Campaigns

 

 

Watpac Limited (ASX:WTP)

 

Funds managed by Sandon Capital have been shareholders of Watpac Limited (Watpac) for over 12 months and currently own 5.4 million shares.  We began purchasing Watpac shares after concluding they were materially undervalued. Poor operational results over a number of years meant Watpac’s shares have traded at a material discount to their reported net tangible asset value per share. We believe this measure is a particularly harsh one, as it ascribes no intangible value to Watpac.

Despite a number of strategic and operational missteps, we believe the challenges facing Watpac are not insurmountable.  Assuming nothing changes at Watpac, we believe its shares are worth at least $1.01-$1.24. However, if factors that have contributed to Watpac’s poor performance can be addressed and other steps taken, we believe Watpac shares are potentially worth more than $1.30 per share.

We see Watpac’s challenges as follows:

  1. The mix of Construction with the Civil and Mining businesses is fundamentally flawed. There is little overlap in skills and the capital profiles of the businesses do not match. We consider this a strategic mismatch.
  2. Considering this mismatch, and Watpac’s record of capital management, we consider Watpac has demonstrated poor and sporadic capital management.

We believe WTP should investigate merging the Civil & Mining business with another mining contractor.  A scrip based deal would allow WTP shareholders to retain exposure to the mining services upcycle. It would also provide the benefit of a more capable and focused management team.

Previously, Watpac has used a buyback to return capital to shareholders, however implementation has been sporadic and consequently there has been very little value accretion. Adjusting for working capital, we estimate the unencumbered cash position of Watpac to be in excess of $35m. We believe Watpac’s significant surplus cash should be returned to its shareholders through a share buyback given the current share price of Watpac relative to its net tangible asset backing. Read the presentation here.

On 28 March, Watpac announced that the board will conduct a comprehensive review of the company's Mining business.  This review will include exploring sale options for the business and/or its assets, either in part or whole.  Read the announcement here.

On 28 May, Sandon Capital released a presentation detailing why it had voted AGAINST the BESIX/Watpac Scheme of Arrangement and encouraging all WTP Shareholders to consider doing the same. Read the presentation here.

On 7 June 2018, Watpac shareholders against the BESIX/Watpac Scheme of Arrangement. See the voting result here.  We are pleased with this outcome and are focused on what changes need to occur at Watpac if the company is to maximise its potential.

 

Specialty Fashion Group Limited (ASX:SFH)

Sandon Capital has written to Specialty Fashion Group Limited (SFH).  If SFH is in need of additional capital, Sandon Capital believes an entitlement offer, that is equitable to existing shareholders, is preferable to an asset sale at a suboptimal price.

Using the following conservative assumptions:

• FY18 (bottom of the cycle) EBITDA of $18m
• EBITDA multiple of 5x
• Net cash of zero at 30 June 2018 (versus net cash of $21.3 million at 31 December 2017)

We calculate SFH to be worth at least $90m ($0.47/share) today (prior to any potential capital raising).

If we are to further assume that SFH is successful with its store optimisation and transformation program, we believe the business has the capability to generate at least $25-30m of EBITDA. Using the same conservative assumptions of net cash of zero at 30 June 2018 and an EBITDA multiple of 5x, we calculate SFH to be worth $125-150m, or $0.65-0.78/share.

This analysis does not take into account the large balance of franking credits held by the company. According to the Consolidated Interim Report for the period ended 31 December 2017, the company has franking credits of $49.8m, which equates to a further $0.26/share of value for a domestic shareholder. So, adding the value of franking to both scenarios takes the value range to between $0.73 and $1.04 per share.

If our analysis is reflective of where the status quo value of the Company lies, a rights issue of the type we are proposing should be well received by most shareholders, especially if it removes any pressure that exists to sell assets in the short term.

 

Fleetwood Corporation Limited (ASX:FWD)

On 12 May 2016 Sandon Capital formed an association with Mercantile Investment Company Ltd and disclosed a substantial position in Fleetwood Corporation lodging a notice of initial substantial shareholder. Read the announcement here.

Sandon Capital believes Fleetwood should focus its attention on becoming a Manufactured Accommodation specialist.  It should also sell or close down business units that are unable to earn acceptable returns through the cycle.  Sandon Capital also believes Fleetwood could undertake significant capital management as part of such a transition.  This investment thesis is detailed in a presentation published on 16 June 2016.  Read the presentation here.

On 22 June 2016, Fleetwood announced that it had signed an exclusive supply agreement with National Lifestyle Villages (NLV) for the supply of manufactured homes.  The agreement has an initial term of 5 years and includes an option for NLV to extend the agreement for a further five years.  Read the announcement here.

On 12 August 2016, Fleetwood announced that Phillip Campbell had been appointed Chairman of the Board.  The company also announced that John Bond had tendered his resignation as a non-executive director, effective 24 August 2016.  Read the announcement here.

On 13 October 2016, Sandon Capital released a research paper following the release of Fleetwood’s Annual Report and full financial statements.  The paper identifies seven key issues that Sandon believes the company should be urgently addressing.  Read the paper here.

On December 2016, Sandon Capital and Mercantile Investment Company disclosed that they had increased their shareholding in Fleetwood from 5.4% to 6.4%.  Read the announcement here.

On 22 March 2017, Fleetwood announced further changes to the Board.  Jeff Dowling and Stephen Boyle were appointed as non-executive directors, and Michael Hardy announced his resignation as a director effective 30 June 2017.  Read the announcement here.

On 29 May 2017, Fleetwood announced that it had received a requisition from Sandon Capital and Mercantile Investment Company for a general meeting of shareholders. Sandon and Mercantile seek to amend the constitution to facilitate the payment of dividends.  Read the announcement here.

 

Iluka Resources Limited (ASX:ILU)

Sandon Capital believes Iluka Resources Ltd (Iluka) is undervalued by the market.  In particular, Sandon Capital believes Iluka's Mining Area C Royalty (MAC Royalty) is the best asset in the Australian mining sector and today, is also the cheapest.  In order to have the market properly value the MAC Royalty, Sandon believes Iluka should demerge the royalty via an in-specie distribution to existing shareholders.  Sandon has published a presentation outlining its investment thesis.  Read the presentation here.

Sandon has also published a white paper to help investors better understand the MAC Royalty.  Read the white paper here.

On 29 March 2017, BHP President of WA Iron Ore, Edgar Basto, presented at the Global Iron Ore and Steel Forecast Conference in Perth, WA.  In his presentation, Mr Basto disclosed that South Flank is the preferred long term solution to replace BHP's production from its Yandi mine, which will be depleted in the next five to ten years.  This is an important comment from BHP as we believe it supports our assumption that the size of Iluka's MAC Royalty will grow significantly over the medium term.  Read BHP's News Release and Presentation here.

At its AGM held in Perth on 28 April 2017, Iluka Managing Director Tom O'Leary, commented that "all options remain open" with respect to the range of alternatives to maximise value from the MAC Royalty.  Read the release here.

 

Tatts Group Limited (ASX:TTS)

Sandon Capital believes Tatts Group Limited (TTS) should demerge its wagering operation and become predominately a lotteries operator.  Sandon Capital published a presentation detailing its investment thesis in February 2016.  Read the presentation here.

On 27 June 2016, TTS announced that it had sold its interest in Talarius, its UK based slots business, for net consideration of $210m.  This brings to an end the disappointing foray into the UK slots market for TTS shareholders and moves the company one step closer to being a pure play Lotteries business.  In the same announcement, the company also provided a trading update.  The Lotteries business continues to go from strength to strength, seeing 8.7% revenue growth in FY16, whilst the Wagering business continues to underperform with further margin deterioration. Read the announcement here.

On 19 October 2016, TTS announced that it had entered into a scheme implementation deed with Tabcorp (TAH) to combine the two companies.  As part of the proposed scheme, TTS shareholders are to receive 0.8 TAH shares and $0.425 cash for each TTS share held.  Read the announcement here

On 14 December 2016, TTS announced it had received an unsolicited confidential, non-binding and conditional proposal from the Pacific Consortium to acquire TTS for a combination of cash and scrip consideration.  The Pacific Consortium comprised First State Super, Morgan Stanley Infrastructure, KKR and Macquarie.  Read the announcement here

On 23 December 2016, the TTS Board determined the Pacific Consortium proposal was not superior. Read the announcement here 

On 19 April 2017, the Pacific Consortium lodged an Amended Revised Indicative Proposal to acquire 100% of TTS for $4.21/share.  Read the announcement here 

On 28 April 2017, the TTS Board determined the Pacific Consortium proposal was not superior. Read the announcement here

On 1 June 2017, TTS announced that its bid for the Victorian Public Lotteries Licence was successful. The new licence commences on 1 July 2018 and is for a duration of 10 years.  Consideration to be paid by TTS is $120m.  Read the announcement here

On 9 November 2017, Sandon Capital published a presentation detailing why it believes TTS shareholders should vote against the proposed merger of TTS and Tabcorp Holdings Ltd.  Read the presentation here.

On 17 November 2017, TTS announced that the Australian Competition Tribunal (ACT) had authorised the proposed combination of TTS and TAH.  Read the announcement here

On 1 December, the Australian Competition and Consumer Commission declared that it would not apply for a judicial review of the ACT’s determination to grant authorisation for the proposed combination of TTS and TAH. Read the announcement here

The Scheme of Arrangement in relation to the combination of TTS and TAH was implemented on 22 December 2017

 

Warrnambool Cheese & Butter Factory Holdings Limited (ASX:WCB)

Funds managed by Sandon Capital together represent the third largest bloc of shares in WCB.  Saputo Inc. has launched a takeover offer at $8.85 per share for all the WCB shares it does not own. WCB established an independent board committee (IBC) to consider the offer.  The IBC has recommended the offer subject to an independent expert's opinion.  We believe the offer should be revised to include a fully franked dividend component. We wrote to IBC on 31 Jan 2017.  We are yet to receive a satisfactory response.  Read our letter to the IBC members.

Dividends such as the one we propose have featured in many takeovers and schemes in recent years.  We believe the IBC has erred by not including a dividend as part of the takeover consideration, and as a result has let down WCB's minority shareholders. 

On 20 February 2017, Sandon Capital released a presentation that details why we believe WCB shareholders have been sold short by the Independent Board Committee's recommendation of the takeover offer by Saputo Inc. We have analysed the financial information contained in the Target's Statement (issued by WCB) to update our views on the potential value of WCB shares. Read the presentation here.

Sandon Capital also wrote to the IBC on the same day. Read the letter here.

On 21 February 2017, Saputo announced that it had raised its offer price to $9.05 per share for all the WCB shares it does not own. Read the announcement here.

 

 OntheHouse Holdings Limited (ASX:OTH)

On 9 October 2014, Sandon Capital formed an association with Blue Lake Partners and Gannet Capital lodging a notice of initial substantial shareholder. Read the announcement here.

On 21 October 2014, Gabriel Radzyminski became a director. Read the announcment here.

On 24 December 2015, OTH announced it had received a non-binding, conditional, indicative proposal from a consortium comprising Macquarie Group Limited, CoreLogic Australia Holdings Limited and 77VSV (Michael & Daniel Dempsey). Read the announcement here.

On 30 December 2015, Sandon Capital increased it's stake to 6.1%. Read the announcement here.

On 9 March 2016, OTH announced that the Macquarie Group consortium had revised it's non-binding, conditional proposal to $0.85/share from $0.755/share. Read the announcement here.

On 6 July 2016, OTH announced that it had entered in to a scheme implementation deed with the Macquarie Group consortium.  The deed provides for the acquisition of OTH by the consortium through a scheme of arrangement for cash consideration of $0.85 per OTH share.  Read the announcement here.  We are not as pleased as one might expect with this proposal, as in the 6 months since the proposal first came to light, we believe there has been significant improvement in the value of OTH following the sale of the loss-making consumer online division.  We will consider our position in respect of the scheme proposal closer to the time of the meeting.  In the meantime, we have increased Sandon Capital's holding in OTH.

 

BlueScope Steel Limited (ASX:BSL)

In June 2015, Sandon Capital believed BlueScope Steel was the cheapest steel company in the world and published a presentation outlining this investment thesis. Sandon also put five questions to BlueScope for consideration. Download the presentation here.

On 26 October 2015, BlueScope announced that they expect to achieve more than $200m in operational savings at Port Kembla. Read the announcement here.

On 26 October 2015, BlueScope announced the acquisition of Cargill's 50% share of North Star BlueScope Steel LLC for US$720m. Read the announcement here.

On 12 February 2016, BlueScope announced it expected December half EBIT of $230m, well above prior guidance ($180m) and the prior corresponding period ($171m). Read the announcement here.

On 22 Februay 2016, BlueScope announced it expected 2HFY16 EBIT to be up to 60% higher than 2HFY15 EBIT ($131m). Read the announcement here.

On 23 May 2016, BlueScope announced it expected 2HFY16 EBIT to be 30% higher than its previous guidance ($209m). Read the announcement here.

On 14 July 2016, BSL announced that it expected 2HFY16 EBIT to be $340m, more than 25% above the guidance for $270m provided only six weeks earlier.  The company also announced that it expects net debt at 30 June to be reduced by almost $600m from that reported at 31 December 2015. Read the announcement here.  This continues the steady stream of good news from the company since we went public with our presentation in June 2015.

 

Alchemia Limited (ASX:ACL)

Entities managed by Sandon Capital bought an initial stake of 13.2% in Alchemia at 5.3 cents per share in 1H15.  

On 18 June 2015, Sandon Capital requisitioned a shareholder meeting seeking the removal of two incumbent directors (Tim Hughes and Tracie Ramsdale) and the appointment of two new directors (Gabriel Radzyminski and Ken Poutakidis, who will be an independent director).  Read the ACL announcement here.

On 26 June 2015, ACL appointed one of the new directors proposed by Sandon Capital, Mr Ken Poutakidis. Read the announcement here.

On 6 July 2015 Sandon Capital withdrew the requisition for a meeting seeking the removal of two ACL directors. Read the announcement here.

On 9 July 2015, Mr Tim Hughes, ACL Chairman, announced his retirement. Read the announcement here.

On 10 July 2015, Mr Ken Poutakidis was announced as interim Chairman. Read the announcement here.

On 25 September 2015, Alchemia announced that it had entered into a binding term sheet for the sale of the worldwide exclusive intellectual property rights to Fondaparinux Sodium, it's generic anti-coagulant drug, to Dr. Reddy's laboratories for US$17.5m. Read the announcement here.

On 17 December 2015, ACL released a notice of General Meeting to seek shareholder approval for the return of Capital to shareholders of 9.3 cents per share. Read the announcement here.

On 29 February 2016, Sandon Capital sold its entire stake. Read the announcement here.

 

Chesser Resources Limited (ASX:CHZ)

Funds managed by Sandon Capital declared a substantial shareholder in Chesser Resources Limited on 22 December 2014. Click here for the substantial shareholder notice.

On 29 December 2014, Sandon Capital Investments Limited (SNC) delivered a notice to Chesser directors of a requisition for a general meeting seeking the removal of three directors, including the Chairman, and the appointment of SNC Chairman and Sandon Capital Managing Director, Mr Gabriel Radzyminski.  Click here to read Chesser's announcement.

Funds managed by Sandon Capital increased their holdings, and now own 18.5% of Chesser. Click here for that announcement.

The Chesser Board made a number of new board appointments, that followed by some incumbent directors resigning.  Gabriel Radzyminski was then appointed as a director on 18 February 2015. Click here for that announcement.

On 6 March 2015, Chesser announces that directors are recommending a share buy-back, at a price above the previous board's return of capital proposal. Read the announcement here.

On 4 August 2015, CHZ released the notice of meeting and explanatory memorandum for the proposed equal access buy-back. Click here for the announcement. 

 

Coventry Group Limited (ASX:CYG)

Funds managed by Sandon Capital have been longstanding shareholders of Coventry Group.  We became shareholders after having concluded the strategy being pursued by the Board was, in our opinion, flawed.   We advocated the Company should abandon plans for acquisitions and instead pay a special fully franked dividend. 

In early 2014, we increased the pressure on the Board, initially with a letter asking they abandon the acquisition strategy and pay a special fully franked dividend (click here).

We then followed this up by forming an association with another investor, Dorsett Investments, in June 2014.  Click here to read the letter outlining our agreement with Dorsett Investments.

On 3 November 2014, we released a presentation outlining Coventry's situation and why shareholders should rebuke the Board at the 7 November Annual General Meeting. Click here for the presentation.

On 19 November 2014, Coventry Group announced that the executive chairman would resign and step down as a director on 23 January 2015.

On 2 January 2015, Coventry Group announced that Mr Peter Caughey had been appointed managing director and that the former chairman has stepped down from the Board.