Sandon Capital Activist Fund's commentary for the month ended May 31, 2024.
The Fund return for May 2024 was +1.3%, bringing total returns (net of all fees and expenses) since inception to the equivalent of 9.6% per annum. Cash levels ended the month at approximately 9%.
The largest positive contributors were Global Data Centre Group (NASDAQ:GDC) (+4.0%), Nuix Ltd (NASDAQ:NXL) (+0.6%) and Midway Ltd (LON: MWY) (+0.6%). These were partly offset by Fleetwood Ltd (ASX:FWD) (-1.4%), COG Financial Services Ltd (ASX:COG) (-0.7%), Coventry Group Ltd (ASX:CYG) (-0.7%), Wellard Ltd (ASX:WLD) (-0.6%) and Magellan Financial Group Ltd (ASX:MFG) (-0.5%).
GDC announced that it had entered into a contract for the sale of its co-controlled investment in Etix Everywhere, the European edge data centre platform, for net proceeds of $175 million. This is significantly above the 31 December 2023 carrying value ($115 million) and our own optimistic expectations. The transaction is expected to close in the September quarter, at which point GDC will update the market on how it will return the proceeds to unitholders. During the month, press reports indicated that the sale process for AirTrunk (GDC owns ~1%) was progressing with first round bids due in mid-June.
NXL provided a solid earnings update with FY24 underlying EBITDA expected to be in the range of $63-68 million. The better-than-expected result is a function of a solid trading environment, as well as a significant multi-year contract win. After an inauspicious first few years on the ASX, NXL has now put many of its legacy issues behind it and is starting to deliver the solid operational performance that was expected when it first listed.
MWY appeared to have a delayed reaction to the unexpectedly strong trading update that was provided in late April. The company expects to deliver FY24 EBITDA of $10-15 million, the bulk of which will be generated in the 2H given 1H EBITDA was only $2.6 million. Encouragingly, demand for woodchips has been strong which means much of the company’s large 1HFY24 inventory balance will have been converted to cash. As a result, we believe the company will have the capacity to announce another meaningful fully franked dividend to shareholders when the FY24 results are released in late August.
FWD announced a soft trading update as Building Solutions has seen short-term delays in awarding Government-announced projects. RV Solutions is affected by lower consumer discretionary spend and original equipment manufacturer (OEM) orders, as well as an inability to pass on the full effects of inflation. On a positive note, FWD announced a long-awaited buyback, an initiative we have been advocating for some time. Given the company’s current share price, strong balance sheet and earnings certainty over the next few years, underpinned by contracts in Community Solutions (Searipple), we believe buying back shares at current levels is extremely value accretive for shareholders.
Karoon Energy (KAR) held its Annual General Meeting during May. We and another fund conducted a public campaign to encourage shareholders to vote against the KAR Board for what we consider its poor allocation of shareholder capital. Despite only running a short campaign and KAR receiving support from the proxy advisors, shareholders sent a very clear message with a first strike against the remuneration report and a large protest vote against some of the other resolutions. We eagerly await KAR’s announcement in July 2024 when it has promised to release its “framework for shareholder returns” which we expect will include dividends and other potential initiatives including buybacks.
