Sandon Capital Activist Fund May 2016 Commentary

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

Sandon Capital Activist Fund Commentary

The Sandon Capital Activist Fund delivered a return of 0.8% in May, bringing total returns (net of all fees and expenses) since inception to the equivalent of 12.6% per annum.

The main contributor (~0.7%) to this month’s return was Armidale Investment Corporation Ltd (AIK). AIK is the largest holding in the Fund, and one of the longest held. The Fund has held AIK shares since inception when it was then known as Wallace Absolute Return Fund Ltd. Fortunately, AIK is a very different company today. We have written about AIK on a regular basis, so long-time readers would know that AIK is today an investment company with investments spanning leasing, buying groups, telecoms reselling, and more recently asset finance broking. During May, AIK announced it had entered into exclusive due diligence for the partial acquisition of two asset finance brokerages. Completion of these proposed acquisitions will further AIK’s transformation into a business largely focused on asset finance broking. According to an independent research report (a copy of which is available on the AIK website), AIK could emerge as a major non-bank equipment finance group. We believe there are also a number of other near term catalysts that could drive a re-rating of the AIK share price including:

  • exceeding the $31m lease origination forecast (reaffirmed in early May)
  • a reduction in the discount rate applied to the valuation of the leasing business. The company currently uses 21% as its discount rate, with each 1% reduction in the discount rate equating to a $1.8 million increase in the value of the leasing business
  • moving away from an LIC structure to fully consolidated accounting, which will provide visibility into the earnings power and value of AIK.

Onthehouse Holdings Ltd also contributed to this month’s return (~0.5%) despite no resolution yet being achieved on the Macquarie consortium non-binding and conditional takeover proposal. We suspect this might be a tactical move on the part of the prospective bidders, perhaps to create a sense of relief and capitulation if an offer does finally materialize.

Changes in the prices of the Fund’s other holdings were immaterial to overall performance.

The Fund exited its short-lived, yet profitable, positions in Asciano Ltd and Broadspectrum Ltd during the month. Cash levels ended the month at approximately 15%.

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