Sandon Capital Activist Fund commentary for the third quarter ended September 30, 2016.
The Sandon Capital Activist Fund delivered a 1.5% return for October, bringing total returns (net of all fees and expenses) since inception to the equivalent of 13.1% per annum. Cash levels ended the month at approximately 21%.
Sandon Capital Activist Fund – Portfolio Review
Centrepoint Alliance Ltd (CAF) was the month’s strongest contributor. CAF’s share price rose 28% over the month, contributing approximately 1.3% to this month’s performance. There were no announcements from CAF other than the release of the Annual Report, whose results had been previously released to the market.
Armidale Investment Corporation Ltd (AIK) again made a strong contribution to the month’s result (~0.8%). The other notable positive contributor (~0.7%) was Tatts Group Ltd (TTS), whose shares rose following the announcement of a proposed merger with Tabcorp Ltd. Although welcomed by some TTS shareholders, we believe the Tabcorp proposal significantly undervalues TTS, in particular, the lotteries business. We first articulated our thesis for TTS in February 2016, calling for a sale or spin-off of the troubled wagering business, which would leave TTS as a largely lotteries-focused company. We believe the TTS lotteries business is a rare and valuable asset. This analysis is available on our website at www.sandoncapital.com.au in the “Campaigns” section.
We expect the proposed transaction to take quite some time to pass regulatory hurdles before being put before shareholders for approval. There is a long time before this game ends, and much can change between now and then.
During the month, our Onthehouse Holdings Ltd (OTH) investment came to a profitable conclusion, though we believe the price for which OTH was sold was well below what we think the company is worth.
We thought it worth drawing your attention to the CIMIC Group Ltd takeover proposal for UGL Ltd, an engineering services firm. Note that we do not currently have any interest in UGL. This situation is noteworthy for the decision by a sole non-executive director, Mr Robert Kaye SC, to recommend against the proposed transaction. The other four directors have recommended the takeover in the absence of a superior offer. It is all too rare in such circumstances for an independent non-executive director to dissent. Mr Kaye will have, like his fellow directors, considered all the information available to him regarding the prospects and risks for UGL. Yet he came to a different conclusion to his fellow directors. We’d like to commend Mr Kaye for having the courage to stand by his own convictions. Importantly, we are not implying the other directors have not also discharged their duties diligently and with conviction.
We have continued to accumulate shares in new activist prospects and remain poised to seize opportunities to deploy cash.
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.
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