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Monthly Report Australian Fund July 2021

31/07/2021

Australian Fund July Monthly Report

The Forager Australian Shares Fund made a solid start to the new financial year. The net asset value rose 5.1% in July, versus a 1.1% increase in the All Ordinaries Accumulation Index. A takeover offer for software reseller Rhipe (RHP) helped but the gains were widespread.

Norwegian software company Crayon bid $2.50 per share for Rhipe, including up to $0.13 of franked dividends. While we thought that sort of price might be a sensible first shot, Rhipe’s board seems to think this is as good as it gets. They have recommended the offer and agreed to proceed with a scheme of arrangement (the friendliest sort of takeover path, requiring 75% of shareholders to approve).

There is no sign of any competing offer and, with the shares trading slightly above the bid price, we have sold the investment and deployed the proceeds elsewhere. It’s been a successful result from a relatively small investment—returning 57% over roughly 15 months since our first purchase—but we are left with a lingering feeling that it could have been better.

Quarterly cashflow statements provide an early preview of earnings for some smaller ASX-listed companies. The turnaround of golf, stadium and club software company MSL Solutions (MSL) has been impressive. A few years ago it was burning cash and generating losses, forcing us to instigate board changes and the new board to install new management. For the June quarter of this year, it generated $2.0m of operating cash and $5.7m for the full financial year.

The share price has more than doubled over the past year but the market value of the company is still less than $60m. With management now able to spend their time growing rather than fixing the business, there should be more upside from here.

Two recent additions to the portfolio are fintech lenders Wisr (WZR) and Plenti (PLT). Both released cashflow statements and trading updates that suggest the investment cases are on track. New loan values written for the June quarter were up 193% and 260% respectively from last year.

The opportunity for these companies to grow has been created by Australia’s largest banks stepping back from personal and auto lending. The Hayne Royal Commission has made compliance cumbersome and regulatory changes since the financial crisis have made it expensive for them to hold personal loans on their own balance sheets.

The word fintech sounds new and disruptive but many of the old rules of lending still apply. Lending to people who can repay is a good start. Both Wisr and Plenti target prime borrowers who would have been good bank customers. And when it comes to profitability, lending is a scale business.

Larger players have access to cheaper funding, enabling them to offer clients better prices and further increase market share. And the fixed costs— compliance, overheads and listing costs—are substantial. That’s why Latitude (LFS), with its $6.5bn loan book, is profitable and Wisr and Plenti are not, yet, making any money.

They are writing enough business to cross that threshold soon and we are anticipating a sector with a small number of nicely profitable large players in a few years’ time. Both have recently announced funding arrangements that are clearly showing the benefits of scale. While it is still early days and the portfolio weightings for both are small, there are encouraging early signs.

The Fund sold the last of its Thorn (TGA) shares in July into the $0.21 takeover offer from Thorn’s largest shareholder. It has been a frustrating journey with this company but the efforts over the past 12 months have at least been worth it.

We remain unsure where this business is headed. Cashflows from its rapidly shrinking Radio Rentals book are dwindling and the new socalled strategy is yet to show any signs of life. Thorn has its current market capitalisation in cash and there is some chance its equipment finance business is worth more than the zero it is currently valued at. How much is left in a few years’ time, however, is anyone’s guess.

The Fund has received almost $0.30 per share in total proceeds, more than a quarter in the form of fully franked dividends. That is a decent final outcome and capital that can be better deployed elsewhere.

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