Value Investing

Sandon Capital Activist Fund December 2015 Commentary

Sandon Capital Activist Fund commentary for the month ended December 31, 2015.

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The Sandon Capital Activist Fund delivered a return of 0.9% in December, bringing total returns (net of all fees and expenses) since inception to the equivalent of 13.4% per annum.

Sandon Capital Activist Fund

Volatility in the market continued to provide good opportunities for adding to existing positions as well as providing new opportunities. Our current cash balance of 14% appears low relative to history – Sandon’s cash balance has averaged ~30% since inception – however we expect ~15% of the investment portfolio to be converted to cash in the next 6-8 weeks as capital returns and takeovers are completed. Thus, we have significant firepower to take advantage of the current volatility in the market.

The main contributor to this month’s performance was Onthehouse Holdings Ltd (OTH), which announced on Christmas eve that it had received an unsolicited, indicative non-binding 75.5 cents per share takeover proposal from a Macquarie-lead consortium, which included OTH Directors Michael and Daniel Dempsey and CoreLogic. It is worth reminding readers of our OTH investment thesis: there are two core businesses, Real Estate Solutions (RES) and Consumer Online (CO). The RES business provides mission critical software to real estate agents and delivered $11.3 million of EBITDA in FY15, representing a margin of 53%. We believe this is a robust, high cash generative software business. Consumer Online, which had aspirations of disrupting the dominance of Realestate.com.au and Domain in real estate listings, has distracted investors from the significant value that exists in the RES business. While it is still far from certain that a proposal will emerge from the consortium, we remain confident of the future prospects for OTH. Funds managed by Sandon recently increased their ownership of OTH to 6.1%.

Armidale Investment Corporation Ltd (AIK) completed its rights issue in late December. Funds managed by Sandon exercised all their rights and applied for additional shares in the rights shortfall and now own 13.2% of AIK.

Also during December, Alchemia Ltd (ACL) announced details of plans to return cash of 9.3 cents per share. If approved by shareholders in late January 2016, the return of capital will represent a substantial return on the Fund’s investment in ACL. The Funds will remain invested in the rump of ACL.

The remainder of the portfolio reported small rises and declines in price for the month. We do not consider any of these noteworthy.

Sandon Capital Activist Fund

Sandon Capital Activist Fund Description

The objective of the Fund is to deliver returns to investors through a combination of capital growth and distributions. The Fund aims to achieve this objective by seeking to invest in opportunities that are considered by Sandon Capital to be trading below their intrinsic value and that offer the potential of being positively influenced by investors taking an active role in proposing changes in the areas of corporate governance, capital management, strategic and operational issues, management arrangements and other related activities. Neither returns nor capital are guaranteed.