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Monthly Report: Australian Fund February 2019

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Australian Fund February Monthly Report

Most of the Forager Australian Shares Fund’s investments released results during February. Pleasingly, given some of the disappointing results of the past 12 months, most companies delivered on our expectations and a few exceeded them.

Marketing services group Enero (EGG) was one of the latter. With its tech-centric public relations agency Hotwire firing, the company grew revenue by 15% organically during the half. After a few years struggling to grow at all, this was a very welcome change. Including a recent acquisition, total revenue grew by 33%. Net profit was up 91%.

Growth rates like this are unlikely to be the norm. But they also don’t need to be. The valuation of the business remains attractive, trading on a current year price-to-earnings ratio of about 10 times. Thanks to a rising share price, Enero is now the Fund’s largest investment.

Another of the Fund’s larger holdings, mining services business Macmahon (MAH) delivered a half-year result that seemed to set the company up to exceed its full year guidance. Revenue doubled as the company started work on its main Batu Hijau mining contract (Macmahon even scored a small bonus for good performance). Earnings before interest and tax increased fourfold. The company is working on $4.8bn worth of contracts and may win $7bn more. But the detail was disappointing.

Macmahon has agreed an employee bonus scheme that means any upside to its guidance will largely accrue to staff. This aligns the employees to achieve the target, but means the company is unlikely to significantly outperform this year. Macmahon should have done a better job of communicating the scheme to shareholders and clearing up what, if any, bonuses to expect in future years.

The last of the Fund’s three most significant investments, comparison website iSelect (ISU), delivered a strong first half result. New management reduced unproductive marketing spend and ‘adjusted’ profit was up 79%, despite revenue falling 12%. The company is also chopping away some unprofitable branches: physical kiosks, an underperforming home loans unit and a troubled Cape Town call centre have been scaled down or closed. iMoney, a previously underappreciated South East Asian subsidiary, is performing well and may be sold off.

All of this makes for a stronger business and, if marketing spend can continue to be effectively managed, sets the business up well for strong performance in the second half of this financial year. With major competitor Compare the Market holding 23% of iSelect’s shares, a good year will strengthen iSelect’s hand when it comes time for a deal.

There was progress on a long-held and problematic investment in engineering services business Logicamms (LCM). The company is pursuing a merger with OSD, a strongly performing private business. Logicamms shareholders would own just 41% of the combined entity but there is lots to like about the deal. The company will now have the scale to operate more efficiently, improving the chances that margins can eventually improve. Adding some much needed alignment of interests, the founder of OSD, Brian O’Sullivan, will own over a third of the combined entity and will continue to be involved in the business. The potential deal also removes the need for lossmaking Logicamms to raise more equity from long-suffering shareholders.

The Fund added a new investment in adventure company Experience Co (EXP) during the month. Poor weather over the last six months and some tragic fatalities slowed skydiver growth while quickfire investments in adventure tourism seemed to unravel. While the market panicked on an earnings downgrade, we saw a good quality, growing business undergoing some temporary setbacks. There will be more on this one in the upcoming quarterly