KFL – December 2017 Quarter Update Newsletter

1
NAV
$
1.47
SHARE PRICE
$
1.34
as at 31 December 2017
Quarter Update Newsletter
1 October 2017 — 31 December 2017
Notable Returns in the Quarter
»The New Zealand share market completed a clean sweep
in the December quarter, making it not only four positive
quarters in a row but also 12 positive months in a row
»The December quarter was the strongest of the year for
the market which was up 5.9%. The Kingfish portfolio
outperformed the market with a gross performance
return of 7.1%
»Synchronised global growth combined with a still healthy
New Zealand economy underpins our expectation of
respectable earnings growth for New Zealand companies
for the coming year
Making history
A “clear round”, a “clean sweep” – use whatever sporting
analogy you like – the S&P/NZX50G closed out the year with
12 straight positive monthly returns.
We have only seen 12 consecutive months of positive
performance in New Zealand once before. According to data
from Bloomberg, the only other time we saw this phenomenon
was 1963.
Back then the market recorded 16 positive months in a row, but
more importantly went on to rally another 15% before finally
peaking in 1965. Wouldn’t it be nice if history repeated itself
54 years later?
Portfolio news
It was pleasing to see that all but one of our investments
were positive contributors over the quarter, and that our
heavyweight positions in Fisher & Paykel Healthcare, Ryman
Healthcare and Infratil were top contributors.
As discussed in our recent interim report, we added Xero
to the portfolio in September 2017. During the quarter Xero
released its maiden EBITDA break-even result, which affirmed
our thesis of EBITDA break-even slightly earlier than expected
and highlighted the strong operating leverage in the core
Australia/New Zealand business. However, this good result was
somewhat overshadowed by the announcement it would be
moving to a sole listing on the ASX in February 2018.
Restaurant Brands also continued to do what it does best
during the period, delivering strong overall sales growth of
almost 8%. KFC in New Zealand remains the main engine,
delivering almost 6% same store sales growth. KFC in Australia
also contributed with almost 6% same store sales growth and
DELEGAT
GROUP
+18
%
PORT OF
TAURANGA
+15
%
RYMAN
HEALTHCARE
+15
%
FISHER & PAYKEL
HEALTHCARE
+13
%
MICHAEL HILL
+10
%
it was especially pleasing to see the recently acquired Taco Bell
business deliver a strong result.
Where to for New Zealand Equities?
The outlook for the New Zealand equity market remains
respectable. While economic growth remains supportive
of continued earnings growth, a repeat of double-digit
market returns is more challenging in 2018 given the strong
performance over the last six years and the resulting higher
valuations. Having said this, pockets of opportunities always
exist and we are optimistic that quality, growth companies
(the natural hunting ground for Kingfish) will outperform the
broader market.
At a headline level valuations appear lofty but recent analysis
by Forsyth Barr provides a timely reminder that, broad brush
statements based on averages often hide a deeper truth.
Using analysis from Forsyth Barr, the proportion of companies
deemed to have structural growth characteristics has increased
from less than 10% of the New Zealand share market in 2007
to 36% currently (at the expense of cyclicals and to a lesser
degree defensive yield stocks). This has increased the quality
and earnings growth potential of the market. It also means
the market should trade at a higher valuation given it is higher
DISCOUNT
8.5
%
Source: Forsyth Barr analysis
100%
90%
80%
70%
60%
50%
40%
30%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Composition of NZ share market
Defensive Yield Structural Growth Cyclicals
Percentage of market

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Disclaimer: The information in this newsletter has been prepared as at the date noted on the front page. The information has been prepared as a general summary of the matters covered only, and it is
by necessity brief. The information and opinions are based upon sources which are believed to be reliable, but Kingfish Limited and its officers and directors make no representation as to its accuracy
or completeness. The newsletter is not intended to constitute professional or investment advice and should not be relied upon in making any investment decisions. Professional financial advice from
an authorised financial adviser should be taken before making an investment. To the extent that the newsletter contains data relating to the historical performance of Kingfish Limited or its portfolio
companies, please note that fund performance can and will vary and that future results may have no correlation with results historically achieved.
Kingfish Limited
Private Bag 93502, Takapuna, Auckland 0740
Phone: +64 9 489 7094 | Fax: +64 9 489 7139
Email: enquire@kingfish.co.nz | www.kingfish.co.nz
The Kingfish quarter update newsletter is produced for the June and
December quarters only. The annual and interim reports cover the
March and September periods. If you would like to receive future
newsletters electronically please email us at enquire@kingfish.co.nz
Performance
as at 31 December 2017
3 Months
3 Years
(annualised)
Five Years
(annualised)
Corporate Performance
Total Shareholder Return+7.0%+8.3%+12.8%
Adjusted NAV Return+6.1%+12.6%+13.8%
Manager Performance
Gross Performance Return +7.1%+15.5%+17.1%
S&P/NZX50G Index+5.9%+14.7%+15.6%

Non-GAAP Financial Information
Kingfish uses non-GAAP measures, including adjusted net asset value, gross performance return and total
shareholder return. The rationale for using such non-GAAP measures is as follows:
»adjusted net asset value – the underlying value of the investment portfolio adjusted for capital allocation
decisions,
»gross performance return – the Manager’s portfolio performance in terms of stock selection, and
»total shareholder return – the return to an investor who reinvests their dividends, and if in the money,
exercises their warrants at warrant maturity date for additional shares.
All references to adjusted net asset value, gross performance return and total shareholder return in this newsletter
are to such non-GAAP measures. The calculations applied to non-GAAP measures are described in the Kingfish
Non-GAAP Financial Information Policy. A copy of the policy is available at http://www.kingfish.co.nz/about-kingfish/
kingfish-policies/
LISTED COMPANIES
% Holding
Abano Healthcare
3.1%
Auckland International Airport
4.3%
Delegat Group
3.1%
EBOS Group
3.6%
Fisher & Paykel Healthcare
11.3%
Freightways
8.8%
Infratil
7.8%
Mainfreight
12.6%
Meridian Energy
2.9%
Michael Hill International
4.8%
Port of Tauranga
3.4%
Restaurant Brands NZ
7.1%
Ryman Healthcare
7.0%
Summerset
5.6%
Trade Me
2.5%
Vista Group International
3.7%
Xero
4.0%
Z Energy
1.8%
Equity Total
97.4%
New Zealand dollar cash
2.6%
TOTAL
100.0%
Portfolio Holdings Summary
as at 31 December 2017
Company News
Dividend Paid 22 December 2017
A dividend of 2.83 cents per share was paid to Kingfish shareholders
on 22 December 2017 under the quarterly distribution policy. Interest
in Kingfish’s dividend reinvestment plan (DRP) remains high with
45% of shareholders participating in the plan. Shares issued to
DRP participants are at a 3% discount to market price. If you would
like to participate in the DRP, please contact our share registrar,
Computershare on (09) 488 8777.
quality than it was in the past. Relative to history, the current
valuation of structural growth companies is within normal ranges.
The New Zealand economy continues to truck along nicely; with
the exception of weak business confidence following the change
in government. Economic data is generally inline or exceeding
expectations and in many instances continues to remain at record
levels. In particular, the terms of trade are at record levels driven
by strong demand for New Zealand export commodities, and
unemployment is at its lowest level since March 2009.
While there remains some uncertainty around government policy,
fiscal investment in housing and other infrastructure is expected
to provide a further kicker to economic growth. Current forecasts
are for 3% real GDP growth in New Zealand for the coming year,
which will support short-term earnings growth for New Zealand
companies.
The global economy is experiencing synchronised growth for
the first time in over a decade and the recovery is accelerating.
That bodes well for investor sentiment and given the small,
open nature of our economy, should be supportive of the New
Zealand economy and our equity market.
Looking beyond 2018, it is possible that New Zealand economic
growth will slow relative to global economies, reflecting, in
part, the late stage of the economic cycle in New Zealand. We
remain well positioned for this ongoing global recovery with
approximately 45% of our companies’ revenue coming from
offshore, and more generally our preference for companies with
structural growth.
Sam Dickie
Senior Portfolio Manager
31 January 2018