From the TOP

Thorney Opportunities Fund has forged its own path to become an activist Listed Investment Company known for identifying high potential companies in the small cap sector.

There is a certain mystique that surrounds Thorney Investment Group. Google the group and all you will find is information on the listed investment company Thorney Opportunities Fund (TOP) and links to articles about its listing.

Chairman Alex Waislitz’s investment background also isn’t easily identifiable but one article suggests the story began when he was given a million dollar parcel of Amcor shares 20 years ago by his late father-in-law Richard Pratt. This was the birth of Thorney Investment Group. The exact value of the funds the group manages is unknown but it is said to be in excess of $1 billion. It is also rumoured if you look into a mirror and say his name three times he appears and restructures your board.

Waislitz and his team at Thorney do what the average SMSF cannot do on their own, which is a reason to join them and not fight them. TOP makes substantial investments in small-cap companies they see opportunity in. This could just be an opportunity where the market has mispriced a stock and the team sees significant upside. In such cases Thorney is happy to take a passive shareholder role.

But the group is better known for identifying opportunities where they can take an activist approach either on their own or with other like-minded shareholders. They will act as a catalyst for change either on a management or board level to help the company unlock its potential. Of course as a substantial shareholder, TOP benefits greatly from this.

Not your average LIC

Like other LICs featured in these articles, TOP benefits from an open mandate. It invests in companies with solid balance sheets, with good cash flow, low levels of debt and the quality of management is crucial. It is sector unaware and market cap unaware, unlike just about every other LIC we have highlighted. But it is in the portfolio construction where it starts to appear truly unique. It looks more like a private equity business.

Seven core holdings make up 90 per cent of the invested component of the portfolio. There are a lot of other managers out there who would call themselves pure stock pickers but there are very few who would do so with such conviction.

There are two main reasons for the high concentration. Firstly the team do not want to spread themselves too thin. They do an incredibly deep dive on these businesses and get to know them intimately. If they were to expand their horizons to a 20-stock portfolio or greater they do not believe they would be able to have the insight they do.

Secondly, to become a significant shareholder that management teams would be open to talking to, they need to take meaningful stakes. On a capital base of $90 million this means they can only hold a finite number of stocks, meaning they must invest with 100 per cent confidence in these businesses. They are taking higher concentrated risk.

What this will also lead to is a lumpier return profile. With a portfolio of 20 to 30 stocks you will typically see a smoother return. When a few names in the portfolio aren’t pulling their weight there will be others that are. The winners will have a certain amount of influence and so will the losers.

With a portfolio of seven core stocks you forego that smoothness and the performance of the underlying stocks will be meaningful, for better or for worse. Waislitz and co have been known as investors with a true long-term focus. They will sit on a stock and work with them for a number of years before they can truly realise the fruits of their labour. But when they do, it is material.

This concentration allows TOP to diversify away from market and broader macro-economic impacts. By not holding the banks or Telstra and other large cap companies that gyrate to the movements in the Dow, the holdings in TOP are more purely impacted by the management teams behind them.

Take AMA for example, this is not a company that will be sold down off the back of GDP numbers. It is a company powered by the consolidation story within the industry and a very experienced management team. If you have an accident in your car you will get it repaired. You will not look at the jobs numbers from the US to make that decision.

A welcome addition to the register

Companies typically tend to welcome the appearance of TOP appear on the register. When Thorney engages a company it brings decades of business experience which it hopes to pass on and influence management.

And when your board is made up of some of the biggest hitters in Australian business, wouldn’t you want to listen too? TOP’s board consists of Ellerston Capital head Ashok Jacob, Henry Lanzer and Dr Gary Weiss.

This also plays into why TOP are so confident in having such a concentrated holding. Their communication with the companies they hold gives them the confidence to hold in such concentration. They have substantial skin in the game and you don’t turn $1m into $1bn with a long record of getting more calls wrong than right.

The holdings

To be comfortable in holding an LIC like TOP you need to be comfortable with the core holdings and the reasons why they are there. Last Wednesday I sat down with Alex Waislitz in the Eureka Interactive studio for a live webcast and he did not skimp on the details when it came to the holdings. 

AMA Group Limited (AMA):

AMA is a stock Eureka members should be familiar with from the model growth portfolio and Simon Dumaresq’s piece last Monday. The auto repair group has been a standout performer and is the largest holding in the TOP portfolio.

Money3 Corporation (MNY):

MNY has been a good story but has dropped from $1.80 to $1.13 off the back of negative sentiment in the payday lending space which makes up a small portion of their business.

Austin Engineering (ANG):

The global designer and manufacturer of dump truck bodies, buckets and other associated parts has been caught up in the mining services storm but Waislitz can see light at the end of the tunnel moving forward.

Diversa Limited (DVA):

TOP have an 11 per cent stake in the small financial services company. Regardless of business performance Waislitz sees potential here as it is in a growth industry and an industry with consolidation in its future.

We ran out of time talking on video but Waislitz was kind enough to talk further about the rest of TOP’s holdings. Below is the transcript.

TPI Enterprises Limited (TPE):

“I’m pretty excited about the company despite the fact that its initial listing came on poorly. We think the reason for it coming on poorly is a combination of early shareholders who even at this price have made a good profit and have liquidated their holdings. Secondly the approval license for the overall business from the regulators was delayed and just recently received and announced by the company so that has come through which of course is a critical component.

"And the commissioning of their new plant, which is in Coolaroo Victoria is running slightly behind but as we understand it will be hopefully up and running before the end of the year. When all those things are in place we believe that this company is very well positioned for long term growth. The demand profile for pain care medication globally is huge and this company is one of the companies with a license to manufacture for that condition.

"In terms of growing risk the company has diversified its growers in terms of locations. Now they will have plantations outsourced in Victoria, Tassie and other parts of Australia and even in Portugal. So I think that will put them in good stead in terms of risk associated with the crop. I guess the market may want to see some of that coming through but from all reports the company is quite confident about the spread of risk and management in that regard. So I think this company looks pretty good, its technology innovation means as we understand it, it is going to produce its product at a lower cost than others and that is a pretty exciting proposition for them in terms of the margin this business can operate under.”

Australian Renewable Fuels (ARF):

“In general, renewables are still a long-term opportunity subject to the individual proposition. Obviously with the lower oil and gas prices around the world it is less attractive at the moment, but what will happen is the better quality ideas will come to the surface and those who have already had their capex invested will take advantage of that.

"Australian Renewables is one of those who have already invested their capital over time. This is a company that was doing all the right things. They had made the plant investment, it was running quite efficiently but unfortunately the government changed the rules on them and had stepped back from the structure that had previously been indicated to the company and to the sector as to the support that was going to be offered recently.

"This company has turned around on the basis the government has reinstated a legislated plan that is very beneficial to the industry and in particular to Australian Renewables who had already sunk a lot of money into capital investment. Now they will be able to take advantage of that despite the lower oil price and in fact have announced they are going to consider expansion and open up a previously mothballed facility. We are quite excited by the prospects that Australian Renewable can bounce back from the lows it saw not too long ago.”

Service Stream Limited (SSM):

“We’ve been a shareholder in Service Stream for quite a while and watched several iterations of leadership of this company and a few false starts. As a substantial shareholder we were pretty vocal and active behind the scenes in challenging management in pushing for change of leadership and I think we are pretty proud of the fact we got involved there. We protected our interests on behalf of all shareholders and it looks like the company is well positioned with an active chairman who has a big shareholding himself having vended his business into the company a number of years ago.

"The company has a relatively new CEO who appears to have hit the ground running as he was an internal appointment. He is doing a good job. The company has a very sound balance sheet now. I think they have no debt and net cash at the moment and that is reflective in the fact that they have started paying dividends again and that is great news for TOP shareholders and all shareholders. I think they are very well placed to capitalise on work coming out of the NBN, ongoing work from TLS and the roll out from work from utilities and smart meters.”

At the time of writing, TOP was trading at a discount to its last reported NTA update of 9 per cent. During my conversation with Waislitz he said he was a buyer at these levels seeing good value and the LIC portfolio is going to follow suit.

TOP is not an LIC for everyone. If you like your traditional 20 to 30 stock portfolios with steady consistent earnings and dividends than TOP does not fit the bill for you. As previously mentioned the earnings will be lumpier here but I am fine with this. TOP is a buy with a long-term investment horizon. We’ll put Waislitz and co in the bottom drawer with a 5 per cent holding and we’ll take them out from time to time and down the track be pleasantly surprised.