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Monthly Report Australian Fund September 2022


During September the net asset value of the Forager Australian Shares Fund fell 6.5%, in line with the All Ordinaries Index’s decline of 6.4%. Smaller companies fared worse than the broader index, with the Small Ordinaries Index falling by 10.1% during the month. With reporting season already wrapped up for the Australian market, it was macroeconomic factors and weak offshore markets that dragged shares lower.

While September gave back some of the recent Fund performance recovery, it has still been a good start to the current financial year. That was mostly driven by company specific positive developments across the portfolio.

The long-awaited merger between Apollo (ATL) and Tourism Holdings (NZX:THL), both Fund investments, was finally approved by competition regulators on both sides of the Tasman. The recreational vehicle operators buy, build, rent and sell vehicles in Australia, New Zealand, North America and Europe.

When the deal was first proposed in December 2021, it was optimistically assumed to complete by June 2022. Then competition authorities, New Zealand’s NZCC and Australia’s ACCC, raised some yellow flags. The companies are close competitors and the authorities worried that consumers would end up paying more.

To assuage these concerns, the companies offered to divest more than 70% of Apollo’s Australian and NZ fleets to Jucy Rentals, a small competitor. Jucy was recently acquired by private equity player Next Capital and will take on the campervans, locations and the Star RV brand from Apollo. It will become a legitimate competitor to the combined group.

During the long deal period Apollo’s Australia-heavy operations recovered faster than THL’s NZ rental-heavy business. So Apollo shareholders were given a sweetener and will now own 27.5% of the combined group, up from the original 25% ownership.

The benefits of the merger remain significant for both parties. Synergies were estimated to be NZ$17-19m, about two-thirds of Apollo’s stand-alone profitability. The combined group will be able to buy better, build their own inventory in Australia and NZ, rent more effectively across the world and sell better through company-owned networks.

Combined, these two stocks represent the largest investment in the portfolio and have seen some share price appreciation as the merger has become more likely and operational improvement has become clearer. There is still plenty of value on offer.

The full impact of synergies and the recovery in international tourism will be in place by the start of the 2024 financial year. At that point, the larger, and we estimate more liquid, ASX-listed Tourism Holdings will be trading at a very attractive seven times after-tax earnings.

The recreational vehicle operators were not the only ones to stitch together a deal.

Motorcycle Holdings (MTO), a seller of motorcycles and accessories across its dealership, retail and wholesale channels acquired MOJO, an agriculture-focussed all terrain vehicles and quad bikes distributor.

MOJO’s key products are imported from China-based manufacturer CFMoto, one of the few manufacturers to install rollover protection on its quad bikes. With rival manufacturers unwilling to implement the recently-mandated safety measure and withdrawing from the Australian market, MOJO’s sales have grown rapidly.

The Motorcycle Holdings management team, led by managing director and 19% shareholder Dave Ahmet, have struck a deal to buy MOJO for $60m, or six times after-tax earnings. The MOJO vendors are taking half the purchase price in stock and one of the founders is joining the company’s board of directors, increasing the likelihood of a successful acquisition. The transaction will increase Motorcycle Holdings’ earnings per share by 18%. There are also opportunities to better integrate MOJO into the group and improve sales and profits from the acquired business.

With economic conditions worsening but not yet impacting sales, concerns about next year’s profitability have weighed on investor appetite for cyclical stocks like Motorcycle Holdings. The combined business would have made $33m in after-tax profit last financial year, trades at only six times after-tax profits and last year paid dividends equating to a 7.8% fully-franked yield.

There is little doubt conditions will deteriorate. We expect this well-run, founder-led business to continue growing the business through deals like this. Any market downturn will hurt short-term profitability but should assist the long-term objectives.