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Monthly Report: Australian Fund January 2016

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Australian Fund January Monthly Report

January was an uneventful month for most of the companies in the Forager Australian Shares Fund, but pleasingly the benchmark fell 5%. The ASX All Ordinaries has now fallen 15% since its high in April last year, and is now priced at a little under 16 times earnings. That’s not an outright bargain, but it certainly makes finding new ideas easier.

We’ve added a couple of new investments to the portfolio, but won’t name them yet until we’ve been able to buy all the shares we want. The Fund also purchased a few more shares in straggler Hughes Drilling (HDX) at bargain prices, but it remains a small holding.

Another investment that was topped up was Macmahon Holdings (MAH). This contract miner sits on a healthy cash balance and should produce plenty of free cash flow in the next few years. With a new boss and some new contracts starting soon, it’s well placed to work through the current tough environment.

The aggressive behaviour of 20% shareholder CIMIC Group (CIM) towards Macmahon remains a concern, but its stake isn’t large enough to seriously erode value for other shareholders. That distinguishes Macmahon from CIMIC’s other listed investments, Devine (DVN) and Sedgman (SDM) where CIMIC is intent on increasing its stake with low-ball takeover offers. CIMIC voted down Macmahon’s remuneration report, a little curious given CIMIC’s representative on Macmahon’s board actually chairs the remuneration committee, but this isn’t likely to have serious consequences.

We keep lobbying Macmahon’s board to distribute excess cash to shareholders through a return of capital, but so far the response has been luke-warm.

Elsewhere, New York landlord RNY Property Trust (RNY), one of the Fund’s largest investments, announced the refinance of a US$72m loan with a new US$97m mortgage. Covering a small portion of RNY’s properties, this is modestly good news. The new loan has a slightly lower interest rate, and importantly provides an extra US$25m of funding for building improvements and attracting new tenants.

That will improve the rent from the eight properties the new mortgage encumbers, and make them easier to sell. The new loan is also more flexible, allowing for early repayments, which gives management options if they wish to sell certain properties and not others.

Financial software expert GBST Holdings (GBT) announced the immediate departure of its chief financial officer, with chief operating officer Patrick Sallis to take over duties. This follows the exit of its chief executive last year after a profit downgrade, and it is hard to know if we should be expecting bad news at the upcoming half year results announcement.

Hopefully it’s just a case of the new boss Rob De Dominicis making changes to suit his management style, but because the full year forecast, $19–23m earnings before interest, tax, depreciation and amortisation, is dependent on a strong second half contribution, a downgrade wouldn’t completely shock us. We’ll keep our eyes peeled.

Lastly, as foreshadowed in the December 2015 quarterly report, the takeover offer for geosciences consultant Coffey International (COF) by Tetra Tech was declared final and unconditional in January. The Fund should soon receive its cash of $0.425 per Coffey share. It’s not quite the price we hoped for, but still a fantastic return on our average purchase price of $0.246.

Most of the Fund’s companies report results in the coming weeks so expect to hear more in the February report.