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Monthly Report: International Fund November 2018

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Australian Fund January Monthly Report

Investors hoping for a rapid recovery from October’s selloff were disappointed in November. The only thing that recovered was the Aussie dollar, adding to the existing pain for Australian investors in international shares.

German online lotto ticket seller Lotto24 (DB:LO24) has been a winning investment for the Fund over the past four years. This month, ZEAL Network (XTRA:TIM) launched an allshare takeover for the company that took us by surprise.

Shareholders representing 65% of Lotto24’s outstanding shares have already agreed to the deal, so it’s going to happen. The rest of us are left to work out what it is going to mean.

ZEAL owns Tipp24, one of Lotto24’s main competitors in Germany, and the combined entity will generate more than double Lotto’s existing revenue while adding only marginally to the administrative cost base. ZEAL also brings €100m net cash to the table, and Lotto24’s existing shareholders will end up owning more than 60% of the merged entity.

The business should quickly become more profitable than Lotto24 was on a standalone basis, but it will also take away some of the upside. Lotto24 shares are up marginally on the pre-bid price and we’re holding while we wait for further details.

It’s been a transformational year for Flughafen Wien (WBAG:FLU), owner of Vienna Airport and also a majority stake in the largest airport in Malta. The bankruptcy of significant client Air Berlin a year ago is ancient history. For the 9 months to 30 September, passenger numbers at Vienna grew more than 7% versus the same period last year, leading to revenue growth of 5% and operating profit growth of 14%. What’s more, growth is accelerating—October passenger numbers were up 18% and there’s likely to be very strong growth over the northern winter. We’re surprised the stock price hasn’t appreciated. But this is an illiquid security and, in this market, flat is a victory in itself.

Engineering services provider Babcock International (LSE:BB) muddled through its first half, with underlying revenue 2% lower than the previous year and profit margins stable. The order intake was healthy and that has continued since the books were closed, with new contracts recently announced in Australia and Canada. Offsetting the good news, an important nuclear decommissioning contract in the UK is not going to generate revenue for as long as hoped and an overpriced acquisition a few years ago has caused impairments to be taken on some of its assets.

Political turmoil in the UK is unwelcome for a company dependent on the government for the majority of its revenue. A Jeremy Corbyn-led labour party is likely to be worse. So it’s not surprising investors have dumped the company’s shares. Management, though, seem to think audible frustration is going to address the issue. The company trades at 5-6 times earnings, has a long history of profitable growth and generates plenty of cash. Increasing the dividend significantly, commencing a share buyback and meaningful insider buying would do the trick.

UK auto classifieds business Auto Trader (LSE:AUTO) also reported its first half result. While the UK used car market is in a slowdown, new products and higher prices led to an increase in revenue from the company’s customer base of dealers. Sales increased 7% and earnings per share 12%. We expect similar growth for a while yet and the company upgraded its own outlook for the full year