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

The Sandon Capital Activist Fund delivered a 3.3% return for November, bringing total returns (net of all fees and expenses) since inception to the equivalent of 13.5% per annum. Cash levels ended the month at approximately 21%.

Sandon Capital Activist Fund

Armidale Investment Corporation Ltd (AIK) made the largest contribution to this month’s return (~3.9%) as its share price rose strongly throughout the month. AIK announced during the month that it was moving away from being a listed investment company and would henceforth report results on a consolidated basis. We believe this is an important move to improve the visibility of AIK’s earning potential. We look forward to the half year results in early 2017.

The main detractor for the month was RNY, which announced a material reduction in NTA following the receipt of bids for some portfolio properties. This was disappointing to say the least, and the share price reacted commensurately. We have considered various courses of action in respect of RNY, but to date have not yet found one that might improve our likely outcome.

During the month we continued to build the Fund’s position in its latest activist target, Iluka Resources Ltd (ILU). In early December, Sandon Capital released a presentation outlining its thesis that ILU was undervalued and should spin-off its valuable iron ore royalty. The thesis was made public after correspondence with the company led us to conclude the status quo would prevail absent public engagement. This analysis is available on our website at www.sandoncapital.com.au in the “Campaigns” section.

The Tatts Group Ltd (TTS) / Tabcorp Ltd (TAH) merger proposal took a new twist during the month when TAH conducted a raid on TTS buying a 9.9% stake. Despite TAH statements portraying the acquisition as innocuous (viz “to help facilitate the proposed combination of” TAH and TTS), we believe the move was a rear-guard action to provide TAH with some protection against interlopers that might seek to get in on the action. Time will tell. We remain convinced the proposed transaction significantly undervalues TTS, especially its lotteries business.

Fleetwood Corporation Ltd (FWD) held its AGM during the month. New Chairman, Phillip Campbell, gave a comprehensive mea culpa, admitting a “number of fundamental mistakes” were made. We agree, and believe that such admissions are the first step to effecting a genuine turnaround. We remain convinced that further board changes are required and look forward to the company’s half year results announcement in early 2017.

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.

See the full PDF below.