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Sandon Capital Activist Fund March 2016 Commentary

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Sandon Capital Activist Fund commentary for the month ended March 31, 2016.

The Sandon Capital Activist Fund delivered a return of 2.7% in March, bringing total returns (net of all fees and expenses) since inception to the equivalent of 12.5% per annum.

The main contributor to the month’s return was Onthehouse Holdings Limited (OTH), whose share price rose closer to the indicative non-binding offer of 85 cents per share made by the Dempsey/Macquarie/CoreLogic consortium. The four week non-exclusive due diligence period ends shortly, so shareholders will soon learn whether the indicative proposal becomes a binding offer. BlueScope Steel Ltd (BSL) also made a positive contribution as the share price continued to rise following better than expected half year results and growing expectations of further upside in BSL’s operating performance as a result of improving regional steel spreads.

During the month, the Fund disposed of its 19.9% rump stake in Alchemia Ltd, following the 9.3 cents per share return of capital during February. This brought to an end a very successful investment for the Fund, which resulted in a total return of approximately 10.1 cents per share for shares that were largely acquired at approximately 5.3 cents per share a little over nine months ago.

In early March, Tatts Group Ltd (TTS) found itself on the losing side of the long-running Victorian pokies compensation case, when the High Court upheld the Victorian Governments appeal against the $540 million settlement. Financial markets had considered a win almost a certainty, so the loss was a surprise to most. We had considered the probability a 50/50 proposition. Despite the financial significance of this loss, the effect on our valuation thesis is minimal. When we consider the renewal of the NSW Gaming Monitoring license announced in February 2016 (which in our valuation we assumed would not be renewed) and an improvement in the net cash position at the half year reporting date, the effect of these positives offset against the negative of the High Court outcome led to a reduction in our valuation of approximately 15 cents per share, which we do not consider significant.

Cash holdings provide a great deal of flexibility to take advantage of a number of investment opportunities. Continued volatility in financial markets has provided a number of opportunities for the fund, including a number of merger-arbitrage opportunities and the building of a stake in an activist opportunity. We expect to disclose this opportunity in the next 4-8 weeks.

Sandon Capital Activist Fund Description

The objective of the Sandon Capital Activist 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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