This is the final part of a multi-part interview with Sandon Capital, a Australian-based, deep value, activist investment firm. The interview is part of ValueWalk’s Value Fund Interview Series.
The interview has been divided into several parts and is downloadable as a PDF at the bottom of this page.
Interview with value activists Sandon Capital [Pt. 3]
ValueWalk: Would you mind sharing some of your current holdings, or perhaps your highest conviction idea?
SC: One of our highest conviction ideas and our most recent public campaign is a company called Fleetwood Corporation (ASX: FWD). Fleetwood has a market cap of ~A$100m and provides manufactured accommodation solutions for a number of end markets. They also own the Searipple accommodation village in Karratha, Western Australia and manufacture recreational vehicles, ute canopies and trays, and distribute caravan parts and accessories.
The company was a market darling during the mining boom as demand for their mine site manufactured accommodation and Searipple accommodation village was booming. Demand has obviously dropped markedly following the collapse of commodity prices, however there are other pockets of demand that are starting to come through that the market is yet to recognise. In particular, demand from the education sector for transportable classrooms and retirement living in manufactured housing estates has been growing strongly.
The market still perceives the company as a mining services supplier and valuation has been punished accordingly. By our calculations, the combined valuation of the assets other than Manufactured Accommodation are almost equivalent to the enterprise value of the company. Hence, investors who buy the stock today are buying the profitable, cash generative and growing Manufactured Accommodation business for negligible value (<1x EBITDA).
The underlying earnings from the core Manufactured Accommodation business are being masked by two negatives:
- Losses in the company’s caravan manufacturing business
- Losses from the Western Australian based manufactured accommodation business that previously supplied to the mining industry
These losses have been ongoing for a couple of years now and we estimate are in the order of A$15m, not insignificant for a company with a $100m market cap. Encouraging the Board and Management to rapidly stem the losses in these businesses is one of several areas we believe we can influence a positive outcome for all shareholders. Fleetwood also has a strong Balance Sheet with minimal net debt, hence buying back stock at current favourable prices is another way for the company to improve its value. We released a public presentation outlining our thesis in mid-June. Any of your readers who wish to understand our thesis in more detail can find the presentation at www.sandoncapital.com.au/site/images/pdfs/1606_FWD_AU_presentation.pdf.
RH: What’s been Sandon’s most costly mistake (both in time and money) over the years?
SC: Like all fund managers, we’ve made our fair share of mistakes, although we obviously try to minimise the impact to overall investment performance when they occur. A disappointing investment that has cost us a significant amount of time and performance has been Coventry Group (ASX: CYG). Whilst the activist component of the investment was successful – the former Executive Chairman retired – the investment itself has been disappointing.
We first purchased shares in the company five years ago and due to a reluctance of one of the major shareholders to support changes at the Board level, it took three years to remove the Executive Chairman who we believed was running the company into the ground. Since his departure, the new Board and Management have significantly improved the operations and have now set the company on a growth trajectory.
We remain shareholders today and don’t believe that selling at a price that is 40% less than liquidation value (current assets minus all liabilities) is the best outcome now that underlying value of the company is improving. Having said that, if we had a crystal ball prior to making the investment, it is one we wouldn’t have made.
RH: With the rise of passive investing do you think activism is going to become more prevalent going forward?
SC: Yes we do. Historically we have invested and agitated in smaller companies where passive investors make up a small part of the register, however in more recent times we have targeted some larger companies – Tatts Group (ASX: TTS) and BlueScope Steel (ASX: BSL) for example – and passive investors have most certainly been a core constituency we have spoken to as part of our campaigns.
We believe passively managed funds have a financial incentive to see the share prices of companies they own perform well and are happy to support an activist if they believe their actions will improve a company’s share price. While an actively managed fund might sell the shares in a company they think is poorly run, passive shareholders don’t have this luxury and are therefore motivated to push companies to perform better. Whilst they like to keep costs low, many of the larger passive/index funds appear to have well-resourced corporate governance departments in order to fulfil this objective.
From an activist’s perspective, having a consolidated register with large passive shareholders can be also be an advantage as it can result in less costly and time consuming campaigns. Whilst it may not appear obvious at first glance we think passive investing firms and activist investors have a symbiotic relationship and for this reason we think the rise of passive investing will continue to facilitate the rise of activist investing.