Investment Matters

Company News: South32 and Paragon Care

South32 has been sold from your equity portfolio in full. South32 has been a positive investment for clients: initial shares were received from the BHP demerger in May-15, at an average price of $2.26 per share.  Additional shares were acquired in May-15 ($2.31 per share), Jul-15 ($1.77) and Aug-15 ($1.42).  Two trim transactions in late CY-16 were at an average price of $2.50.  The average sale price over the last week was $3.59.  In addition, significant fully franked dividends were received during the period of ownership.  Together, this has delivered an annualised return of 25.5% over your ownership period.

Although some growth prospects continue to exist (e.g. the Arizona acquisition), these are long dated, and South32 has issues at its major contributing mines, for example aging assets (Cannington), geopolitical risk (South Africa), and operational issues (Illawarra coal).  We consider there are better opportunities to benefit from resources / commodity demand growth in the short to medium term (such as Coronado and Paladin; refer to last week’s Investment Matters).

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Paragon Care has made a small but strategic acquisition of a provider of communications services, Total Communications.  It has expertise in the aged care sector, and clients include Bupa Aged Care, Allity Aged Care, Ramsay Health Care and Healthscope.  Annual revenues are circa $16m, with a price paid of $27.5m, or 5.5x EBITDA, plus an earnout.

 

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Murray River Organics is a new addition this week to the extended small cap portfolio. The company is one of few certified organic, natural and "better for you" goods producers listed on the ASX and is the owner of brands such as Pacific Organics, Nutritious Foods, Gobble and Premium Australian Clusters. Its products consist of both grown and sourced produce including dried vine fruit, nuts, seeds, dried berries and coconut. It is unique in that its business is vertically integrated – operating several farms which primarily grow both organic and non-organic dried fruit, a processing facility and a packaging facility.

The company has previously suffered as a result of poor utilisation of its assets but we are confident the quality and experience of its new management will lead to a marked improvement. We asses that the company, with its strong brands and assets, is leveraged to capitalise on a rapidly growing organic food and dried fruit market in the future. We have taken a small initial stake as part of its re-capitalisation at a substantial discount to the net value of its tangible assets (-14.5%) and will look to add to our position as we monitor its progress.

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Here, there and everywhere (HT&E) appointed Hamish McLennan as its Chairman on Tuesday. Mr McLennan is an experienced media and marketing executive, having previously held senior roles including Executive Chairman and CEO of the Ten Network, Executive Vice President of News Corporation in Sydney and New York, and Global Chairman and CEO of Young & Rubicam (a division of WPP - a current world leader in advertising and communication services). His extensive expertise in both media and marketing is expected to guide the company through a changing media landscape, helping it align with the needs of advertisers.

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QBE announced a change to its company structure after the consolidation of its business in Asia. Asia Pacific will no longer be classified as a separate division, with the company now consisting of three divisions: International (Europe and Asia), Australia Pacific (Australia, New Zealand, Pacific and India) and North America. Former CEO of Asia Pacific Operations Jason Brown will take on the newly created role of Group Chief Underwriting officer – responsible for underwriting, pricing and reinsurance. 

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Origin Energy released its September Quarterly Production report which showed an increase in Integrated Gas revenue of 12% and an increase in electricity sales and natural gas sales (of 4% and 6% respectively). Production and sales remained flat over the quarter (+0.47%, 1% respectively) with a majority of the increase in Integrated Gas revenue coming from an increase in LNG spot prices and currency effects (a lower AUD/USD).

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BHP announced the sale of its US onshore oil and gas assets has been completed. The net proceeds of US $10.4 billion will be returned to shareholders in December. This will be in the form of an off-market buyback (with a franked dividend component) of up to $5.2 billion with the remainder distributed as a fully franked special dividend.