Thorney gives a TOP performance
After a stellar 2016 , we attended Thorney Opportunities' (ASX:TOP) AGM to see if more is in store for 2017.
As listed investment companies (LICs) are required to report their net tangible assets (NTA) monthly - with many reporting more often than that, such as weekly or even daily - their AGMs are usually boring affairs.
Refreshingly, however, Thorney Opportunities (TOP) - which is owned by our Eureka Report Listed Investment Companies portfolio - is a bit different, with chief executive Alex Waislitz inviting the CEOs of some of TOP's investments to present at each AGM. This year he invited the CEOs of OneVue Holdings (ASX:OVH), TPI Enterprises (ASX:TPE) and Service Stream (ASX:SSM) to make presentations.
OneVue CEO Connie Mckeage passionately argued that 'fintech' OneVue was using its FUND.eXchange technology to disrupt the superannuation industry. Its Fund Services division has a market-leading $427bn of funds under administration (FUA) after a recent big contract win with NAB (ASX:NAB), while its Trustee Services division is also the market leader in superannuation trustee services - with $8.4bn of funds under trusteeship, management and administration (FUTMA).
OneVue recorded negative earnings before interest, tax, depreciation and amortisation (or EBITDA) of $1.2m in 2016 but with revenue growing on average by 77% per year over the last three years (and 19% over the last 12 months), investors may do well if it continues to increase its revenue at a rapid clip.
TPI Enterprises manufactures Narcotic Raw Material (NRW) for the international pharmaceutical industry, with the end product used in pain relief medications. With only eight licences worldwide, the industry has significant barriers to entry while demand for its product, particularly in the developing world, is growing.
TPI's attraction is that it has developed a process that manufactures product significantly cheaper than its competitors. So although it's currently making significant losses, CEO Jarrod Ritchie may be correct that the company has a more profitable future if it can successfully ramp up its new factory in Victoria.
For its part, Service Stream designs, constructs, installs and maintains services across the Telecommunications and Utility sectors. In 2016 it made a profit of $20m with its share price rising 148% in the 12 months to June 2016. Growth in 2017 has continued in line with management expectations and will likely continue with the rollout of the NBN.
The other attraction of a TOP AGM is to hear from chairman Alex Waislitz, whose stock-picking skills are renowned.
He lived up to his reputation in 2016, with TOP's NTA per share rising 16.7% compared to the 3.6% fall in the All Ordinaries index.
Investments in vehicle panel repair aggregator AMA Group (ASX:AMA), fast-growing sub-prime auto loan provider Money3 (ASX:MNY), Service Stream and Fairfax (ASX:FXJ) were behind TOP's 2016 performance. The LIC also benefitted from OneVue's merger with Diversa Limited (of which TOP owned 19%), with TOP receiving OneVue shares in exchange for its Diversa holding, and it now owns 11% of OneVue.
So far 2017 is looking just as good: TOP's NTA has increased a further 17.3% in the four months to 31 Oct compared to the 3.5% increase in the index.
Highlighting the potential opportunity in Fairfax, Waislitz believes the Domain business alone is worth more than the company's current market capitalisation. He urged Fairfax to repurchase 10% of its stock to take advantage of what he believes is a discounted share price.
This is an example of how Waislitz actively seeks to influence the companies TOP invests in.
Austin Engineering (ASX:ANG), which designs and manufactures trays and buckets for heavy machinery used by miners and mining services companies is another. Waislitz has been integral in forcing board and senior management changes which, along with early signs that miners are starting to replace their aging capital equipment, have helped create a much brighter outlook for the company.
Point of difference
Another difference is that, unlike most LICs, Waislitz runs a highly concentrated stock portfolio. As you can see in Table 1, just seven stocks make up 92% of his portfolio.
|Money3 Corporation (MNY) *||24%|
|Service Stream (SSM)||21%|
|AMA Group (AMA)||17%|
|Fairfax Media (FXJ)||9%|
|OneVue Holdings (OVH)||7%|
|TPI Enterprises (TPE)||7%|
|Austin Engineering (ANG)||7%|
|Cash and Other Assets||3%|
|* The Money3 investment includes bonds, loans and equities.|
The advantage of a concentrated portfolio is that it allows a fund manager to invest significant amounts in their best ideas, potentially leading to large outperformance. However, fewer stocks also usually mean higher volatility and, if one or more holdings significantly underperforms, this can have a big effect on the LIC's performance.
If this occurs with TOP, then there might be an opportunity to purchase TOP at a material discount to its post-tax NTA if investors overreact and dump its stock. However, with TOP's current share price of $0.74 around 4% above its latest post-tax NTA of $0.71, the LIC is fairly valued at the moment.
Thorney Technologies IPO
With TOP investors having done so well since Waislitz took over management in 2013 - $1.00 invested then would be worth $1.48 now - we weren't surprised to see prospectuses for the proposed Thorney Technologies LIC prominently placed at the exits.
Hoping to raise $125m and scheduled for December, we'll be reviewing the prospectus and will let members know our thoughts on the IPO.
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