Sandon Capital Activist Fund commentary for the month ended June 30, 2016.

Sandon Capital Activist Fund Commentary

The Fund delivered a return of 0.7% in June, bringing total returns (net of all fees and expenses) since inception to the equivalent of 12.6% per annum. The main contributor (~1.8%) to this month’s return was Armidale Investment Corporation Ltd (AIK). AIK is the largest holding in the Fund, and one of the longest held. Last month we wrote about three near term catalysts we thought might positively affect the share price. These were: (i) exceeding the lease origination forecast, (ii) a reduction in the discount rate applied to the valuation of the leasing business and (iii) a move away from the LIC structure. In late June, AIK announced an increase in the valuation of the leasing business arising from a reduction in the discount rate (21% to 19%) and post 30 June the company also announced that it had exceeded the forecast lease origination by almost 8%, which represented a 48.5% increase from the prior year. It also moved to full ownership of the underlying loan note, which we see as a pivotal step in moving away from the LIC structure. We remain confident that AIK’s true worth will be increasingly recognised by the wider share market, including its potential to deliver growth in an otherwise low-growth environment. The broker aggregation strategy has various successful comparators, and if AIK management are able to deliver, AIK shareholders will be well rewarded.

Sandon Capital Activist Fund

On 27 June 2016, Sandon Capital made a Takeovers Panel application in respect of the 3 for 8 entitlement offer for new shares at $6.75 made by Warrnambool Cheese & Butter Factory Holdings Ltd (WCB). The application sought orders to prevent the entitlement offer from proceeding. In summary, our concern was that WCB’s major shareholder Saputo, Inc. might have been able proceed to compulsory acquisition of minority shareholders if no other WCB shareholders exercised their entitlements. Most shareholders, including funds managed by Sandon Capital, exercised their entitlements, and Saputo did not go above the 90% threshold. On 1 July, the Takeovers Panel announced that it had declined to conduct proceedings, noting the strong take up of entitlements.

During the month, we also released a presentation detailing our investment thesis for Fleetwood Corporation Ltd (FWD). It is available on our website or by clicking on this link (click here). FWD announced a retirement living manufactured accommodation contract with National Lifestyle, a retirement living provider. FWD shares contributed 0.8% to the month’s result.

Onthehouse Holdings Ltd (OTH) was a detractor to the month’s performance (-0.7%), as the mooted takeover continued unresolved at months’ end. This uncertainty was laid to rest a week later, when a Scheme of Arrangement at 85 cents per share was announced. We are not as pleased as one might expect with this proposal, as in the 6 months since the proposal first came to light, there has been, in our view, a significant improvement in the value of OTH following the sale of the loss-making consumer online division. We will consider our position in respect of the scheme proposal closer to the time of the meeting. In the meantime, we have increased Sandon Capital’s holding in OTH.

Changes in the prices of the Fund’s other holdings were immaterial to overall performance.

Cash levels ended the month at approximately 13%.

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