Hi everyone and welcome. It’s Steve Johnson here, Chief Investment Officer at Forager Funds, and this is our quarterly video for the quarter ended 31 December 2020. I’m joined by Alex Shevelev, Senior Analyst on the Australian fund.
It was a fascinating year for the Australian fund. Things were looking pretty horrible at the end of March, and it ended up being quite a good year. As you wrote in the Australian Fund section of the quarterly report, there’s still lots of work to do here. My view of these things is you get out of a hole, a step at a time, and last year was a really big step.
Well done to you on that portfolio and how well it’s performing. How are you seeing things as we sit here at the moment?
I think it’s definitely a step, and a step in the right direction. We had an atrocious first quarter to the year. A lot of the smaller stocks that we owned were beaten down severely and a lot of that was because of the illiquidity involved there. If someone wanted to sell even a small amount of stock, the price was significantly lower during that period of illiquidity and panic. Subsequent to that though, we had a significant bounce, both in those positions and from new investments and managed to finish the year plus 22% with a market that was up a fraction.
Yeah, it’s a portfolio that has come a long way as well. That’s been something that’s been very pleasing for me. Obviously, we get paid to buy things where the share price goes up, but that normally follows a business going well and as we sit here at the moment, we’ve got a portfolio of stocks that are operationally performing much better. I’d say two years ago a lot of the stocks that were in the portfolio predated your time with us, but we’d dread reporting season. And sometimes when an announcement came out, you were dreading what you were going to see because some of the businesses that were owned were not in a good place.
I feel like now across the portfolio, it’s a much better balance. How are you feeling looking into this coming reporting season?
It was definitely good to see upgraders in the portfolio and often significant and serial upgraders as well. So we’d have companies like a Motorcycle Holdings or a National Tire, fueled by some of the trends we’ve seen post COVID, really significantly hit this first half out of the park. That wasn’t all the companies necessarily, there was a good tailwind to those, but it was positive to see that, not only in those names, but often across the portfolio.
Yeah, good profitability and return to dividends as well. Maybe one that was one of the laggards in terms of recovery but was showing some good signs of progress is advertising agency WPP, it’s also announced that it’s got a takeover bid from its parent. That takeover bid is 70 cents compared to share price that was down in the 20s back in March, maybe early 40s when we first bought it.
How does 70 cents stack up against your estimate of the value here?
So actually it was not far from the estimate of the value when we initially invested in the business at that price. In the meantime, we’ve had a ride all the way down to 20 in that March collapse and subsequently a recovery to the 40 cent range.
Interestingly though in the meantime, and this is evident during calendar 20, the management team was doing some pretty good things to try to get the business back onto even ground. They were cutting costs, whether it was required in the face of reducing advertising revenues and actually, profitability in the business had grown for the quarterly period that we saw.
Now, we weren’t the only ones to see it. Other investors were seeing it as well. Interestingly the parent company that already owned 62% of WPP, of course was aware of what was going on there and that things were improving. Clearly they felt that was a good opportunity to launch a bid for the remaining portion that they didn’t own.
Yeah, it’s historically been a feature of this fund. I think generally when buying stocks cheap that your exit is often a takeover. In this latest quarterly report you’ve identified a number of other candidates. What do you think are the highest probability over the next couple of years for takeover bids in the portfolio?
I think one that has been sort of perennially talked about is Eclipx. Eclipx is a fleet management business with a small novated business to it as well. The company was bid for a couple of years ago by two students.
It is a reasonably unique industry where the economics to scale are very dramatic. So if you had an acquisition of this business by one of the other two players, and the bids last time came from both SG Fleet which is another position in the Fund and McMillan Shakespeare, the synergies across that group would be very significant. That’s sort of coupled with a restriction on the number of deals that can be done here because the industry is getting quite consolidated after a period of mopping up of smaller players.
So now we’re looking at probably two deals still to come here and after that you’d be hard pressed to get another one across the line.
We own Eclipx and SG Fleet and they’re both likely to be involved in further consolidation. As you said, I think the economic rationale for it in that sector is very significant.
My experience with takeovers in the past is if you’re relying on them for value realization, then you’re in trouble because it means something else has gone wrong with your investment. It very rarely happens at the bottom or at particularly low share prices because the company is not trading at a price at which the majority of shareholders are willing to get out.
So you tend to see them once the business has at least turned around. Once it’s recovered and the share price is reasonably fair and then someone can pay a sense of premium to that and everyone is happy. I think WPP is the perfect example of that. As the business started to recover, the parent goes, if we wait, we’re going to have to pay more rather than if we don’t wait.
So Eclipx is a good example there. Maybe iSelect is an example where it needs to show some more progress on the operational front.
I think that’s right. We had a pleasing report out for the first quarter for iSelect but there’s more work still to be done. There is a new CEO in place who seems to be making some interesting moves around partnerships on the media side.
So we hope that can prove a turnaround there, and that will impact not only the traded price, but will hopefully attract back the suitor that bid for the company previously at a healthier price.
That’s my advice to everyone: make money and pay dividends and if we get a takeover, then that’s the cream on the cake, not the reason that we own the stock.
Thanks for joining us today Alex, and thanks for tuning in. We’ve got an interesting month coming up with reporting seasons through this portfolio where we still think a lot of the investments that we’ve got are extremely well priced despite the run-ups over the past six months or so. Thanks again for tuning in, you can catch all of our videos at foragerfunds.com or on our YouTube channel.
This video is part of the December 2020 Quarterly video series. You can view the full December 2020 quarterly report here:
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.