report Auditor’s Independence Declaration Financial Statements for the year ended 30 June 2018 Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flow Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report to the Shareholders Shareholder Information 4 6 8 11 19 21 22 23 25 26 44 46 50 Corporate Governance Statement The Board of Directors of QV Equities Limited (“the Company”) is responsible for corporate governance. The Board has chosen to prepare the Corporate Governance Statement (‘CGS’) in accordance with the third edition of the ASX Corporate Governance Council’s Principles and Recommendations under which the CGS may be made available on a company’s website. Accordingly, a copy of the Company’s CGS is available on the Company’s website: www.qvequities.com QV Equities Limited Annual Report 2018 | 3 Xxxxxxx Financial Highlights Year in Summary FY2018 Profit after tax $11,143,913 ($8,497,402 in FY17) Management Expense Ratio 0.99% (1.01% in FY17) Earnings Per Share (cents) 4.05 Basic (3.61 in FY17) Dividends 5.2 cps Fully Franked (declared for FY 2018) (4.0cps in FY17) Net Assets $326,002,469 ($320,401,651 in FY17) Historical NTA Growth Portfolio Return (Pre-tax)* +6.0% Portfolio Return (Post-tax)* +5.6% Portfolio Return (Pre-tax) since inception +9.6% p.a. Benchmark*# +15.9% ASX 300* +13.2% Benchmark# Return since inception +11.9% p.a. Net Tangible Assets (NTA) 1.23 (pre-tax cum div) 1.18 (post tax cum div) All data as at 30 June 2018 *Returns are measured for the 2018 financial year # S&P/ASX300 ex20 index Historical Dividend Growth QVE Dividend Payments 1.5 1.5 1.8 2.0 2.0 2.1 3.1 1.0 2.1 E R A H S R E P S T N E C 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0.5 FY15 Interim FY15 Final FY16 Interim FY16 Final FY17 Interim FY17 Final FY18 Interim FY18 Final & Special 4 | QV Equities Limited Annual Report 2018 August -14$1.30$1.25$1.20$1.15$1.10$1.05$1.00$0.95$0.90NTA PER SHAREOctober -14December -14February -15April-15June-15August -15October-15December-15February -16April-16June-16August -16October -16December-16February-17April-17June-17August-17October-17December-17February-18April-18June-18QVE Pre-tax NTA QV Equities Overview QV Equities Limited (the “Company”) is a Listed Investment Company, established to invest in a diversified portfolio of ASX listed entities outside the S&P/ASX 20 Index. The Company’s investment portfolio is managed by Investors Mutual Limited (IML). Investment Objective The Company’s primary objective is to deliver long term value to shareholders through a combination of capital growth and income, by investing in a diversified portfolio of quality ASX listed entities outside the S&P/ASX 20 Index. The Company aims to achieve after-fee returns over a five-year plus investment period that are higher than the S&P/ASX 300 Accumulation Index, excluding that part of the return that is generated by the securities comprised in the S&P/ASX 20 Accumulation Index. Foundation of the Company’s Investment Strategy The Australian sharemarket is heavily concentrated amongst the larger entities both in terms of market capitalisation and industry sector. The S&P/ASX 20 Index - representing the 20 largest entities by market capitalisation on the ASX - accounts for 52% of the S&P/ASX 300 Index by market capitalisation and has a high, 71% concentration in the Financial and Resource sectors as at 30 June 2018. Investment Strategy The Company’s investment strategy is to create a diversified and balanced portfolio of ASX listed securities outside the S&P/ ASX 20 Index, aiming to capitalise on IML’s disciplined investment approach and intensive research process. When assessing investment opportunities, IML’s team of highly experienced analysts undertake a comprehensive ‘bottom-up’ approach in identifying, researching and valuing companies. IML’s approach to identifying opportunities for the portfolio is systematic, disciplined and focuses on finding those entities that meet IML’s investment criteria and then determining an appropriate valuation for those entities. This is the same approach that has been applied successfully by IML for over 20 years. In addition to long term capital growth, IML is focused on long term income growth for the portfolio, seeking investment opportunities that pay sustainable and growing dividends with attractive franking credits, with the portfolio being diversified across both industry and individual securities. QV Equities Limited Annual Report 2018 | 5 Chairman’s Letter Dear Shareholders, This is the fourth annual report to shareholders, since the Company listed on the Australian Stock Exchange (‘ASX’) on 22 August 2014. Our objective The Company’s key objective remains unchanged - to deliver both long-term capital growth and income to our shareholders. We do this by investing in a quality, diversified portfolio of securities listed on the ASX, excluding those in the S&P/ASX top 20 Index. The Australian sharemarket, as measured by the ASX 300 Index, is highly weighted towards the twenty largest entities. The top 20 Index is heavily concentrated in the volatile Financial and Resources sectors and accordingly may not provide investors with an opportunity to diversify their portfolios. In comparison, the remaining part of the market (ex-20), where the QVE portfolio is invested, offers investors the opportunity for greater diversification across various sectors and stocks. The ex-20 segment is less researched than the larger companies listed on the ASX and as such, offers investors an enhanced opportunity to gain the long-term capital growth and income they are seeking. In October 2017, the Company was named as one of three finalists for the Listed Investment Company of the Year in the Professional Planner/Zenith Fund Awards for 2017. We are proud of this achievement and the independent recognition of the Company as a high-quality listed investment company. Our portfolio of securities is managed by Investors Mutual Limited (the “Manager”), a multi award-winning and experienced fund manager with an excellent track record of managing Australian equities since 1998. The Manager seeks to target quality entities led by capable management, which have competitive advantages, a recurring and predictable earnings stream which can grow over time and whose securities can be bought at an attractive entry price. 2018 marks the 20th year in which Investors Mutual has been successfully managing investors’ funds. During the year Investors Mutual joined Natixis Investment Managers, a Global group that has ownership in fund managers world-wide. Under Natixis, Investors Mutual retains its autonomy, investment philosophy and culture and benefits from the support of a global group which has a track record of successful ownership in investment management companies around the world. Market overview The ASX300 Accumulation Index enjoyed a solid year returning +13.2% and finishing at its highest level in a decade. The main drivers of returns were the Resources sector which gained +40% over the financial year and the Consumer Staples sector which gained +30%. The Healthcare sector also continued its strong run returning +26.6% over the year. Conversely, in the Telecommunication sector, competition continued to intensify with the NBN rollout contributing to a negative return of 28.3% for the year. It was also a challenging year for the Financials sector with the Royal Commission fallout leading to a flat return for the sector. Fiscal year 2018 was fairly eventful for global markets. The positive mood in the first half turned into a more cautious one in the second half as investors responded to US interest rate rises and tax cuts as well as geopolitical events around the world, notably North Korea’s nuclear threat, US/China trade tariffs, higher oil prices and the re- emergence of nationalist politics in Europe. Investment performance For the 12 months to 30 June 2018, the Company’s portfolio returned +6.0% before tax, whilst a solid outcome, it lagged the ASX ex 20’s return of +15.9% primarily as a result of the portfolio’s low weighting to the volatile Resources sector which had a strong year. The past 12 months has been challenging with upward momentum in the market taking many companies’ valuations beyond their fundamentals. On behalf of shareholders, the Manager continues to adhere to its disciplined investment strategy which has defined its approach to investing for the past 20 years – through all market cycles. 6 | QV Equities Limited Annual Report 2018 Chairman’s Letter (continued) With the market at ten year highs, the Manager is investing with caution. The Manager has provided details of the Company’s investment performance and an overview of holdings and activity in the Investment Manager’s Report on pages 8 to 10. Financial results For the year ended 30 June 2018, the Company delivered a net after-tax profit of $11.1 million. On an earnings per share basis, the FY 2018 result equates to after-tax earnings of 4.05 cents, up 12.19% from FY2017. A fully franked interim dividend of 2.1 cents per share was paid on 4 April 2018. A final fully franked dividend for the 2018 financial year, of 2.1 cents and a special dividend of 1.0 cents per share, will be paid on 31 October 2018 (the ex-dividend date for the final dividend will be 1 October 2018). This represents an increase of 30% on the declared dividends for FY2017. Pleasingly, this means that shareholders who subscribed four years ago to the IPO in August 2014, have now been paid a total of 11.4cps in fully franked dividends in addition to the growth in the NTA. AGM Shareholders are invited to attend our fourth Annual General Meeting to be held on Wednesday 24 October at 10am, in the Adelaide Room of the Sofitel Wentworth in Sydney. Following the AGM, the Manager will provide an Investor Update. For those not able to attend, a webinar will be held later in the day. Further details regarding the AGM proceedings will be sent to shareholders shortly. Shareholder communication We are committed to engaging shareholders with regular and consistent communication through a variety of formats: y Monthly NTA reports, including investment commentary y y y y Regular investment videos Investment insights from the Manager Annual shareholder briefings in major cities Regular webinars We would encourage shareholders to subscribe to receive these updates and invitations via the Company’s website www.qvequities.com. In summary The Board continues to believe that a carefully selected holding of ex-20 stocks, managed by Investors Mutual Limited, will provide good opportunities for shareholders going forward. The Company’s investment portfolio remains prudently positioned in good quality companies, underpinned by reasonable valuations – with upside potential, sustainable earnings from a diverse range of sectors, solid and consistent levels of franked dividends and cash ready to take advantage of market volatility. I look forward to further discussing the results presented in this Annual Report and to meeting as many of our shareholders as possible at the Annual General Meeting on 24 October. Yours sincerely, Peter McKillop, Chairman 15 August 2018 QV Equities Limited Annual Report 2018 | 7 Investment Manager’s Report Investors Mutual Limited (‘IML’) is pleased to deliver its fourth investment report for QV Equities Limited. Synchronised global economic growth and continued low interest rates pushed markets higher over FY 2018 with many company valuations pushed above their fundamentals. As such, IML has remained cautious and prudent in managing the QVE portfolio of stocks outside the ASX top 20. IML continues to maintain strict adherence to the investment mantra which has defined its approach to investing for the past 20 years through all market cycles. IML looks to invest in companies at an attractive entry price, which possess the following four clear quality characteristics: y y y y a competitive advantage over their peers; recurring predictable earnings; a capable management team; and the ability to grow earnings and dividends over time. As at 30 June 2018, the Company’s portfolio was made up of 42 listed securities spread across various ASX sectors. Some of the top holdings of the Company include well-known companies such as Caltex, Crown and Orica as well as other lesser known but quality companies such as Pact Group, Spark Infrastructure and Steadfast. Portfolio Allocation as at 30 June 2018 Consumer Staple Information Technology Real Estate Industrials Cash Energy Utilities Health Care Materials Financial Consumer Discretionary 8 | QV Equities Limited Annual Report 2018 Investment Manager’s Report (continued) Key Equity Investments Description Holding weight* Pact Group Sonic Healthcare Caltex Australia Clydesdale Bank Amcor Limited Crown Resorts Rigid plastics packaging company Global pathology company Petrol retailer and refinery company UK retail bank Global packaging company Entertainment and gaming company Fletcher Building NZ building materials company Spark Infrastructure Owner of electricity distribution and transmission assets Orica Steadfast Manufacturer of commercial grade explosives & chemicals Insurance broker Bank of Queensland Australian regional bank Mayne Pharma Global Pharmaceutical company Skycity Entertainment Entertainment and gaming company Ansell Global glove manufacturer Integral Diagnostics Radiology company Aurizon GWA Australian rail company Owner & importer of bathroom brands incl. Caroma Southern Cross Media Radio, television and digital assets company Z Energy Genesis Energy NZ Petrol retailer and refinery company NZ electricity generation, natural gas & LPG retailing company *Holding weight as at 30 June 2018 The complete portfolio is shown on pages 50 to 51 of this financial report. 4.28% 4.06% 4.05% 3.99% 3.92% 3.78% 3.77% 3.71% 3.34% 2.99% 2.86% 2.44% 2.19% 2.07% 2.05% 2.05% 2.01% 1.94% 1.86% 1.53% For the 12 months to 30 June 2018 the QVE portfolio returned +6.0% before tax and after fees. While a solid outcome, it lagged the ASX ex 20’s return of +15.9% primarily as a result of the portfolio’s low weighting to the volatile Resources sector which had a strong year. The portfolio benefited from its exposure to holdings such as Tox Free Solutions, Integral Diagnostics and Crown Resorts which all performed well. The Resource sector rallied strongly, mainly on the back of a stronger oil price with companies such as Santos, Whitehaven Coal, Beach Energy and WorleyParsons all performing strongly. These are stocks which do not fit the four quality criteria that we look for in companies. Their earnings, dividends and share prices can be very unpredictable and volatile over time. One of the best performers for QVE over 2018 was Tox Free Solutions. Tox is a leader in hazardous, industrial and healthcare waste with its licences, treatment facilities across Australia and scale creating significant barriers to entry. With waste removal and disposal an essential service, the revenues of Tox are highly recurring and defensive. The increasing diversion of waste away from landfill as well as a number of strategic acquisitions over the last few years has also supported a solid growth outlook over the medium term. Given this defensive and growing profile, it was little surprise when listed peer Cleanaway emerged as a bidder for the company at a 30% premium at $3.48 per share in late calendar 2017, a bid which we accepted thereby realising very good capital gains for QVE. Crown Resorts was another strong contributor over the year, gaining +21%. Crown is the owner of strong and exclusive casino franchises in Melbourne and Perth, and has also commenced construction of the Crown Sydney Hotel Resort at the new Barangaroo South precinct in Sydney. The barriers to entry to Crown’s businesses are high as the company is the owner of long term exclusive casino licences in desirable locations in central Melbourne and Perth and that enjoy strong incumbency benefits. Crown has addressed market concerns over future funding of Crown Sydney in recent times by divesting its stake in Melco Crown in Macau, exiting out of its development project in Las Vegas, and selling its CrownBet bookmaking business. Focusing on its core Australian operations has allowed the company to repair its balance sheet, undertake capital management by paying an 83cps special dividend to shareholders and undertaking a $500m on-market buyback. QV Equities Limited Annual Report 2018 | 9 Investment Manager’s Report (continued) Looking forward, while global growth has improved, risks to the outlook remain. High consumer debt levels in most developed economies means that earnings growth for many companies remains difficult to achieve. While the outlook for interest rates in most parts of the world remains benign, the Federal Reserve in the US and other central banks are moving towards normalising cash rates. Australia’s inflation rate remains low at around 2%, and with household debt at record levels, interest rates in Australia look set to remain low for some time as there is little incentive for the RBA to raise the cash rate from its current record low of 1.5% in the near term. IML remains cautious on the outlook for markets. Given the low alternative rates of return from cash and bonds many equity valuations remain elevated as investors have bid up share prices in search of income and growth. Markets, which repriced higher on the back of the Trump election victory in late 2016, have remained buoyant as US economic and labour data has remained robust. Global indices now sit at record levels. As a consequence, we continue to hold a reasonably high cash weighting, reflecting the high valuation of many companies. In what is a volatile and variable growth environment going forward, IML remains focused on investing in companies that we believe are reasonably valued and that can grow through their own initiatives rather than relying on general economic tailwinds. IML continues to focus on companies that can grow their earnings through identified ‘self-help’ initiatives. These initiatives include; companies capable of making accretive bolt-on acquisitions, such as Pact Group; companies growing market share, such as GWA Group; companies restructuring their business, such as Caltex and Crown Resorts; or companies that have contracted revenue growth, such as Spark Infrastructure and Shopping Centres Australasia. It remains our pleasure to continue to apply IML’s quality and value investment philosophy and approach to the Company’s portfolio for another year. The ex-20 sector of the market is a sector which has delivered good returns for our investors over many years, and which we believe continues to offer investors good opportunities while also diversifying their exposure away from the ASX top 20. The last 18 months has been challenging for value investors such as IML. Companies exposed to the latest theme or fad are being aggressively bid up, despite what are often poor fundamentals or a lack of sustainable earnings. We remain focused on investing in companies with strong fundamentals that are trading at reasonable valuations. With the market willing to pay ever higher multiples for growth, we continue to believe that portfolios such as QVE’s which are underpinned by value and quality stocks remain the best place to be. Our objective is clear; to deliver reasonable, long-term growth over time through a steadily growing NTA, whilst also paying a healthy dividend to the Company’s shareholders sourced predominantly from the dividends paid by the companies in which we invest. As true-to-label value investors we refuse to be carried away with the latest fads, concepts or momentum plays. Together with the investment team, we look forward to meeting shareholders either at the upcoming AGM or any of the investor forums which we will be holding early in 2019. Anton Tagliaferro Investment Director Investors Mutual Limited 15 August 2018 Simon Conn Senior Portfolio Manager Investors Mutual Limited 15 August 2018 10 | QV Equities Limited Annual Report 2018 Directors’ Report The Directors present their report together with the financial report of QV Equities Limited (“the Company”) for the year ended 30 June 2018. Directors The following persons were Directors of the Company from their appointment date and up to the date of this report: Name Peter McKillop John McBain Jennifer Horrigan Anton Tagliaferro Simon Conn Position Appointment date Independent Director (Chairman) Independent Director Independent Director Non-independent Director Non-independent Director 17 April 2014 17 April 2014 26 April 2016 30 April 2014 14 June 2016 Principal activities The principal activity of the Company is making investments in a diversified portfolio of entities listed on the Australian Securities Exchange which are not included in the S&P/ASX 20 Index. The primary objective is to provide both long-term capital growth and income. No change in this activity took place during the year or is likely in the future. Dividends Dividends paid to shareholders were as follows: 2018 Ordinary shares – interim 2018 Ordinary shares – final 2017 2017 Ordinary shares – interim 2017 Ordinary shares – final 2016 Dividend Per Share 2.1 cents 2.0 cents 2.0 cents 1.8 cents Total amount Date of payment $5,780,957 $5,501,410 $4,430,175 $3,984,999 04/04/2018 31/10/2017 03/04/2017 31/10/2016 % Franked 100% 100% 100% 100% Since year end, the Directors have declared a final fully franked dividend of 2.1 cents and a special dividend of 1.0 cent per fully paid ordinary share both to be paid on 31 October 2018. Review of operations The Board is pleased with the performance of the Company since listing in August 2014. Our investment manager, Investors Mutual Limited (IML) has patiently built a portfolio of good quality ex 20 shares which IML believe are well placed to deliver the Company’s objectives of long term capital growth and consistent income. QV Equities Limited Annual Report 2018 | 11 Directors’ Report (continued) Review of operations (continued) Listed below is the Company’s performance for the past 6 and 12 months: PERFORMANCE 12 months to 30 June 2018 31 December 2017 to 30 June 2018 Increase in QVE's NTA BENCHMARK Return +5.6% +1.9% +15.9% +3.9% Note: these figures are calculated net of IML’s management fee. Investment operations for the year ended 30 June 2018 resulted in an operating profit before tax of $11,658,676 (2017: $9,222,156) and an operating profit after tax of $11,143,913 (2017: $8,497,402). Net Tangible Assets (NTA) for each ordinary share as at 30 June 2018 (calculated on market value less realisation costs and before applicable taxes and before provision of dividends) amounted to $1.23 (2017: $1.21) per share. NTA after provision for tax and before provision for dividends was $1.18 (2017: $1.16) per share. Further information on the operating and financial review of the Company is contained in the Chairman’s letter on pages 6 to 7 of the Annual Report. Financial position The net asset value of the Company at 30 June 2018 was $326,002,469 (2017: $320,401,651). Significant changes in the state of affairs There were no significant changes in the state of affairs of the Company during the year ended 30 June 2018. Matters subsequent to the end of the period Since the end of the financial year, the Directors declared a fully franked final dividend of 2.1 cents and a special dividend of 1.0 cent per fully paid ordinary share both payable on 31 October 2018. No other matter or circumstance other than those mentioned above, has occurred subsequent to the end of the financial year that has significantly affected, or may significantly affect the operations of the Company, the results of those operations or the state of affairs of the Company in subsequent financial years. Likely developments and expected results of operations The Company will continue to pursue its primary objective of providing long term capital growth and income through a diversified portfolio of the ASX listed entities outside of the S&P/ASX 20 index. Further information on the Company’s business strategies and results is contained in the Investment Manager’s Report on pages 8 to 10 of the Annual Report. Environmental regulation The Company is not affected by any significant environmental regulation in respect of its operations. To the extent that any environmental regulation may have an incidental impact on the Company’s operations, the Directors of the Company are not aware of any breach by the Company of those regulations. 12 | QV Equities Limited Annual Report 2018 Directors’ Report (continued) Information on Directors Peter McKillop Independent Director, Chairman Experience and expertise Other current directorships Peter McKillop has over 30 years’ experience in the funds management, financial planning and superannuation industry. Peter was Managing Director of State Super Financial Services from 1990 until his retirement in 2011. During his time with State Super Financial Services, Peter was responsible for the overall management of the company’s activities, including compliance with all legislative requirements and ensuring that the product range remained appropriate to clients needs. Prior to joining State Super Financial Services, Peter was the Group Manager Investment Services at Perpetual Funds Management Limited (Perpetual) where he engineered the launch of Perpetual’s house funds into the retail area in 1987, including Perpetual’s highly successful Industrial Share Fund. Peter is a Fellow of the Institute of Chartered Accountants of Australia and holds a Bachelor of Economics from the University of Sydney. Peter was appointed as the Chairman of the Board on 14 June 2016. John McBain Independent Director Experience and expertise John McBain has over 19 years’ experience in the funds management industry. John is currently the Chief Executive Officer and Executive Director of Centuria Capital Limited (Centuria), an ASX listed specialist investment manager with $4.6 billion in assets under management. In 1999 John formed Century Property Funds, a dedicated unlisted property fund manager and in 2006 he arranged the merger of unlisted property fund manager Century Funds Management Pty Limited with Centuria Capital Limited. John oversees the core operations of Centuria namely, listed and unlisted property funds management and tax effective investment bond management. John is a director of Centuria Life Limited and sits on the investment committees of both Centuria Life and Over Fifty Guardian friendly societies. Prior to his roles with Century and Centuria, John held senior positions in a number of property investment and consulting companies in Australia, New Zealand and the United Kingdom. John holds a Diploma in Urban Valuation from Auckland University. Peter McKillop is a Director of the Advisory Board of the Australian Dental Health Foundation. Former directorships in last 3 years Peter McKillop has not held any other directorships of listed companies within the last three years. Special responsibilities Chairman of the Board. Interests in shares and options of the Company Details of Peter McKillop’s interest in shares of the Company are included later in this report. Interests in contracts Peter McKillop has no interests in contracts of the Company. Other current directorships John McBain is a Director of Centuria Capital Limited and Centuria Life Limited. Former directorships in last 3 years John McBain has not held any other directorships of listed companies within the last three years. Special responsibilities Chairman of Nomination and Corporate Governance Committee. Interests in shares and options of the Company Details of John McBain’s interest in shares of the Company are included later in this report. Interests in contracts John McBain has no interests in contracts of the Company. QV Equities Limited Annual Report 2018 | 13 Directors’ Report (continued) Information on Directors (continued) Jennifer Horrigan Independent Director Experience and expertise Jennifer Horrigan has more than 25 years’ experience across investment banking, financial communications, investor relations and strategic communications. She was most recently the Chief Operating Officer in Australia of the independent investment bank Greenhill & Co. Jennifer holds a Bachelor of Business from the Queensland University of Technology, a Graduate Diploma in Applied Finance from Finsia and a Graduate Diploma in Management from the Australian Graduate School of Management (AGSM). Anton Tagliaferro Non-independent Director Experience and expertise Anton Tagliaferro has over 30 years’ experience in the financial services industry. Anton founded the Manager, Investors Mutual Limited in March 1997 and holds the position of Chief Investment Officer and Investment Director. Anton commenced his professional year with Deloitte Haskins and Sells in London, where he gained the status of Chartered Accountant. From 1988 to 1992 Anton was Group Investment Manager and Equities Manager at Perpetual Trustees Australia Ltd (Perpetual). At Perpetual, Anton was responsible for running Perpetual’s Industrial Share Fund which during his time, continually outperformed in the Australian equities market and was highly rated in Money Management’s annual Australian Equity Manager surveys for four years in a row. 14 | QV Equities Limited Annual Report 2018 Other current directorships Jennifer Horrigan is a Director of APN Funds Management, Industria REIT (ASX: IDR), Convenience Retail REIT (ASX:CRR) and Chairman of Redkite (national children’s cancer charity) and a Director of Breast Cancer Trials. Former directorships in last 3 years Jennifer Horrigan was formerly a Director of Generation Healthcare (ASX: GHC) Special responsibilities Chair of the Audit Committee. Interests in shares and options of the Company Jennifer Horrigan has no interests in shares in the Company. Interests in contracts Jennifer Horrigan has no interests in contracts of the Company. Anton holds a Bachelor of Arts (Honours) in Accountancy from the Metropolitan University in London, is a member of the Institute of Chartered Accountants and a member of the Financial Services Institute of Australasia. Other current directorships Anton Tagliaferro is a Director and holds equity interests in Investors Mutual Limited. Former directorships in last 3 years Anton Tagliaferro has not held any other directorships of listed companies outside the Company. Interests in shares and options of the Company Details of Anton Tagliaferro’s interest in shares of the Company are included later in this report. Interests in contracts Details of Anton Tagliaferro’s interest contracts of the Company are included later in this report. Directors’ Report (continued) Other current directorships Simon Conn has not held any other directorships of listed companies outside the Company. Former directorships in last 3 years Simon Conn has not held any other directorships of listed companies within the last three years. Interests in shares and options of the Company Details of Simon Conn’s interest in shares of the Company are included later in this report. Interests in contracts Details of Simon Conn’s interest contracts of the Company are included later in this report. Information on Directors (continued) Simon Conn Non-independent Director Experience and expertise Simon Conn has served as part of the Manager’s investment team since June 1998 and has over 12 years’ experience as a Senior Portfolio Manager in the small cap sector. While employed with the Manager, Simon is responsible for analysing stocks from a wide range of industry sectors which have given him the broad grounding to manage the Manager’s small cap portfolios. In 1992 Simon commenced his career at KPMG as a tax and investment consultant. In 1995 Simon joined the investment division of QBE Insurance Group where he was employed as an analyst across a range of asset classes including equities. Simon holds a Bachelor of Economics and Bachelor of Laws from the University of Sydney. Simon is a qualified solicitor and is a Fellow of the Financial Services Institute of Australasia. Simon was appointed to the Board on 14 June 2016. Zac Azzi Company Secretary Zac Azzi has over 20 years’ financial services experience covering asset management, custody, platform and advice. Zac started his career in corporate accounting at AMP and then St George Bank. In 2003 Zac joined Old Mutual Australia Limited (Skandia) in the role of Head of Finance and Operations, and subsequently Chief Operating Officer (COO), helping them establish and manage their Australian operations Zac subsequently joined SFG Australia Limited where he helped them established their funds management and platform businesses before joining Investors Mutual Limited (the Manager) in August 2015 where he was appointed as COO and Company Secretary. Zac holds a Bachelor of Commerce from the Macquarie University, a Masters of Business Administration from the Australian Graduate School of Management and is also a Certified Practicing Accountant. QV Equities Limited Annual Report 2018 | 15 Directors’ Report (continued) Meeting of Directors The numbers of meetings of the Company’s Board of Directors and each Board committee held during the year ended 30 June 2018, and the numbers of meetings attended by each Director were: Directors’ Meetings Audit Nomination Meeting of committees A 6 6 6 3 6 B 6 6 6 6 6 A 5 5 5 - - B 5 5 5 - - A 3 3 3 - - B 3 3 3 - - Directors Peter McKillop John McBain Jennifer Horrigan Anton Tagliaferro Simon Conn A = Number of meetings attended B = Number of meetings held during the time the Director held office or was a member of the committee during the year The Company has not established a Remuneration Committee as it has no paid employees. The services of Zac Azzi (COO and Company Secretary), Anton Tagliaferro (Executive Director) and Simon Conn (Executive Director) are provided to the Company without additional charge as part of the arrangements with the Investment Manager. Remuneration report (audited) This report details the nature and amount of remuneration for each Director of QV Equities Limited in accordance with the Corporations Act 2001. Fees and payments to Directors reflect the demands that are made on and the responsibilities of the Directors and are reviewed annually by the Board. The Company determines the remuneration levels and ensures they are competitively set to attract and retain qualified and experienced Directors. Directors’ base fees are set at a maximum of $100,000 per annum. Directors do not receive bonuses nor are they issued options on securities. Directors’ fees cover all main Board activities and membership of committees. Under the ASX Listing Rules, the maximum fees paid to Directors may not be increased without the approval from the Company at a general meeting. Directors seek approval from time to time as appropriate. (a) Details of remuneration The following table shows details of the remuneration paid by the Company to the Directors for the year ended 30 June 2018 and 30 June 2017. 2018 Non-executive Directors Peter McKillop Jennifer Horrigan John McBain Total key management personnel compensation 2017 Non-executive Directors Peter McKillop Jennifer Horrigan John McBain Total key management personnel compensation 16 | QV Equities Limited Annual Report 2018 Short term employee benefits Directors’ fees $ Post-employment benefits Superannuation $ 15,000 27,397 27,397 69,794 25,000 2,603 2,603 30,206 Short term employee benefits Directors’ fees $ Post-employment benefits Superannuation $ 9,132 27,397 27,397 63,926 30,868 2,603 2,603 36,074 Total $ 40,000 30,000 30,000 100,000 Total $ 40,000 30,000 30,000 100,000 Directors’ Report (continued) Remuneration report (audited) (continued) (a) Details of remuneration (continued) Directors receive a superannuation guarantee contribution required by the government, which was 9.5% of individual benefits for financial year 2018 and did not receive any other retirement benefits. Directors may also elect to salary sacrifice their fees into superannuation. (b) Director related entity remuneration All transactions with related entities were made on normal commercial terms and conditions. Anton Tagliaferro is a Director and holds equity interest in Investors Mutual Limited (IML), the entity appointed to manage the investment portfolio of QV Equities Limited. In its capacity as the Investment Manager, IML was paid a management fee of 0.90% p.a. (plus GST) of the portfolio net asset value on the first $150 million and then 0.75% p.a. (plus GST) thereafter, amounting to $2,974,146 (2017: $2,550,828) inclusive of GST. The amount expensed in the Statement of Comprehensive Income after allowing for the reduced input tax credit is $2,771,364 (2017: 2,376,908). As at 30 June 2018, the balance payable to the manager was $249,642 (2017: $246,307). Simon Conn is a Portfolio Manager of the Manager and holds equity interests in the Manager. No Director has received or become entitled to receive a benefit (other than those detailed above) by reason of a contract made by the Company or a related Company with the Director or with a firm of which he is a member or with a Company in which he has substantial financial interest. Directors’ fees are not directly linked to the Company’s performance. Further details of the Company’s performance are detailed in the Chairman’s Letter and Investment Manager’s Report. (c) Remuneration of Executives There are no Executives paid by the Company. IML, the Investment manager remunerated Anton Tagliaferro, Simon Conn and Zac Azzi as employees of the Manager during the financial period. The Manager is appointed to provide the day to day management of the Company and is remunerated as outlined above. (d) Equity instrument disclosures relating to Directors As at 30 June 2018 and 30 June 2017, the Company’s Directors and their related parties held the following interests in the Company: Ordinary Shares Held 2018 Director Position Peter McKillop Non-Executive Director John McBain Non-Executive Director Jennifer Horrigan Non-Executive Director Anton Tagliaferro Executive Director Simon Conn Executive Director Balance as at 1 July 2017 418,542 206,247 - 5,710,000 150,000 6,484,789 Acquisitions Disposals 6,803 7,015 - - - - 90,000 1,200,000* - - 103,818 1,200,000 * Investors Mutual Limited initial capital contribution reduction 2017 Director Position Peter McKillop Non-Executive Director John McBain Non-Executive Director Jennifer Horrigan Non-Executive Director Anton Tagliaferro Executive Director Simon Conn Executive Director Balance as at 1 July 2016 400,000 200,000 - 6,000,000 150,000 6,750,000 Acquisitions Disposals 18,542 6,247 - 10,000 - 34,789 - - - 300,000* - 300,000 Balance as at 30 June 2018 425,345 213,262 - 4,600,000 150,000 5,388,607 Balance as at 30 June 2017 418,542 206,247 - 5,710,000 150,000 6,484,789 * Investors Mutual Limited initial capital contribution reduction. QV Equities Limited Annual Report 2018 | 17 Directors’ Report (continued) Remuneration report (audited) (continued) Directors and Director-related entities acquired ordinary shares in the Company on the same terms and conditions available to other shareholders. Options Held 2018 The directors did not hold or exercise any options during the current financial year. 2017 The directors did not hold or exercise any options during the current financial year. End of Remuneration Report Insurance and indemnification of Officers and Auditors During the financial year, the Company paid a premium in respect of a contract to insure the Directors of the Company, the Company Secretary and any related body corporate against liability incurred as such by a Director or Secretary to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. No indemnities have been given or insurance premiums paid during or since the end of the financial year, for any person who is or has been an auditor of the Company. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services The Board of Directors, in accordance with the advice from the Audit Committee, is satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the services disclosed in Note 20 did not compromise the external auditor’s independence for the following reasons: y y all non-audit services have been reviewed by the Audit Committee to ensure they do not impact the impartiality and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 19. This report is made in accordance with a resolution of the Board of Directors. Peter McKilllop, Chairman 15 August 2018 18 | QV Equities Limited Annual Report 2018 Auditor’s Independence Declaration Auditor’s Independence Declaration To the Directors of QV Equities Limited ABN 64 169 154 858 In relation to the independent audit for the year ended 30 June 2018, to the best of my knowledge and belief there have been: (i) no contraventions of the auditor independence requirements of the Corporations Act 2001; and (ii) no contraventions of any applicable code of professional conduct. This declaration is in respect of QV Equities Limited. S M Whiddett Partner Pitcher Partners Sydney 15 August 2018 An independent New South Wales Partnership. ABN 17 795 780 962. Level 22 MLC Centre, 19 Martin Place, Sydney NSW 2000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International QV Equities Limited Annual Report 2018 | 19 Financial Statements for the year ended 30 June 2018 Statement of Comprehensive Income Notes 30 June 2018 $ 30 June 2017 $ Investment income Dividend income Interest income Realised gains on options Unrealised (losses) on options Other income Total investment income Expenses Management fees Directors' fees ASX fees Registry fees Other expenses Total expenses Profit before income tax Income tax expense Profit after income tax Other comprehensive income Items that will not be reclassified to profit and loss Movement in fair value of long term equity investments, net of tax Total comprehensive income for the year, net of tax Earnings per share 12,923,731 10,760,296 1,146,036 962,874 (175,934) 73,115 941,302 313,419 (22,017) 27,696 14,929,822 12,020,696 2,771,364 100,000 85,866 119,501 194,415 2,376,908 100,000 88,819 121,618 111,195 3,271,146 2,798,540 5 11,658,676 514,763 11,143,913 9,222,156 724,754 8,497,402 5,172,870 16,316,783 17,960,106 26,457,508 Basic and diluted earnings per share (cents per share) 13 4.05 3.61 The Statement of Comprehensive Income should be read in conjunction with the accompanying notes. QV Equities Limited Annual Report 2018 | 21 Financial Statements (continued) Statement of Financial Position Notes 30 June 2018 $ 30 June 2017 $ Assets Current assets Cash and cash equivalents Receivables Prepayments Total current assets Non-current assets Long-term equity investments Deferred tax assets Total non-current assets Total assets Liabilities Current liabilities Trade creditors and other payables Current tax liabilities Financial liabilities held at fair value Total current liabilities Non-current liabilities Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Asset revaluation reserve Capital profits reserve Profits reserve Total equity 6 7 8 5 10 5 9 5 11 12 12 55,310,602 865,640 55,730 56,231,972 284,256,550 340,072 284,596,622 340,828,594 1,558,248 3,205,655 1,001,920 5,765,823 9,060,302 9,060,302 14,826,125 326,002,469 281,680,091 21,810,925 15,899,401 6,612,052 326,002,469 75,657,537 814,228 33,375 76,505,140 259,247,833 564,565 259,812,398 336,317,538 2,359,882 3,262,102 374,650 5,996,634 9,919,253 9,919,253 15,915,887 320,401,651 281,113,681 24,595,350 10,294,914 4,397,706 320,401,651 The Statement of Financial Position should be read in conjunction with the accompanying notes. 22 | QV Equities Limited Annual Report 2018 Financial Statements (continued) Statement of Changes in Equity Issued capital $ Asset revalued reserve $ Capital profits reserve $ Notes Profits reserve $ Retained profits $ Total $ 281,113,681 24,595,350 10,294,914 4,397,706 - 320,401,651 Balance at 1 July 2017 Profit for the year Other comprehensive income: Net revaluation of investments Total comprehensive income for the year Transactions with equity holders in their capacity as owners: Shares issued from dividend reinvestment plan Dividends provided for or paid Other Realised profits on sale of investments transferred to capital profits reserve Transfer to profits reserve - - 5,172,870 - 5,172,870 - - - - - - - - (2,352,808) (8,929,567) 11,143,913 11,143,913 - 5,172,870 11,143,913 16,316,783 - - - 566,410 (11,282,375) - - - - - 11 14 12 12 566,410 - - - (7,957,295) 7,957,295 - - - 11,143,913 (11,143,913) Balance at 30 June 2018 281,680,091 21,810,925 15,899,401 6,612,052 - 326,002,469 The Statement of Changes in Equity should be read in conjunction with the accompanying note. QV Equities Limited Annual Report 2018 | 23 Financial Statements (continued) Statement of Changes in Equity Issued capital $ Asset revalued reserve $ Capital profits reserve $ Notes Profits reserve $ Retained profits $ Total $ 216,339,116 17,252,345 1,216,678 2,776,613 - 237,584,752 - - 17,960,106 17,960,106 - - - - - - - - - - - - (1,538,865) (6,876,309) - - - - Balance at 1 July 2016 Profit for the year Other comprehensive income: Net revaluation of investments Total comprehensive income for the year Transactions with equity holders in their capacity as owners: Costs of issued capital Shares issued Shares issued from dividend reinvestment plan Dividends provided for or paid Other Realised profit on sale of investments transferred to capital profits reserve Transfer to profits reserve Balance at 30 June 2017 - 11 11 14 12 12 (719,863) 65,160,968 333,460 - - - 8,497,402 8,497,402 - 17,960,106 8,497,402 26,457,508 - - - - - (719,863) 65,160,968 333,460 (8,415,174) - - (10,617,101) 10,617,101 - - - 8,497,402 (8,497,402) 281,113,681 24,595,350 10,294,914 4,397,706 - 320,401,651 The Statement of Changes in Equity should be read in conjunction with the accompanying notes. 24 | QV Equities Limited Annual Report 2018 Financial Statements (continued) Statement of Cash Flow Cash flows from operating activities Dividends/distributions received Interest received Net realised gains on exchange traded options Payments for other expenses Other income Income tax paid Net cash inflow from operating activities Cash flows from investing activities Payments for investments Proceeds from sale of investments Net cash outflow from investing activities Cash flows from financing activities Dividends paid Proceeds from issue of ordinary shares Share issue transaction costs Net cash inflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents held at the beginning of the year Cash and cash equivalents at the end of the year Notes 30 June 2018 $ 30 June 2017 $ 12,795,401 1,146,896 1,414,210 (3,327,553) 73,115 (3,574,444) 8,527,625 (91,841,695) 73,683,092 (18,158,603) (10,715,957) - - (10,715,957) (20,346,935) 75,657,537 55,310,602 10,990,770 1,039,069 214,077 (2,801,611) 31,384 (2,545,194) 6,928,495 (93,186,066) 72,702,502 (20,483,564) (8,081,715) 65,160,968 (1,028,375) 56,050,878 42,495,809 33,161,728 75,657,537 6 6 The above Statement of Cash Flow should be read in conjunction with the accompanying notes. QV Equities Limited Annual Report 2018 | 25 Notes to the Financial Statements for the year ended 30 June 2018 1. General Information QV Equities Limited (“the Company”) is a listed investment company domiciled in Australia. The Company was established with the primary objective of providing long term capital growth and income, through a diversified portfolio of the ASX listed entities outside of the S&P/ASX 20 Index. The portfolio is managed by Investors Mutual Limited. The Company was registered with the Australian Securities Commission (ASIC) on 17 April 2014 and commenced operations on 22 August 2014. The financial statements were authorised for issue by the Board on 15 August 2018. 2. Summary of significant accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. The annual financial statements are for the entity QV Equities Limited. (a) Basis of preparation These general purpose annual financial statements for the year ended 30 June 2018 have been prepared in accordance with the Australian Accounting Standards and interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. The Company is a for-profit entity for financial reporting purposes under the Australian Accounting Standards. (i) Compliance with IFRS The financial statements of the Company also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (ii) New accounting standards and Interpretations The Australian Accounting Standards Board has issued new accounting standards and interpretations that have mandatory application for future reporting periods, some of which are relevant to the Company. The Directors have assessed these new standards and interpretations. The Company has elected to early adopt AASB 9 Financial Instruments Standard which applies to annual reporting periods beginning from 1 January 2018. AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and liabilities. These requirements improve and simplify the approach for the classification and measurement of financial assets and liabilities compared to the requirements of AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 allows investments in equity instruments, which were previously classified as available for sale financial assets, to be classified as equity instruments revalued through other comprehensive income. Investments continue to be valued at fair value with changes in value being recognised in the asset revaluation reserve. Under AASB 9 there is no recycling of the realised gains and losses to the income statement as was previously required by AASB 139. There is also no requirement to test the Company’s investments for impairment so there is no transfer of unrealised impairment losses from the asset revaluation reserve to the income statement. (iii) Standards issued but not yet effective There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. 26 | QV Equities Limited Annual Report 2018 Notes to the Financial Statements (continued) Summary of significant accounting policies (continued) 2. (b) Investments (i) Recognition and initial measurement Long term equity investments and investments held for sale are recognised initially at cost. (ii) Classification and subsequent measurement The Company designates all long term equity investments as financial assets measured at fair value through other comprehensive income and therefore records subsequent changes in fair value of equity investments in the Statement of Comprehensive Income through the asset revaluation reserve, not to be reclassified to profit and loss, after deducting a provision for the potential deferred capital gains tax liability. The Company holds call options. These derivative financial instruments are classified as financial assets at fair value through profit and loss, changes in the fair value of options are recognised in profit or loss for the year. (iii) Derecognition Financial assets are derecognised where the contractual rights to receipt of cash flows expires or the asset is transferred to another party whereby the entity no longer has any significant continuing involvement in the risks and benefits associated with the asset. Gains or losses on long term equity investments are transferred from the asset revaluation reserve to the capital profits reserve. (iv) Valuation All investments are classified and measured as being at fair value, please refer to note 4 for more information on the Company’s policy for measuring fair value. (c) Revenue (i) Interest income Interest income is recognised as it accrues, taking into account the effective yield on the financial asset. (ii) Dividend income Dividend income is recognised in the profit or loss on the day on which the relevant investment is first quoted on an “ex-dividend” basis. (d) Expenses All expenses, including management fees, are recognised in the profit and loss on an accruals basis. (e) Income tax The income tax expense or benefit for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate, adjusted by changes in the deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends to either to settle on a net basis, or to realise the asset and settle the liability simultaneously. QV Equities Limited Annual Report 2018 | 27 Notes to the Financial Statements (continued) Summary of significant accounting policies (continued) 2. (f) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), unless GST incurred is not recoverable from the Australian Taxation Office (ATO). In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the Statement of Financial Position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the Australian Taxation Office (ATO), are presented as operating cash flows. (g) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash which are subject to an insignificant risk to changes in value. (h) Receivables Receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Receivables may include interest and dividends. Interest and dividends are accrued in accordance with the policy note set out in note 2(c) and note 2(b)(iv). All receivables, unless otherwise stated are non interest bearing, unsecured and generally received in 30 days of being recorded as a receivable. (i) Trade creditors and other payables These amounts represent liabilities for goods and services provided to the Company prior to the reporting date which was unpaid. These amounts are unsecured and are usually paid within 30 days of recognition. Purchases of securities and investments that are unsettled at the reporting date are included in payables and are normally settled within 2 business days of trade dates. (j) Share Capital Ordinary shares will be classified as equity. Costs directly attributable to the issue of ordinary shares will be recognised as a deduction from equity, net of tax effects. (k) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period. It is the Boards’ policy that all dividends paid will be franked to the maximum extent possible. 28 | QV Equities Limited Annual Report 2018 Notes to the Financial Statements (continued) Summary of significant accounting policies (continued) 2. (l) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing: y y the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares. by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: y y the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and; the weighted average number of ordinary shares that would have been outstanding assuming the conversion of options. (m) Rounding of amounts In accordance with ASIC Corporations (Rounding in Financial/Director’s Reports) Instrument 2016/191, the amounts in the directors’ report and in the financial report have been rounded to the nearest dollar unless otherwise stated. (n) Functional and presentation currency The functional and presentation currency of the Company is Australian dollars. 3. Financial risk management The Company’s financial instruments consist of deposits with banks, listed and unlisted investments, trade and other receivables and trade and other payables. The main risks the Company is exposed to through its financial instruments are market risk - consisting of interest rate risk and other price risk - credit risk and liquidity risk. Under delegation from the Board, the Manager has the responsibility for assessing and monitoring the financial market risk of the Company. The Manager monitors these risks daily. (a) Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. By its nature, as a listed investment company that invests in tradable securities, the Company will always be subject to market risk as it invests its capital in securities which are not risk free as the market price of these securities can fluctuate. The Manager seeks to reduce market risk for the Company by diversification of the investment portfolio across numerous stocks and multiple industry sectors. The relative weightings of the individual securities and market sectors are reviewed daily by the Investment Manager. (i) Price risk The Company is exposed to equities securities price risk. This arises from investments held by the Company and classified in the Statement of Financial Position as financial assets held at fair value through equity reserves and financial liabilities at fair value through profit and loss. The Company seeks to manage and constrain other price risk by diversification of the investment portfolio across multiple stocks and industry sectors. The portfolio is maintained by the Investment Manager within a range of parameters governing the levels of acceptable exposure to stocks and industry sectors. The relative weightings of the individual securities and relevant market sectors are reviewed on a daily basis such that risk can be managed by reducing exposure where necessary. QV Equities Limited Annual Report 2018 | 29 Notes to the Financial Statements (continued) Financial risk management (continued) 3. (a) Market risk (continued) (i) Price risk (continued) The Company’s industry sector weighting of investments including options as at 30 June 2018 and 30 June 2017 is listed below: Industry sector Financials Materials Health Care Utilities Consumer Discretionary Industrials Energy Listed property trust Consumer Staple Information Technology Cash 2018 % 11.1 16.7 10.6 9.1 14.3 5.8 6.9 4.5 1.1 0.6 80.7 19.3 100.0 2017 % 13.8 11.9 10.2 9.7 9.1 8.1 6.7 4.7 - 1.1 75.3 24.7 100.0 As at 30 June 2018, no individual securities (including options) represent over 5% of the long term investment portfolio. Sensitivity analysis A sensitivity analysis relating to price risk was performed on investments held by the Company at the end of the reporting period. This analysis demonstrates the effect on current year equity as a result from a reasonable possible change in the risk variable. The sensitivity assumes all other variables remain constant. Investments represent 81% (2017: 75%) of gross assets at year end. The following table illustrates the effect on the Company’s equity from possible changes in price risk that were reasonably possible based on the risk the Company was exposed to at reporting date, assuming a flat tax rate of 27.5% (2017: 30%). Increase 5% Decrease 5% Increase 10% Decrease 10% Impact on Total Comprehensive income 2018 $ 10,267,980 (10,267,980) 20,535,961 (20,535,961) 2017 $ 9,060,561 (9,060,561) 18,121,123 (18,121,123) (ii) Cash flow and fair value interest rate risk The Company’s interest bearing financial assets expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The risk is measured using sensitivity analysis. 30 | QV Equities Limited Annual Report 2018 Notes to the Financial Statements (continued) Financial risk management (continued) 3. (a) Market risk (continued) (ii) Cash flow and fair value interest rate risk (continued) The table below summarises the Company’s exposure to interest rate risks. It includes the Company’s assets and liabilities at fair value, categorised by the earlier of contractual repricing or maturity dates. 30 June 2018 Financial Assets Cash and cash equivalents Receivables Long term equity investments Financial Liabilities Trade creditors and other payables Financial liabilities held at fair value Floating interest rate $ Non-interest bearing $ Total $ 55,310,602 - 4,163,550 59,474,152 - - - - 865,640 280,093,000 280,958,640 (1,558,248) (1,001,920) (2,560,168) 55,310,602 865,640 284,256,550 340,432,792 (1,558,248) (1,001,920) (2,560,168) Net exposure to interest rate risk 59,474,152 278,398,472 337,872,624 Floating interest rate $ Non-interest bearing $ 30 June 2017 Financial Assets Cash and cash equivalents Receivables Long term equity investments Financial Liabilities Trade creditors and other payables Financial liabilities held at fair value 75,657,537 - 4,038,500 79,696,037 - - - Net exposure to interest rate risk 79,696,037 - 814,228 255,209,333 256,023,561 (2,359,882) (374,650) (2,734,532) 253,289,029 Total $ 75,657,537 814,228 259,247,833 335,719,598 (2,359,882) (374,650) (2,734,532) 332,985,066 Sensitivity analysis At 30 June 2018, if interest rates had increased/decreased by 75 basis points (2017: 75 basis points) from the period end rates with all other variables held constant, post-tax profit for the period would have been $347,388 (2017: $253,465) higher/$347,388 (2017: $253,465) lower, mainly as a result of higher/lower interest income from cash and cash equivalents. (b) Credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Market prices generally incorporate credit risk assessments into valuations and risk of loss is implicitly provided for in the carrying value of assets and liabilities as they are marked to market at balance date. QV Equities Limited Annual Report 2018 | 31 Notes to the Financial Statements (continued) Financial risk management (continued) 3. (b) Credit risk (continued) The total credit risk for assets is therefore limited to the amount carried in the Statement of Financial Position. The Manager is responsible for ensuring there is appropriate diversification across counterparties and that they are of a sufficient quality rating. The Manager minimises the Company’s concentration of credit risk by undertaking transactions in ASX listed securities with a large number of approved brokers. Payment is only made once a broker has received securities and delivery of securities only occurs once the broker received payment. Cash The majority of the Company’s short term deposits are invested with financial institutions that have a Standard and Poor’s AA or A1 credit rating. The majority of maturities are within three months. The weighted average interest rate of the Company’s cash and cash equivalents at 30 June 2018 is 1.45% (2017: 1.45%). Receivables The majority of the Company’s receivables arise from dividends and distributions yet to be received. None of these assets exposed to credit risk are overdue or considered to be impaired. (c) Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Company’s cash receipts depend on the level of dividends and interest received and the exercise of options that may be on issue. The Company’s cash payments are the purchase of securities, expenses paid and dividends that are paid to shareholders. The Manager monitors the Company’s cash flow requirements daily by reference to known purchase and sale of securities, dividends and interest received. Should these decrease by a material amount the Company can alter its cash outflows as appropriate. The Company also holds a portion of its portfolio in cash and term deposits sufficient to ensure that it has cash readily available to meet all payments. Finally, the assets of the Company are largely in the form of tradable securities which can be sold on market if necessary. The Company is not exposed to material liquidity risk. 4. Fair value measurement The Company measures and recognises the following assets and liabilities at fair value on a recurring basis: y y Long term equity investments Financial liabilities held for trading Fair value hierarchy AASB 13: Fair value measurement requires disclosure of fair value measurements by level of the fair value hierarchy: Level 1 - measurements based on quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 - measurements based on inputs other than quoted prices included in level 1 that are observable for the asset or liability; and Level 3 - measurements based on unobservable inputs from the asset or liability. 32 | QV Equities Limited Annual Report 2018 Notes to the Financial Statements (continued) 4. Fair value measurement (continued) (i) Recurring fair value measurements The following table presents the Company’s assets measured and recognised at fair value as at 30 June 2018 and 30 June 2017. As at 30 June 2018 Financial assets Long term equity investments: Listed equities Listed unit trusts Floating rate notes Unlisted equities Total Financial liabilities Financial liabilities held for trading: Options Total As at 30 June 2017 Financial assets Long term equity investments: Listed equities Listed unit trusts Floating rate notes Unlisted equities Total Financial liabilities Financial liabilities held for trading: Options Total Level 1 $ Level 2 $ Level 3 $ Total $ 249,810,000 29,161,000 4,163,550 - 283,134,550 - - - 1,122,000 1,122,000 1,001,920 1,001,920 Level 1 $ 228,362,790 26,272,000 4,038,500 258,673,290 - - Level 2 $ - - - 574,543 574,543 374,650 374,650 - - - - - - - - - Level 3 $ - - - - - - - 249,810,000 29,161,000 4,163,550 1,122,000 284,256,550 1,001,920 1,001,920 Total $ 228,362,790 26,272,000 4,038,500 574,543 259,247,833 374,650 374,650 Included within Level 1 of the hierarchy are listed investments. The fair value of these financial assets and liabilities have been based on the last close prices at the end of the reporting year. The investments included in Level 2 of the hierarchy include amounts in relation to entitlement offers and placements to which the Company has subscribed to during the year. These investments have not listed on the Australian Securities Exchange as at year end and therefore represent investments in an inactive market. In valuing these unlisted investments, included in Level 2 of the hierarchy, the fair value has been determined using the valuation technique of quoted prices for similar assets and the amount of securities subscribed for by the Company under the relevant offers. During the year $574,543 (2017: $3,181,350) has been transfered from Level 2 to Level 1. There were no transfers in and out of Level 3. The Company’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period. QV Equities Limited Annual Report 2018 | 33 Notes to the Financial Statements (continued) 4. Financial risk management (continued) (ii) Disclosed fair values The carrying amounts of receivables and payables other than tax items are reasonable approximations of their fair values due to their short-term nature. 5. Taxation (a) Income tax expense The prima facie tax on profit from ordinary activities before income tax is reconciled to the income tax expense as follows: Prima Facie tax on profit from ordinary activities before income tax of 27.5% (2017: 30%) Increase/(decrease) in income tax expense due to: Gross up of imputation credits received Imputation credits on dividends received Gross up of foreign income tax offsets Foreign income tax offsets (Over)/under provisions in previous year Tax expense composition: Current tax expense Movement in deferred tax liabilities Movement in deferred tax assets (Over)/under provisions in previous year 30 June 2018 $ 30 June 2017 $ 3,206,136 2,766,646 913,088 (3,320,321) 66,208 (240,758) (109,590) 514,763 297,326 72,337 224,493 (79,393) 514,763 783,474 (2,611,579) 81,892 (272,975) (22,704) 724,754 436,847 41,356 258,988 (12,437) 724,754 Effective tax rate is: 4.42% 7.86% The charge for current income tax expense is based on the profit for the year adjusted for any non-assessable or disallowed items. It is calculated using the tax rates that have been enacted or are substantially enacted by the end of the current financial year. (b) Deferred tax assets This balance comprises temporary differences attributable to: Accruals Share issue costs capitalised Movements Opening balance Share issue costs capitalised Charged to statement of comprehensive income The rate used at 30 June 2018 is 27.5% (30 June 2017: 27.5%) 34 | QV Equities Limited Annual Report 2018 30 June 2018 $ 30 June 2017 $ 9,499 330,573 340,072 564,565 - (224,493) 340,072 16,539 548,026 564,565 540,750 282,803 (258,988) 564,565 Notes to the Financial Statements (continued) Taxation (continued) 5. (c) Current tax liabilities Balance at beginning of year Current year income tax on operating profit Realised capital gain Net income tax paid Over provisions in previous year (d) Deferred tax liabilities This balance comprises temporary differences attributable to: Fair value adjustment on equity investments Revaluation of options Income receivable not assessable for tax until receipt Tax deferred distributable income Prepayments Other Movements Opening balance Charged to statement of comprehensive income Other The rate used at 30 June 2018 is 27.5% (30 June 2017: 27.5%) 30 June 2018 $ 30 June 2017 $ 3,262,102 297,326 3,220,671 (3,574,444) - 3,205,655 703,492 436,847 4,678,091 (2,545,194) (11,134) 3,262,102 30 June 2018 $ 30 June 2017 $ 8,680,055 (58,248) 36,336 402,159 - - 9,641,659 (9,866) 26,123 282,474 9,178 (30,315) 9,060,302 9,919,253 9,919,253 72,337 (931,288) 9,060,302 7,933,898 (41,356) 2,026,711 9,919,253 QV Equities Limited Annual Report 2018 | 35 Notes to the Financial Statements (continued) 6. Cash and cash equivalents Cash at Bank Total cash and cash equivalents Reconciliation of operating profit after tax to cash inflows from operating activities Net profit after income tax Changes in operating assets and liabilities Unrealised losses on options (Increase)/Decrease in dividends/distributions receivable Decrease in interest receivable Decrease/(Increase) in other receivables (Increase)/Decrease in prepayments Increase/(Decrease) in sundry creditors and accruals Decrease in deferred tax assets Decrease in current tax provision Increase in deferred tax liabilities Net cash inflow from operating activities 7. Receivables Interest receivable Dividends/distributions receivable Other receivables Total receivables None of the receivables above are past the due date and are not impaired. 30 June 2018 $ 55,310,602 55,310,602 30 June 2017 $ 75,657,537 75,657,537 30 June 2018 $ 11,143,913 30 June 2017 $ 8,497,402 175,934 (128,330) 859 - (22,355) 417,284 224,493 (3,356,510) 72,337 8,527,625 22,017 230,474 97,767 3,688 8,432 (112,517) 258,988 (2,119,112) 41,356 6,928,495 30 June 2018 $ 30 June 2017 $ 2,130 623,630 239,880 865,640 2,990 495,300 315,938 814,228 36 | QV Equities Limited Annual Report 2018 Notes to the Financial Statements (continued) 8. Long term equity investments Financial assets held at fair value through other comprehensive income are all held as long term investments include the following: Listed equity securities Fair value 30 June 2018 $ 284,256,550 Fair value 30 June 2017 $ 259,247,833 The fair value of investments is based on the fair value measurement hierarchy disclosed in note 4(i). The total dividends received on these investments, included in the Statement of Comprehensive Income were: Dividend income: Listed equity securities held at year-end Listed equity securities sold during the year Total dividend 2018 2017 7,641,395 5,282,336 12,923,731 7,724,872 3,035,424 10,760,296 This is in line with AASB 7 11(A) (d) dividends recognised during the period, showing separately those related to investments derecognised during the reporting period and those related to investments held at the end of the reporting period. During the year, the total fair value of investments sold in the normal course of the business and to preserve capital were: Fair value at disposal date Listed equity securities Gain on disposal after tax Listed equity securities 2018 73,606,880 2017 72,846,961 7,957,295 10,617,101 This is in line with AASB 7 11(B) (c) the net gains/losses recognised during the period, showing separately those related to investments derecognised during the reporting period and those related to investments held at the end of the reporting period. 9. Financial liabilities held at fair value Financial liabilities held at fair value through profit or loss are held for trading and include the following: Exchange traded options Exchange traded options revaluation Total financial liabilities held at fair value Fair value 30 June 2018 $ Fair value 30 June 2017 $ 790,111 211,809 1,001,920 338,774 35,876 374,650 QV Equities Limited Annual Report 2018 | 37 Notes to the Financial Statements (continued) 10. Trade creditors and other payables Payable - investment creditors Payable - other expenses Total trade creditors and other payables 11. Issued capital (a) Share capital 30 June 2018 $ 30 June 2017 $ 1,122,000 436,248 1,558,248 1,889,735 470,147 2,359,882 Fully paid ordinary shares 275,536,547 30 June 2018 Number of Shares 30 June 2018 Total amount $ 281,680,091 30 June 2017 Number of Shares 275,070,493 30 June 2017 Total amount $ 281,113,681 (b) Movements in ordinary share capital 2018 Date 01/07/2017 Opening balance Ordinary Shares issued under dividend reinvestment plan - final 2017 Ordinary Shares issued under dividend reinvestment plan - interim 2018 30/06/2018 Closing balance 2017 Date 01/07/2016 Opening balance Ordinary Shares issued under dividend reinvestment plan - final 2016 Ordinary Shares issued under dividend reinvestment plan 2017 Ordinary Shares offered under Placement Ordinary Shares offered under Share Purchase Plan Ordinary Shares offered under shortfall Share issue cost 30/06/2017 Closing balance (c) Fully paid ordinary shares Number of Shares 275,070,493 213,177 252,877 275,536,547 Issue Price* $ $1.29 $1.16 Total amount $ 281,113,681 274,241 292,169 281,680,091 Number of Shares 221,388,859 Issue Price* $ Total amount $ 216,339,116 119,889 151,656 28,688,524 20,183,778 4,537,787 - 275,070,493 $1.21 $1.24 $1.22 $1.22 $1.22 145,705 187,756 34,999,999 24,624,868 5,536,100 (719,863) 281,113,681 * Rounded to two decimal places. Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. 38 | QV Equities Limited Annual Report 2018 Notes to the Financial Statements (continued) Issued capital (continued) 11. (d) Capital management The Company’s objectives in managing capital is to continue to provide shareholders with dividends and capital appreciation over the longer term. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. There were no changes in the Company’s approach to capital management during the year. The Company is not subject to any externally imposed capital requirements. 12. Reserves (a) Capital profits reserve The capital profits reserve is made up of amounts transferred from the asset revaluation reserve for future dividend payments. Realised profit on sale of investments transferred to reserves Movements: Opening balance Gain on sale of equities Loss on sale of equities Dividends provided for or paid Closing balance (b) Profits reserve 30 June 2018 $ 7,957,295 30 June 2017 $ 10,617,101 10,294,914 11,119,581 (3,162,286) (2,352,808) 15,899,401 1,216,678 11,446,959 (829,858) (1,538,865) 10,294,914 The profits reserve is made up of amounts transferred from retained earnings for future dividend payments. Profits reserves Movements: Opening balance Transfer from retained earnings Dividends provided for or paid Closing balance 30 June 2018 $ 6,612,052 30 June 2017 $ 4,397,706 4,397,706 11,143,913 (8,929,567) 6,612,052 2,776,613 8,497,402 (6,876,309) 4,397,706 QV Equities Limited Annual Report 2018 | 39 Notes to the Financial Statements (continued) 13. Earnings per share (a) Basic and diluted earnings per share 30 June 2018 cents 30 June 2017 cents Total earnings per share attributable to the ordinary equity holders of the Company 4.05 3.61 (b) Weighted average number of shares used as denominator. Weighted average number of shares used as the denominator in calculating basic and diluted earnings per share is based on the average number of shares as at 30 June 2018 and 30 June 2017. 275,273,384 235,279,798 Diluted earnings per share and basic earnings per share are the same as there are no potential dilutive ordinary shares. 14. Dividends (a) Dividends paid during the year Dividends paid fully franked at 27.5% (2017: 30%) tax rate. Final dividend FY17: 2.0 cents per share fully franked paid 31 October 2017 (final dividend FY16: 1.8 cents) lnterim dividend FY18: 2.1 cents per share fully franked paid 4 April 2018 (interim dividend FY17: 2.0 cents per share fully franked) (b) Dividends not recognised at the end of the reporting period In addition to the above dividends, since year end the Directors have recommended the payment of a final dividend of 2.1 cents and a special dividend of 1.0 cent per fully paid ordinary share, fully franked based on tax paid at 27.5%. The aggregate amount of the proposed dividend expected to be paid on 31 October 2018 (2017: 31 October 2017) out of the profits of the Company at 30 June 2018 and 30 June 2017, but not recognised as a liability at year end is: 30 June 2018 $ 30 June 2017 $ 5,501,410 3,984,999 5,780,957 11,282,367 4,430,175 8,415,174 30 June 2018 $ 30 June 2017 $ 8,541,633 5,501,410 40 | QV Equities Limited Annual Report 2018 Notes to the Financial Statements (continued) 14. Dividends (continued) (c) Dividends franking account The fully franked final dividend to be paid on 31 October 2018 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in relation to the year ended 30 June 2018. Opening balance of franking account Franking credits on dividends received Tax paid during the period Franking credits on ordinary dividends paid Franking credits lost under 45-day rule Closing balance of franking account Adjustment for tax payable on the current period profits Adjusted for dividends declared subsequent to reporting period 27.5% (2017: 27.5%) Adjusted franking account balance 30 June 2018 $ 30 June 2017 $ 1,674,953 3,316,867 3,574,444 (4,279,521) (2,438) 4,284,305 3,205,655 (3,239,930) 4,250,030 124,683 2,611,579 2,545,194 (3,606,503) - 1,674,953 3,262,102 (2,086,742) 2,850,313 The Company’s ability to continue to pay franked dividends is dependent upon the receipt of franked dividends from investments and the payment of tax. Under recent changes to the corporate tax legislation, the final dividend must be franked using the expected tax rate for 2018-19 of 27.5%. 15. Key management personnel disclosures The names and position held of the Company’s key management personnel (including Directors) in office at any time during the financial year are: Peter McKillop John McBain Independent Director (Chairman) Independent Director Jennifer Horrigan Independent Director Anton Tagliaferro Non-Independent Director Simon Conn Non-Independent Director QV Equities Limited Annual Report 2018 | 41 Notes to the Financial Statements (continued) 15. Key management personnel disclosures (continued) (a) Remuneration Detailed remuneration disclosures are provided in the Remuneration Report of the Directors’ Report on page 16 Short term employee benefits - Directors fees Post employment benefits - Superannuation 30 June 2018 $ 30 June 2017 $ 69,794 30,206 100,000 63,926 36,074 100,000 (b) Share and option holdings of Directors The number of ordinary shares in the Company that were held during the financial year by each Director of the Company including their related parties, are set out below: 2018 Ordinary shares held Directors Peter McKillop John McBain Jennifer Horrigan Anton Tagliaferro Simon Conn Balance as at 30 June 2017 418,542 206,247 - 5,710,000 150,000 6,484,789 Acquisitions Disposals 6,803 7,015 - 90,000 - 103,818 - - - 1,200,000* - 1,200,000 * Investors Mutual Limited initial capital contribution reduction 2017 Directors Peter McKillop John McBain Jennifer Horrigan Anton Tagliaferro Simon Conn Balance as at 30 June 2016 400,000 200,000 - 6,000,000 150,000 6,750,000 Acquisitions Disposals 18,542 6,247 - 10,000 - 34,789 - - - 300,000* - 300,000 * Investors Mutual Limited initial capital contribution reduction. Options Held 2018 The directors did not hold or exercise any options during the current financial year. 2017 The directors did not hold or exercise any options during the current financial year. Balance as at 30 June 2018 425,345 213,262 - 4,600,000 150,000 5,388,607 Balance as at 30 June 2017 418,542 206,247 - 5,710,000 150,000 6,484,789 42 | QV Equities Limited Annual Report 2018 Notes to the Financial Statements (continued) 16. Related party transactions All transactions with related entities were made on commercial terms and conditions no more favorable than those available to other parties unless otherwise stated. Anton Tagliaferro is a Director and holds equity interest in Investors Mutual Limited (IML), the entity appointed to manage the investment portfolio of QV Equities Limited. In its capacity as Manager, IML was paid a management fee of 0.90% p.a. (plus GST) on the portfolio net asset value for the first $150 million and then 0.75% (plus GST) thereafter, amounting to $2,974,146 (2017: $2,550,828) inclusive of GST. The amount expensed in the Statement of Comprehensive Income after allowing for the reduced input tax credit is $2,771,364 (2017: 2,376,908). As at 30 June 2018, the balance payable to the Manager was $249,642 (2017: $246,307). No Director has received or become entitled to receive a benefit (other than those detailed above) by reason of a contract made by the Company or a related Company with the Director or with a firm of which he is a member or with a Company in which he has substantial financial interest. Simon Conn is a Portfolio Manager of the Manager and holds equity interests in the Manager. 17. Segment information The Company has only one reportable segment. The Company is engaged solely in investment activities conducted in Australia, deriving revenue from dividend income, interest income, and from the sale of its investments. 18. Contingencies and commitments The Company had no contingent liabilities as at 30 June 2018 and 30 June 2017. 19. Events occurring after the reporting period Since the end of the financial year, the Directors declared a fully franked final dividend of 2.1 cents and a special dividend of 1.0 cent per fully paid ordinary share both payable on 31 October 2018. No matter or circumstance has occurred subsequent to period end that has significantly affected, or may significantly affect, the operations of the Company, the results of those operations or the state of affairs of the Company in subsequent financial periods 20. Remuneration of Auditors Audit and other assurance services: Audit and review of financial report Non-assurance services: Tax services 30 June 2018 $ 30 June 2017 $ 39,250 41,910 9,600 48,850 15,180 57,090 The Company’s Audit Committee oversees the relationship with the Company’s external auditors. The Audit Committee reviews the scope of the audit and the proposed fee. It also reviews the cost and the scope of the other tax compliance services of the related entity of the audit firm, to ensure that they do not compromise independence. QV Equities Limited Annual Report 2018 | 43 Directors’ Declaration In the Directors’ opinion, (1) the financial statements and notes set out on pages 21 to 43 are in accordance with the Corporations Act 2001 including: (a) (b) (c) complying with the Accounting Standards, the Corporations Regulations 2001 and any other mandatory professional reporting requirements; and complying with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 2 to the financial statements; and giving a true and fair view of the Company’s financial position as at 30 June 2018 and of its performance for the year end on that date. (2) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by S295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Peter McKillop, Chairman 15 August 2018 44 | QV Equities Limited Annual Report 2018 Independent Auditor’s Report to the Shareholders Independent Auditor’s Report to the Members of QV Equities Limited A.B.N. 64 169 154 858 REPORT ON THE FINANCIAL REPORT We have audited the accompanying financial report of QV Equities Limited (the Company), which comprises the statement of financial position as at 30 June 2018, the statement of comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration. Opinion In our opinion, the financial report of QV Equities Limited is in accordance with the Corporations Act 2001, including: i. giving a true and fair view of the Company’s financial position as at 30 June 2018 and of its performance for the year ended on that date; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis of Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibility section of our report. We are independent of the Company in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (“the Code”) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current year. We have communicated the key audit matters to the Audit Committee, but they are not a comprehensive reflection of all matters that were identified by our audit and that were discussed with the Committee. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. An independent New South Wales Partnership. ABN 17 795 780 962. Level 22 MLC Centre, 19 Martin Place, Sydney NSW 2000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane| Newcastle An independent member of Baker Tilly International 46 | QV Equities Limited Annual Report 2018 Independent Auditor’s Report to the Shareholders (continued) Key audit matter How our audit addressed the matter Measurement of Financial Instruments Refer to Note 4 Fair Value Measurement, Note 8: Long Term Equity Investments and Note 9: Financial Liabilities held at fair value We focused our audit effort on the existence and valuation of the Company’s financial assets and financial liabilities as they are its largest asset and liability and represent the most significant impact of the Company’s net tangible assets and profits. The quantum of level 1 investments held inherently makes financial assets and financial liabilities a key audit matter. Therefore, we focused on whether the investments were owned by the Company and whether the financial assets and liabilities had been appropriately valued to market price in an active market at the period end. Our procedures included, amongst others: ! Obtaining an understanding of the investment management process and controls; ! Reviewing and evaluating the independent audit report on internal controls (ASAE 3402 Assurance Reports on Controls at a Service Organisation) for the Custodian; ! Reviewing and evaluating the independent audit report on internal controls (ASAE 3402 Assurance Reports on Controls at a Service Organisation) for the Administrator; ! Making enquiries as to whether there have been any changes to these controls or their effectiveness from the periods to which the audit reports relate and where necessary performing additional procedures; ! Obtaining a confirmation of the investment holdings directly from the Custodian; ! Assessing the valuation of individual investment holdings to independent sources of information to determine an acceptable range of valuations of securities held at 30 June 2018, and compared this to the valuations recorded by the Company; ! Evaluating the accounting treatment of revaluations of financial instruments to ensure current /deferred tax and unrealised gains or losses arising from revaluations have been appropriately accounted for; ! Assessing the adequacy of disclosures in the financial statements. Other information The Directors are responsible for the other information. The other information comprises the information in the Company’s annual report for the year ended 30 June 2018, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially consistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. QV Equities Limited Annual Report 2018 | 47 Independent Auditor’s Report to the Shareholders (continued) Directors’ Responsibility for the Financial Report The Directors of QV Equities Limited are responsible for the preparation and fair presentation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the Directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our responsibility is to express an opinion on the financial report based on our audit. Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. • Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Company audit. We remain solely responsible for our audit opinion. 48 | QV Equities Limited Annual Report 2018 Independent Auditor’s Report to the Shareholders (continued) We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. REPORT ON THE REMUNERATION REPORT Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 16 to 18 of the Directors’ Report for the year ended 30 June 2018. In our opinion, the Remuneration Report of QV Equities Limited for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of QV Equities Limited are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. S M Whiddett Partner 15 August 2018 Pitcher Partners Sydney QV Equities Limited Annual Report 2018 | 49 Shareholder Information The shareholder information set out below was applicable as at 30 June 2018. Additional information required by the Australian Securities Exchange Limited Listing Rules and not disclosed elsewhere in this report, is listed below: A. Long term equity investments QV Equities Limited Portfolio as at 30 June 2018 Ordinary Shares, Trust Units or Stapled Securities Abacus Property Group AGL Energy Limited Amcor Limited* Ansell Limited AusNet Services Limited ASX Limited* Aurizon Holdings Limited* BWP Trust Bank of Queensland Limited Cabcharge Australia Limited Caltex Australia Limited Charter Reit Clearview Wealth Limited Coca- cola Amatil Contact Energy Limited Crown Resorts Limited Cybg PLC Event Hospitality and Entertaiment Ltd Fairfax Media Limited Fletcher Building Limited Flight Centre Travel Group Limited FlexiGroup Limited Genesis Energy Limited GWA Group Limited Hotel Property Investments Integrated Research Limited Integral Diagnostics Limited IPH Limited Link Administration Holdings Limited Mayne Pharma Group Limited Mirvac Group Myer Holdings Limited MyState Limited Pinnacle Investment Management Group Limited 2018 2017 Holding Units Fair Value $ Holding Units Fair Value $ 400,000 250,000 1,508,000 5,620,000 1,000,000 14,410,000 300,000 2,500,000 50,000 1,600,000 600,000 950,000 1,600,000 430,000 700,000 1,350,000 550,000 700,000 1,000,000 2,400,000 350,000 5,000,000 2,000,000 - - 2,300,000 2,000,000 1,000,000 - 2,300,000 500,000 300,000 9,500,000 1,000,000 5,000,000 - - 8,157,000 4,012,500 3,219,500 6,928,000 1,950,000 9,680,500 3,840,000 13,992,200 2,933,000 1,566,000 5,060,000 3,766,000 13,500,000 13,512,000 4,686,500 3,750,000 12,740,000 - - 5,175,000 6,800,000 3,160,000 - 6,946,000 2,225,000 2,199,000 8,265,000 2,170,000 1,850,000 - - 1,000,000 220,000 650,000 440,000 4,000,000 140,000 1,200,000 900,000 900,000 1,500,000 320,000 - 3,240,000 5,610,000 10,536,500 10,441,200 6,940,000 7,505,400 6,432,000 2,682,000 10,305,000 3,795,000 10,115,200 - 1,200,000 1,740,000 - - 800,000 3,960,000 - - 2,250,000 10,597,500 280,000 3,000,000 1,400,000 100,000 1,200,000 2,300,000 2,500,000 1,100,000 450,000 2,400,000 - 272,727 7,000,000 - 4,200,000 480,000 900,000 900,000 3,743,600 3,300,000 10,654,000 3,830,000 2,190,000 5,313,000 7,875,000 3,300,000 1,449,000 3,984,000 - 2,154,543 7,595,000 - 3,507,000 2,328,000 2,610,000 6,138,000 Oil Search Limited 800,000 7,120,000 50 | QV Equities Limited Annual Report 2018 Shareholder Information (continued) A. Long term equity investments (continued) Orica Limited* Pact Group Holdings Ltd Pro-Pac Packaging Limited Ruralco Holdings Limited Shopping Centres Australasia Property Group Skycity Entertainment Group Limited Sonic Healthcare Limited Southern Cross Media Group Limited Spark Infrastructure Group Steadfast Group Limited Trade Me Group Limited Tox Free Solutions Limited Tatts Group Limited Tabcorp Holding Limited Salmat Limited Z Energy Limited Floating Rate Notes Crown Resorts Limited unsecured sub floating rate note Total equities Cash Total Portfolio 2018 Holding Units 650,000 2,750,000 12,800,000 1,600,000 2,000,000 2,000,000 Fair Value $ 11,537,500 14,492,500 4,637,000 4,912,000 4,900,000 7,400,000 560,000 13,736,800 5,000,000 5,500,000 3,600,000 6,550,000 12,540,000 10,116,000 - - - - - - 500,000 2,230,000 - - 900,000 6,300,000 2017 Holding Units 450,000 Fair Value $ 9,306,000 1,800,000 10,782,000 - 1,445,000 3,000,000 900,000 500,000 4,500,000 4,000,000 3,600,000 400,000 4,000,000 173,000 - 2,000,000 800,000 - 4,262,750 6,570,000 3,492,000 12,110,000 5,602,500 10,480,000 9,576,000 2,024,000 9,600,000 723,140 - 770,000 6,040,000 Holding Units 4,100,000 Fair Value $ Holding Units Fair Value $ 4,163,550 4,100,000 4,038,500 284,256,550 259,247,833 55,310,602 75,657,537 339,567,152 334,905,370 * Part or all of the security was subject to call options written by the company. There were 448 (2017: 461) investment transactions during the financial year. The total brokerage paid on these transactions was $299,787 (2017: $297,325). B. Distribution of equity securities Analysis of numbers of shareholders by size of holding as at 30 June 2018: Holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Class of equity security ordinary shares No. of shareholders 201 785 1,136 4,789 297 7,208 Shares 70,649 2,751,640 9,246,583 154,074,785 109,392,890 275,536,547 Percentage 0.03 1.00 3.35 55.92 39.70 100.00 There were 116 holders of less than a marketable parcel of ordinary shares holding a total of 7,656 shares. QV Equities Limited Annual Report 2018 | 51 Shareholder Information (continued) C. Equity security holders Twenty largest shareholders - ordinary shares: Name Citicorp Nominees Pty Limited Navigator Australia Ltd Nulis Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited Bennamon Pty Ltd AKAT Investments Pty Ltd Austair Pilots Pty Ltd ZEBPLAND Pty Ltd Netwealth Investments Limited Australian Executor Trustees Netwealth Investments Limited Citicorp Nominees Pty Limited Mr Christoper Peter Jones and Mrs Linda Jones Australian Academy Of Science Investors Mutual Ltd IOOF Investment Management Ltd Magnet Investments Pty Ltd BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP Beth Maclaren Smallwood Foundation P/L Meroma Pty Limited Substantial shareholders D. There are currently no substantial shareholders of QV Equities Limited. Ordinary Shares Percentage of Numbers Held issued shares 17,857,029 8,143,462 8,079,173 3,154,982 3,045,795 2,500,000 2,460,441 2,000,000 1,797,945 1,437,964 1,335,422 1,054,065 1,013,626 1,000,000 1,000,000 909,688 856,719 835,501 800,000 712,295 6.48 2.96 2.93 1.15 1.11 0.91 0.89 0.73 0.65 0.52 0.48 0.38 0.37 0.36 0.36 0.33 0.31 0.30 0.29 0.26 52 | QV Equities Limited Annual Report 2018 This page is left intentionally blank QV Equities Limited Annual Report 2018 | 53 Q V E Q U I T I E S A N N U A L R E P O R T 2 0 1 8 QV Equities Limited ABN 64 169 154 858 Level 24, 25 Bligh Street, Sydney NSW 2000 Corporate Enquiries: 1300 552 895 Investment and General Enquiries: 1800 868 464 info@qvequities.com qvequities.com Annual Report Year ended 30 June 2018

Continue reading text version or see original annual report in PDF format above