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Monthly Report Australian Fund October 2022


Australian Fund October Monthly Report

October was a busy month for the Forager Australian Shares Fund. Takeover and merger action led to a 7.6% increase in the Fund’s net asset value for the month versus a 5.7% rise for the All Ordinaries Accumulation Index.

Both Apollo Tourism and Leisure (ATL) and Tourism Holdings (NZX:THL) saw significant share price appreciation as investors cottoned on to the benefits of these two companies merging (see the September Quarterly Report). Both companies released individual upgrades to their estimates of stand-alone profitability in the 2023 financial year as international travellers return to Australia and New Zealand. And Apollo released a merger-related document estimating the cost synergies from the combination should be more than originally estimated.

There is plenty of work to be done to realise those benefits and most of that can’t start until the merger is completed in late November. But our newly updated estimates suggest the combined entity could make $100m of profit in the 2025 financial year.

Despite the recent rally, that would still look attractive relative to the current combined market capitalisation of about $800m. We have taken some profits purely for risk mitigation (the combined portfolio weighting is now 8.7%), but this remains one of the Fund’s most important investments.

Nitro Software (NTO) isn’t our largest investment, but it is nonetheless important. It has been a couple of months since Nitro’s board rejected private equity firm Potentia’s $1.58 per share bid for the company. We were beginning to wonder whether that was the end of it when the fireworks started. The first cracker was a 27 October article in The Australian suggesting Nitro was well progressed with alternate potential bidders. The following day, Potentia let off its own rocket, upping its offer to $1.80, declaring that offer final (sort of) and guaranteeing that it won’t support anyone else’s bid.

That was intentionally designed to scupper any competing offers but clearly didn’t work. Nitro did indeed have an interested bidder in the works and it turns out they aren’t dissuaded by Potentia’s aggressive threats. KKR-backed Alludo has entered the ring, offering $2.00 per share and only requiring 50.1% of shares on issue to accept in order to proceed with its deal. There’s nothing like competition to determine the true value of an asset. Now all shareholders need to do is sit back and see who wants it most.

We won’t be surprised to see more Australian tech companies go the way of Nitro and fellow ASX-listed software company Elmo Software (ELO). Elmo, which isn’t owned by the Fund, agreed on a deal from a private equity fund at double the undisturbed share price during October. No doubt we will see them returned to the stock exchange at three times the price once optimism returns.

The best thing the companies themselves can do is find financial religion before private equity imposes it on them. On that front, two of our investments are showing progress. Another is proving hard to convert.

Bigtincan (BTH) seems to have gotten the message loud and clear. Its last quarterly report shows a nice balance of high growth and simultaneous cost containment. The share price traded 40% higher after the update.

Fineos (FCL) similarly showed a nice combination of fast-growing revenues and relatively modest cost growth. This provider of cloud software for life insurers has many years of growth ahead of it but is already in a good position with 38m cash on the balance sheet, no financial debt and quickly approaching break even next financial year.

On the other hand, Whispir (WSP) has become the villain of our group of quarterly reporters. The communications automation company is suffering from a bout of indigestion after a massive 2022 financial year where revenue grew 48%. Its quarterly report for the three months to September showed annualised “recurring” revenue fell 5% from the last quarter. Declining revenue and sticky costs made for significant cash outflow, in turn triggering concerns about the strength of its balance sheet. While it’s never wise to extrapolate any single quarter, Whispir management needs to find financial discipline in the very near future.