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Monthly Report: Australian Fund February 2016

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Australian Fund February Monthly Report

February provided a mixed bag of results for the Forager Australian Shares Fund. Fortunately, expectations are low for our out-of-favour stocks so a mixed bag does the job. On the ledger’s troubled side, office landlord RNY Property Trust (RNY) had a shocker. Net asset value per unit plunged 35% from $0.54 to $0.35 in Australian currency. Writedowns were taken as a result of a ‘structural shift’ in its suburban New York leasing markets. Businesses are preferring central locations connected to public transport over suburban office properties with large car parks. A demographic migration towards urban areas is underway.

That means our assets will struggle to produce the income expected over the coming decades. Though RNY has been one of the Fund’s best investments, this is a big blow. Management believe they can liquidate the trust at the new net asset value over the next two years, which would produce a good return on the current $0.155 unit price, but with the leverage involved here we are a little circumspect.

No prizes for guessing the other struggling performers were mostly our engineering and mining contractors. Between Boom Logistics (BOL), Brierty (BYL), Logicamms (LCM), Matrix Composited & Engineering (MCE), Mining and Civil Australia (MACA/MLD), MMA Offshore (MRM) and Watpac (WTP), only Matrix and MACA actually managed a statutory profit. Even they announced profit down 70% and 65% respectively.

It’s a very tough environment out there. The jury is still out on whether we’ve made the right call buying in to these sectors, despite favourable (eventual) experiences from Macmahon Holdings (MAH) and Coffey International (COF).

Speaking of Macmahon, it falls into a category of stocks that announced weak financial results but saw their share prices rally. The company’s revenue fell more than 50%, and earnings before interest, tax and impairments more than 60%. But expectations were extremely low.

For this mining contractor, which has survived a torrid run of contract losses, impairments and redundancies, the results showed a business stabilising. Macmahon has net cash of $69m, and should be able to produce at least $20m free cash flow for the foreseeable future. The market capitalisation of $137m still doesn’t ask a whole lot of the business.

Joining it in this low expectations category were South32 (S32) and a new portfolio addition, Whitehaven Coal (WHC). Both companies are doing it tough but showing impressive cost reduction skills (hence the pain in mining services).

On the unequivocally good side of the ledger, telecommunications contractor Service Stream (SSM) continued its path to redemption under chief executive Leigh Mackender, reporting higher revenue and profit for the fifth half-year in a row. The company also announced a 1c fully franked dividend and a capital distribution of 5c per share, returning more than 10% of the company’s market capitalisation to shareholders.

And marketing agency Enero Group (EGG) produced a good result, which must bring joy to its indefatigable boss Matthew Melhuish who has toiled hard for many years. Enero has a market capitalisation of just $89m. For that investors get around $7m per year earnings, cash of $34m, $22m in franking credits and $39m of tax losses. If the earnings can be maintained or — deep breath required — grow, that looks a good deal.