OC Premium Small Companies Mandate commentary for the month of November 2015.
OC Premium Small Companies Mandate – Performance review
The OC Premium Small Companies Mandate returned 3.8% for the month of November in volatile market conditions. This was ahead of both the S&P/ASX Small Ordinaries Accumulation Index which was flat for the month (0.0%) and the S&P/ASX Small Industrials Accumulation Index which was up 1.9%. The Mandate has achieved a strong 12-month return of 26.2%, well ahead of both indices which were up 6.5% and 11.9%, respectively, over that time period.
OC Premium Small Companies Mandate – Portfolio attribution
SG Fleet (SGF) (+35.2%) – re-rated strongly following the announcement it had acquired specialist manager and provider of novated leases, consumer vehicle finance and vehicle sourcing services, nlc. We believe the strategic rationale for the deal is compelling given the complementary nature of the novated business model, product and skill set. The acquisition creates a leading market position, diversifies the group and opens up a variety of cross-sell opportunities. The deal will be largely debt funded, leveraging SGF’s strong balance sheet, with 9.1 million shares also to be issued to the vendor. SGF anticipates cash earnings per share accretion of +25% in its first full year of ownership, with meaningful revenue and cost synergy opportunities providing potential future upside. On all levels, this looks like a stellar deal which has been rewarded accordingly by the market.
Ozforex (OFX) (+21.1%) – during the month, OFX announced it had received a preliminary, non-binding conditional proposal to acquire 100% of its shares via a scheme of arrangements from The Western Union Company (WU). The indicative price is all cash consideration of $3.50-$3.70 per OFX share. The board of OFX subsequently advised the market it has concluded it is in the interests of shareholders to engage further with WU on an exclusive basis to progress the proposal. We were not surprised by the bid given industry consolidation has been a common feature of the money transfer industry in recent years and that OFX has a high quality, globally scalable business model. Although the bid represents a healthy 35%-42% premium to the closing share price prior to the announcement, we would not rule out the possibility of other bidders emerging given the company’s quality technology platform and attractive global footprint.
Our exposure to the listed out-of-home media companies APN outdoor (APO), oOh!Media (OML) and QMS Media (QMS) continued to reward investors during the month with these stocks up 12.5%, 25.0% and 20.8%, respectively. Year-to-date out-of-home share of the broader advertising sector revenue has increased by 16.6%, driven by the ongoing conversion of static billboards to digital as well as increasing yields across the out-of-home space. From a stock-specific perspective, OML followed the lead of APO last month and upgraded its full-year profit guidance as well as announcing the acquisition of Inlink, which owns a network of more than 2,800 digital screens located in office towers, cafes and fitness centres. Additionally, QMS announced the acquisition of iSite, one of the two dominant companies in the New Zealand outdoor advertising market. We recently visited the QMS NZ operations and we subsequently met with management following the announcement. We have high conviction it is a quality acquisition that was sensibly priced and will add to shareholder value in the coming years.
Baby Bunting (BBN) (+21.1%) – recent IPO, BBN, was a strong performer for the month, moving higher as postlisting selling dried up and increased research analyst coverage raised investor awareness of the stock. BBN listed on the ASX in mid October 2015 and we added to our position shortly thereafter despite the stock immediately trading at a healthy premium to its issue price of $1.40. A specialty retailer in baby products, BBN has an established brand and a current footprint of some 33 stores. We expect BBN management to roll out six stores per annum over the next six years, effectively doubling its presence in the Australian market and driving significant scale and synergy benefits for the group. Though BBN is now trading at a good premium to the market PE multiple, we believe the medium to long-term growth prospects of the business are outstanding and we remain comfortable holders of the stock at these levels.
Slater & Gordon (SGH) (-66.6%) – during November, we exited SGH following the announcement of proposed regulatory changes to the UK road traffic accident compensation regime. This was a very disappointing outcome and followed an earlier announcement the company’s H1 FY16 cash flow will be materially worse than the market’s and our expectations. While regulatory change is always a risk for a company such as SGH, in its recent AGM commentary the company stated, “we do not see any negative regulatory impacts on the horizon”. The UK government proposals in relation to road traffic accidents, if implemented, will have a material impact on the Slater Gordon Solutions (SGS) business, particularly the proposal to transfer personal injuries claims of less than GBP5,000 to a small claims court. This is game changing for SGH and the proposal would have a material impact on the business should it be implemented in its current format. We believe forecasting the future profitability of SGS in the UK is now very difficult given the considerable uncertainty brought about by this proposed regulatory change. When the facts change we are always prepared to change our mind and so we have exited the position.
Simmonds Group (SIO) (-21.7%) – the portfolio was negatively impacted by the performance of SIO which announced it had commenced a strategic review of the Group’s business-to-business project builder, Madisson Projects. Madisson Projects operates in the apartment, medium density and townhouse sectors which have been highly competitive in recent years leading to significant margin pressure. Although it only contributes 10% of group revenue, the likely closure of the business creates uncertainty for SIO as well as an operational earnings drag and one-off costs associated with the closure in the FY16 year. Although the impact of issues within Madisson Projects ought to be contained within FY16, it is poorly timed following last month’s announcement that well regarded Managing Director, Paul McMahon, had resigned from the business. Sentiment towards SIO is likely to remain weak near term but the stock looks cheap for investors prepared to look past these FY16 issues.
OC Premium Small Companies Mandate – Outlook
Coming into the end of calendar year 2015, it is worth taking a moment to consider the overall macro-economic environment.
In Australia, GDP growth is tracking below trend as the gradual transition from the commodities boom to an east coast-led economic recovery continues. On a more positive note, unemployment is falling and consumer confidence recently hit a six-month high. Despite this, we remain cautious on domestic cyclical stocks given our internal research indicates the Australian economy is unlikely to accelerate meaningfully in the coming six months.
There is now an overwhelming consensus among economic forecasters that the US Federal Reserve will raise short-term interest rates this week, which will be the first time rates have moved higher since the