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Monthly Report: Australian Fund January 2020

31/01/2020
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Australian Fund January Monthly Report

The Australian stock market rose 5% in January despite the continuation of disastrous bushfires and the outbreak of coronavirus. Retailers and car dealers have been feeling the impact. And with fewer international travellers, stock prices of companies dependent on tourism fell.

Experience Co (EXP), the operator of skydiving and adventure activities, is one of these. Management haven’t made a formal announcement about the effects of the bushfires and the virus outbreak, but when they do the news won’t be good. The company caters to skydivers in Australia and New Zealand and to reef visitors in Cairns. More than half are international tourists.

As the bushfires raged, estimates from a tourism industry organisation were for at least a 10% reduction in the number of international visitors. With Australia banning foreign travellers who have been in China, those estimates will head lower. Experience Co’s revenue will be severely affected this year. With costs mainly fixed, profit will fall even further.

The impact of past viral outbreaks have been short lived. Australian tourist numbers recovered within seven months of the SARS outbreak, although this virus will probably hit harder. The bushfires may have a longer term effect, with significant media coverage globally. However, a multi-year impact seems unlikely. Extra government funding has already led to the “Holiday Here This Year” campaign.

Experience Co has almost no net debt. The business has an enviable market position in skydiving on both sides of the Tasman, flying seven of every ten jumpers. And a new management team, led by former Tourism Australia head John O’Sullivan, has already made some sensible capital allocation decisions. As these temporary challenges fade, a quality growing business will emerge.

Despite two large shocks to the business this summer, the Fund hasn’t lost money on its investment in Experience Co. A low purchase price has provided a handy margin of safety.

Some better news came from the Fund’s recent investment in mining software provider RPMGlobal (RUL). A few years of high software development spending and a push into subscription software is paying off for RPM. By late November recurring subscription revenue had doubled from June and reached $8m. In late January, having signed new contracts worth another $7m, annual recurring revenue rose to $10m.

This is only one source of the high quality recurring revenue that the company produces. Maintenance revenue for software sold on perpetual licenses was $22m last year. And unlike many growing software companies, RPM is generating cash. About 5% of the current market cap (after adjusting for cash holdings) will be generated in free cash flow this year.

Mainstream (MAI), the funds management administration provider, grew total funds under administration to a record $188bn in December. Rising global stock markets helped funds under administration rise 27% from the prior year. Even without market movements the company would have grown by $12.6bn from new client funds and growth in existing funds.

Mainstream’s custody product has now attracted $7bn, growing 36% from the prior quarter. And the US private equity administration business, started only two years ago, now administers $6.7bn. Continuing organic growth, and improved profit margins, over the next few years should allow Mainstream to be recognised for its high quality recurring revenue.

Vale CSG (CSV). The print and technology services provider was acquired by giant Fuji Xerox in early February. With no other bidders emerging since the bid was announced in October, the acquisition was approved by CSG shareholders. Investors will receive the $0.31 per share consideration in mid February. Proceeds will total 7% of the Fund.

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