OC Premium Small Companies Mandate May commentary for the month ended May 31, 2016.
OC Premium Small Companies Mandate – Performance review
It was a strong month for the OC Premium Small Companies Mandate which finished May up 5.8%, ahead of both the S&P/ASX Small Ordinaries Accumulation Index (+4.1%) and the S&P/ASX Small Industrials Accumulation Index (+4.8%). Pleasingly, the Mandate remains ahead of both benchmarks for the financial year, despite the sharp rally in speculative resource stocks in the first four months of calendar year 2016, which saw the Mandate underperform the S&P/ASX Smalls Ordinaries Accumulation Index for a few consecutive months.
OC Premium Small Companies Mandate – Portfolio Review
Two recent portfolio additions were strong double-digit performance contributors to the portfolio in May, namely Eclipx Group (ECX) (+21.3%) and CSG Group (CSV) (+17.2%). ECX has been an outstanding performer since we added it to the portfolio in mid- February. The company is a leading player in vehicle fleet leasing, fleet management and diversified financial services in Australia and New Zealand. During May, ECX announced a solid H1 FY16 NPATA, up 9% on the previous corresponding period, and also announced the strategically sensible acquisition of Right2Drive, a company that provides rental cars to “not-atfault” drivers that have accident-damaged cars. The management team has built considerable momentum in new business written and we remain attracted to the growth profile of the business.
CSG Group (CSV) – is a leading provider of print and business technology solutions in Australia and New Zealand and is supported by a growing in-house equipment financing business that helps facilitate the sale of its suite of products. The stock was added to the portfolio after its H1 FY16 result when the share price fell materially following a slight miss to consensus revenue and earnings forecasts. A number of meetings with management convinced us the miss was a temporary procurement delay which had opened up an attractive entry point into the stock. CSV has a solid management team led by Julie-Ann Kerin, who we have known for many years and rate highly. CSV has a strong pipeline of opportunities in the enterprise solutions area where it expects to sign at least one new contact per half-year for the foreseeable future.
Fisher and Paykel Healthcare (FPH) (+18.3%) – portfolio stalwart, FPH, continues to deliver for investors after announcing another typically strong full-year profit result, up 27% on the prior year. We have long been attracted to FPH’s global growth strategy and were not disappointed as both of the company’s major product groups, hospital/ respiratory and acute care and homecare/obstructive sleep apnoea again delivered double-digit revenue and profit growth. We have reduced our weighting slightly on the back of the strong share price appreciation but continue to hold the stock as a core portfolio position given our forecast of relatively low risk double-digit earnings growth over the medium term.
During the month, we added two quality mining services stocks to the portfolio, namely WorleyParsons (WOR) and Mineral Resources (MIN); pleasingly both stocks are up 10%+ from our initial entry points.
Many investors would be surprised to hear that the once mighty WorleyParsons has fallen back into the S&P/ASX Small Ordinaries Index following the global oil price rout that hit WOR’s earnings hard and left the balance sheet over geared. Nevertheless, extensive due diligence has convinced us that management is in the early stages of turnaround, which will be largely driven by extensive cost out and a working capital unwind which we expect will significantly de-lever the balance sheet over the coming 12 months. WorleyParsons remains a quality business with a solid reputation across the hydrocarbons, minerals, metals, chemicals and infrastructure sectors. New CFO, Tom Honan, and Bain Consulting are embarking on a credible strategy that we expect will strengthen the balance sheet and leave the company well positioned to benefit from the recovery in the oil price that is already underway.
After exiting Mineral Resources in April on valuation grounds, we have re-initiated a position in the company a little over a month later at a higher share price. Why? We always say to investors if the facts change, then we are willing to change our investment view. Over recent weeks, we have come to appreciate the significant value MIN has in its portfolio of lithium assets which we still think is under-appreciated by the market. MIN has recently exercised an option to move to a 43.1% ownership stake in the Mt Marion lithium project, a high-quality, long-life project, which we expect to be in production and materially profitable in FY17. We also understand the company has a number of other exciting opportunities in the lithium space at various stages of development. We expect the MIN share price to continue to re-rate as the company brings Mt Marion into production and remain confident the high caliber management team will deliver a strong FY16 result.
Blue Sky Alternative Investments Limited (BLA) (+13.8%) – during the month the Mandate initiated a position in BLA, an alternative asset manager with more than $2 billion in assets under management. Headquartered in Brisbane and founded in 2006, Blue Sky now has offices in Adelaide, Sydney, Melbourne and New York and a team of over 80 investment professionals and support staff. BLA has built a strong track record across a number of alternative asset strategies to produce a blended compound return of 16.9% p.a. since inception across private equity and venture capital, private real estate, real assets (water entitlements and utilities) and hedge fund products. We have long admired the BLA business model and the vision of the founding Managing Director, Mark Sowerby. In the course of our due diligence, we have visited operations in Brisbane, New York and Melbourne, meeting with a raft of quality investment and distribution staff who work with the group. A placement at $6.50 provided an attractive entry point in what we expect to be a rewarding long-term investment for the Mandate.
Speedcast International (SDA) (-13.3%) – was the Mandate’s biggest detractor in May, despite announcing several new contract wins during the month and conducting an AGM which included overall upbeat outlook for the business. No doubt operating conditions in two of its core markets, oil and gas and maritime, are somewhat challenging as highlighted by global peers in recent commentary, but we remain confident SDA is continuing to take market share. We believe SDA is a quality company led by a highly experienced management team who can deliver significant shareholder value in the coming years.
Blackmores (BKL) (-6.0%) – has been topical recently with the share price having pulled back in recent months due to concerns about disruption within its Chinese distribution channels brought about by tax and regulatory change. As recently as last month’s report, we stated that, “Our recent visit to China and discussions with industry players and government officials has led us to conclude that these risks are overstated”. However, during May, we met with no less than five players in the Chinese vitamin markets. This has given us cause for concern that there may be, in fact, some near-term supply disruptions to the Chinese markets, which could be material to BKL profitability. While we continue to believe