Monthly Report Australian Fund November 2022
30/11/2022
Australian Fund November Monthly Report
Equity prices appreciated meaningfully in November, with the ASX All Ordinaries index finishing the month with a gain of 6.4% including dividends. There is growing evidence that inflation is at or close to a peak here in Australia and around the world. The prices of many key inflation components, including used cars, food and oil prices are already falling and we believe this should contribute to dramatically lower headline inflation rates this time next year.
Rightly or wrongly, that has translated to a significant reduction in longer-term interest rates as expectations around future rate rises have fallen. Back in mid-October, financial markets expected the RBA to raise base interest rates to around 4%. Now, at the end of November, the expectation is 3.6%, just a few more notches higher than the current rate. Hence the share market rally.
Despite smaller stocks continuing to underperform their larger brethren, it was also a good month for the Forager Australian Shares Fund, with the net asset value increasing 5.7%. That was largely due to further takeover action, with private equity funds bidding for more of the Fund’s investments, including one of our largest.
On the first day of the month, Readytech (RDY) announced it had received a non-binding offer from Pacific Equity Partners (PEP) to acquire the company for $4.50 per share (the stock had been trading around $3 a share for the few months prior). The initial announcement suggested that Readytech’s largest shareholder, private equity firm Pemba, was seeking to work with the bidder on taking the company private via a scheme of arrangement.
Readytech’s second largest shareholder, Microequities (MAM), was out quickly with a public statement that it has “zero interest” in selling its shares at the offer price. Microequities backed up its statement with further on-market purchases, taking its combined stake to 15% of Readytech. If Pemba can’t vote its 32% stake due to an association with the bidder, a scheme of arrangement (which requires 75% of shareholders to vote in favour) is effectively dead without Microequities support.
On the last day of the month, Readytech announced receipt of an updated proposal from PEP, a clear attempt to circumnavigate Microequities’ resistance. It said that there are no longer any plans to work with Pemba, but that all shareholders would have the option of taking scrip in the bidding entity rather than cash. Giving all shareholders the same options as Pemba gives Pemba the right to vote on a deal.
We’re in agreement with Microequities about the quality of this business. Their view, that it is a mini Technology One (TNE) and should trade at similar multiples, has some merit but probably requires a few more years of growth and profitability to prove. There is nothing for us to do until we see something firm and serious to consider, but our ownership of 2.1% of Readytech’s shares could become important in this particular takeover battle.
At the simpler end of the spectrum, golfing and club management software company MSL Solutions (MSL) has agreed an attractive deal for shareholders. Pemba will take the company private for $0.295 per share (yes, coincidentally, that’s the same Pemba). Long term investors will remember MSL as one of our important activism candidates a few years ago. The share price had fallen from $0.20 at its 2017 IPO to $0.10 in 2019, a year in which it reported a loss of some $18m and burned approximately $6m of cash.
We introduced Tony Toohey to the board in late 2019. Tony replaced the management team and he and new CEO Pat Howard set about resurrecting the company. The 2022 financial year showed a net profit, $4.1m of positive operating cashflow and good growth prospects for the coming year.
They’ve done a wonderful job and the $0.295 price shareholders will receive if the deal goes through is a reflection of what has been achieved.
An equally successful turnaround is well underway at Gentrack (GTK). This Kiwi company, which has a September year end, followed a couple of recent upgrades with a good result for the 2022 financial year. Revenue for 2022 grew almost 20% on the previous year and is forecast to hit $150m in 2024. That’s despite losing a number of UK utilities clients to bankruptcy and ownership changes.
Its airports software business is recovering alongside global tourism and its utilities software seems to be winning plenty of new clients as the industry shifts its operations to the cloud. While the share price has jumped more than 50% over the past few months, it is still cheap if management deliver on their targets. We think they can do better.
