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Monthly Report: Australian Fund July 2020

31/07/2020
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Australian Fund July Monthly Report

The 2021 financial year started quietly, with the All Ordinaries Index little changed through July. There was plenty of portfolio news, though.

Tyre distribution company National Tyre and Wheel (NTD) announced the acquisition of Tyres4U, a competitor of
roughly similar size. Tyres4U has been unprofitable the past couple of years and was carrying too much debt, making for an attractive purchase price for NTD. The combined entity should generate some $480m of revenue and there is plenty of expense overlap to be extracted.

NTD’s previously cash rich balance sheet will be sporting some debt after funding the deal, and that increases the
investment risk. But we also think it can double the company’s per-share earnings over time. After a positive trading update at the end of June, it’s a piece of news that further increases our confidence in the investment.

Fund administrator Mainstream (MAI) announced a fourth quarter increase in funds under administration of $9.4bn, taking the full year increase to 14%. The company continues to attract a diverse range of new clients, with particularly pleasing growth in US private equity. Mainstream has shown its resilience through difficult equity markets and looks set to grow further through 2021 and beyond, hopefully translating into substantial increases in profitability.

It was a muted end to an otherwise successful financial year for mining software company RPMGlobal (RUL). For the year it added $8.4m of annual subscription revenue to the business and sold an additional $7.5m of perpetual licences. Both numbers were in line with our expectations a year ago but, up until COVID-related travel restrictions and project deferrals from March, it had been tracking well ahead of those hopes.

We will hear more when the full year results come out. Some of its potential new clients are in rude health, particularly in the gold sector. Others, coal miners for example, are doing it tough. On balance, we are expecting growth for many years to come.

Eclipx (ECX) managing director Julian Russell has been fixing past misdemeanors since taking control of this car leasing company a little over a year ago. The last of his clean up jobs—the sale of its loss-making Right2Drive business— was completed in July. The sale price was a small discount to the already written down book value but adds $15m to Eclipx’s bank balance immediately, with another $11.5m due over time and depending on business performance.

That gets its debt down closer to desired levels and puts the resumption of dividends within sight.

Dividends are what we want to see from Thorn Group (TGA), too. Thorn’s quarterly cashflow statement—released at the end of July—suggests that its shrinking Radio Rentals business is throwing off healthy (albeit expected) amounts of cash. The $44m of net cash sitting in Thorn’s bank account at 30 June was almost 50% higher than its market capitalisation just prior to the release. If left alone it will increase substantially over the next 18 months, but we hope that is not the case. It is better in our coffers than theirs and we are pushing for its distribution sooner rather than later.

While reporting season often results in share price volatility, this August is likely to be even more important. With expectations extremely low for most of our investments, we’re hoping the volatility is on the upside.

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