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Monthly Report: Australian Fund April 2020

30/04/2020
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Australian Fund April Monthly Report

COVID-19 fears subsided in April as global social distancing eased infection numbers. As these uncertainties faded and both central banks and governments finalised gigantic support programs, global markets rose sharply. Australian stocks were up 10%, posting the best monthly performance in more than 30 years. While the Fund’s 21% increase for the month was its largest on record, there remains much catching up to do.

It has been a busy few months for Thorn Group (TGA). Its equipment finance division provides equipment-backed loans to small and medium businesses. Losses from customer payment delays increased even before COVID-19. Now many customers are asking for reduced or deferred payments. With a significant amount of debt, Thorn’s equity in this division is probably worthless. That is painful—especially given the company spurned an offer for this division at multiples of Thorn’s current market capitalisation—but it is the smaller of the two divisions by some margin.

And there is encouraging news at Thorn’s Radio Rentals arm. The provider of washing machines and TVs to cash strapped consumers will cease physical operations, closing 62 stores permanently and cutting 300 staff in stores, warehouses and head office.

The consumer leasing business is not going away completely. Radio Rentals will move online, where 77% of enquiries already start. The business model will need to change. However, with high brand recognition the company has a chance to move some of its business into a digital future. In the meantime, it should generate a lot of cash. Existing customers still owe Radio Rentals $123m for products already leased.

The Fund’s largest investment, mining software company RPM Global (RUL) continued to win new customers despite the crisis. As COVID-19 was raging, contracted subscriptions rose by another $4.6m in the month to mid-April. Annual subscription revenues now total $12.8m, three times the runrate last June.

As prices collapsed there were many new investments to consider in March and April. Two new additions to the portfolio are Perenti (PRN) and Star Group (SGR).

Mining services provider Perenti makes most of its money helping miners extract gold from mines in Australia and Africa. Most of the company’s work takes place underground,  using know-how and equipment to build infrastructure, explode rock and haul it up to the surface.

During COVID-19 the share price fell by 70% on concerns about mine closures and debt levels. With more than 8,000 staff working and living in close quarters, the company has had to be particularly careful to avoid the spread of COVID-19. With the virus subsiding, Perenti has felt minimal impact from closures. Whilst the debt makes it riskier than our other mining services company, Macmahon (MAH), it also has a lot more upside. We have reallocated a small portion of the Macmahon investment to Perenti and kept the overall industry exposure roughly the same.

Star Group, owner of casinos in Sydney and Queensland, felt the brunt of social distancing measures. At first, visitors were forced to spread out. Then full closures were announced. With net debt of $1.2bn, the company was at risk of needing to sell new shares to supplement cash reserves.

But Star’s assets are high quality and almost impossible to replicate. Domestic visitors make up more than 90% of profits and growth in domestic revenue at its main casino in Sydney has been 4% annually for the last two decades. Despite the current debt levels, the company can access enough financing to withstand a shutdown until early 2021. With recent successes in battling COVID-19, the casinos should reopen much sooner than that.

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