HM1: High-Conviction Investments and Meaningful Contributions to Australian Medical Research Organizations – Long-Term “Buy”

Key Takeaways Hearts and Minds Investments (ASX: HM1) is a great option for investors looking to combine strong financial performance with contributing to a meaningful cause. Since launching in 2018, the company has delivered solid returns by focusing on high-conviction global equities, especially in sectors like biotechnology and technology. What really sets HM1 apart is its commitment to philanthropy, donating 1.5% of its net tangible assets each year to Australian medical research. With top holdings like NVIDIA and Microsoft driving growth, HM1 combines strong potential with social impact. Based on our analysis, we believe the fair value of the stock is $5.85 per share, which suggests a potential upside of +46%. If you’re looking for both solid returns and the chance to support a worthwhile cause, we are issuing a long-term “Buy” rating for HM1. If you’re looking for an investment that delivers strong returns while also making a meaningful impact, Hearts and Minds Investments (ASX: HM1) deserves a closer look. Launched in 2018, HM1 stands out as a unique listed investment company that blends financial performance with philanthropy. Inspired by the Sohn Hearts & Minds Investment Leaders Conference, it pools the expertise of some of the world’s top fund managers to create a concentrated global equities portfolio. This approach gives investors access to high-conviction ideas, often unavailable to retail investors, while supporting cutting-edge medical research in Australia. HM1’s numbers speak for themselves. Since inception, the company has achieved a compound annual pre-tax investment return of 9.3%, with a one-year return of 32.2% as of October 31, 2024. For the year ended June 30, 2024, the portfolio delivered an 11.7% pre-tax gain, driven by strong performances in sectors like biotechnology, semiconductors, and technology infrastructure. Key holdings such as NVIDIA, Microsoft, and Amazon led the charge, and shareholders enjoyed a fully franked dividend yield of 5.1%. With a net asset value of $697.4 million and a commitment to consistent returns, HM1 is built for long-term success. But what truly sets HM1 apart is its purpose. The company donates 1.5% of its net tangible assets annually to leading Australian medical research organizations. In 2024 alone, $9.4 million was directed toward groundbreaking research into chronic diseases and mental health disorders, with an additional $6.4 million provisioned for future contributions. This is made possible because HM1’s fund managers and board work pro bono, ensuring shareholder investments not only generate financial growth but also create real social impact. It’s no surprise HM1 is recognized as one of Australia’s Top 30 Corporate Philanthropists. For investors, HM1 offers the best of both worlds: access to a carefully curated, high-performing portfolio and the chance to contribute to a greater good. Its strong financial foundation, combined with a focus on delivering social and economic value, makes it a compelling long-term investment. If you’re in it for both returns and impact, HM1 is a standout choice.

HM1’s investment approach continues to impress. With 65% of its portfolio in the Core Fund, it has consistently benefited from top-performing stocks in sectors like technology. Big names like NVIDIA, TSMC, and Microsoft have been key drivers of growth. Plus, the addition of Munro Partners to the Core Fund has further boosted returns. The other 35% of the portfolio, made up of Conference Fund picks, adds additional diversification, ensuring HM1’s portfolio remains well-rounded and resilient. As we look ahead to 2025, the U.S. equity market shows a mix of optimism and caution. There’s confidence in strong economic growth and steady earnings, with earnings expected to grow around 11%. That said, high valuations could lead to some volatility if earnings fall short. Value stocks are likely to do better than growth stocks, thanks to their steadier performance and lower valuations. Mid-cap stocks also look appealing, offering solid earnings growth at more attractive price-to-earnings ratios compared to large- and small-cap stocks. On the economic front, interest rates, inflation, and geopolitical risks will play a big role in how the U.S. market performs. If interest rates keep coming down, that could help boost equity prices, but inflation concerns could introduce some bumps. Geopolitical tensions and trade policies, including the impact of Trump’s influence on U.S. trade policies, might also add some uncertainty. Even with these risks, institutional investors are feeling positive about avoiding a recession in the U.S. next year, which could drive investment activity. Still, with high valuations and potential global challenges, it’s important for investors to stay cautious. Valuation: Big Upside Potential When we look at HM1’s valuation, we’ve used a mix of approaches to get a clear picture. First, we compared HM1 to its peers using relative valuation models like Price-to-Earnings (P/E), Price-to-Book (P/B), and Price-to-Sales (P/S). For this, we picked a P/B multiple of 1.1x based on the last twelve months, and 0.9x based on historical trends. We also considered the last twelve months’ P/E multiple of 14.9x and a forward P/E of 14.5x. With these, we came up with a fair value range for HM1 between $3.20 and $3.93. Next, we used a Discounted Cash Flow (DCF) revenue exit model, applying a discount rate of 9.5x and a terminal revenue multiple of 2.7x. We also factored in revenue growth for the next five years, expecting a range from 3.5% to 35%. This approach gave us an estimated fair value of $5.85 per share. To settle on an intrinsic value, we averaged all these estimates, which gives us a fair value of $4.53 per share. That’s a potential upside of +46% based on our analysis at the time of writing. Recommendation: A Buy with a Strong Purpose Overall, we recommend HM1 as a Buy. The company offers strong growth potential, attractive dividends, and an impactful philanthropic mission. With its ability to deliver solid returns while supporting vital medical research, HM1 is a great option for members who want both financial performance and the satisfaction of contributing to a greater cause.

Over FY24, HM1’s investment portfolio grew by 11.7% before taxes, marking another solid performance. Since the company’s inception, it has delivered a compound annual return of 9.3%. The good news comes from both the Core and Conference Portfolios. The Core Portfolio, which is focused on 65% of the total investment, performed well, particularly in the tech space with holdings in companies like NVIDIA, TSMC, Microsoft, and Amazon. On the other hand, the Conference Portfolio, which makes up 35%, also saw positive movement despite a few underperforming stocks. The total investment gains for the year amounted to $33.3 million in realised gains and $53.6 million in unrealised gains, contributing to a healthy overall financial position. Revenue and Profit For the year, HM1 posted a total comprehensive income after tax of $53.5 million, slightly lower than the $63.0 million recorded in FY23. While the income dipped a bit, it’s important to note that the drop was mainly driven by adjustments for medical research funding. The company’s net asset value (NTA) still showed positive growth, rising from $675.5 million in FY23 to $697.4 million by June 2024. This reflects HM1’s solid track record in generating revenue through its investments while still staying true to its philanthropic goals. The company’s strong focus on its equity portfolio has paid off, allowing it to both reinvest and fund its important medical research projects. Philanthropy in Action One of the key things that sets HM1 apart is its commitment to supporting Australian medical research. In FY24, the company donated $9.4 million to various medical research organisations and set aside a further $6.4 million for future contributions. This is all part of HM1’s mission to contribute 1.5% of its NTA each year to funding vital research into chronic diseases and mental health. These contributions are made possible by the fund managers, Board, and Committees working pro bono, ensuring that as much money as possible goes directly to the research. Net Asset Value and Shareholder Returns In terms of shareholder value, HM1’s share price increased from $2.26 to $2.58 during FY24, helping to close the gap between the share price and the company’s NTA. At the end of June 2024, HM1’s share price was trading at a 17% discount to its pre-tax NTA of $3.09. This marks a positive shift, reflecting investor confidence in the company’s portfolio and future prospects. Overall, HM1 delivered a total shareholder return of 20% in FY24, combining share price growth with solid returns from the investment portfolio. Risk and Portfolio Composition HM1’s portfolio remains concentrated, with significant exposure to growth sectors like Software, Biotechnology, and Semiconductors. This high-conviction strategy is aimed at driving long-term capital appreciation, although it does come with higher volatility. The portfolio’s active management means it doesn’t track the broader market closely, which can lead to higher risk but also the potential for greater returns. There’s also a bias toward mid-cap companies, with some high-profile names valued over US$50 billion.

Hearts and Minds continues its solid track record with fully franked dividends. For FY24, they paid 14 cents per share, and they declared an increased half-yearly dividend of 7.5 cents per share, paid in October 2024. With a dividend yield of 6.96%, HM1 is focused on delivering consistent returns to investors. The board is committed to maintaining this policy, as long as there are sufficient reserves and franking credits in place, and it aligns with the company’s careful business approach.