BRM – March 2018 Quarter Update Newsletter

Quarter Update Newsletter
31 December 2017 — 31 March 2018
Notable Returns for the Quarter
in Australian dollars
»»Over»the»quarter»the»Barramundi»portfolio»was»down»2.9%,»
while»the»benchmark¹»was»down»4.7%
»»Market»volatility»gave»us»the»opportunity»to»add»to»positions»
in»Credit»Corp»and»Domino’s»Pizza
»»Increased»competition»prompted»us»to»begin»exiting»IVF»»
provider,»Virtus
»»Recent»departure»from»the»Kingfish»portfolio,»Xero,»is»now»
welcomed»into»the»Barramundi»portfolio
In the first quarter of 2018 market volatility picked up. Common
volatility indicators such as the VIX index spiked from all-time
lows to five times those levels. Driven by inflation concerns, and
exacerbated by technical factors, investors were treated to a
rollercoaster ride that has not been experienced for some time.
Globally, investors have become used to low and incredibly
stable inflation; in fact deflation was the bigger fear for most
market participants. However, during the quarter, investors got a
reminder that nothing lasts forever, including low inflation. Two
data points acted as wakeup calls. Payroll data in the United
States was released which showed early evidence of upwards
pressure on wages, followed up by surprisingly strong consumer
prices data.
Markets do not like change and reacted accordingly. Shares fell
sharply from recent highs on January 26, with the United States
S&P 500, as an example, down 10% to its lows for the quarter
on February 8. Australia did not escape unscathed and was
down 4.9% intra period, however climbed back somewhat. It is
important to remember that on the flipside, Australia’s economy
is sound, as is the global economy, more and more people are
working and wages are rising, which fuels more activity. Company
earnings will continue to be robust. Earnings growth is a powerful
tonic for equity prices.
In such an environment, while the Barramundi portfolio was down
2.9% for the three months to 31 March 2018, it outperformed its
benchmark¹ which fell 4.7% over the same period.
Key portfolio news
Strong earnings results drove the performance of the leading
contributors to portfolio performance over the quarter. NextDC
was up 9% for the quarter. An owner and operation of carrier
neutral datacentres, it crushed market expectations posting a
very upbeat earnings result. NextDC is benefitting from strong
uptake of datacentre space as customers increasing move
towards cloud computing and away from traditional on premise
IT infrastructure. NextDC is in the enviable position where every
dollar of revenue added generates a high incremental level of
profitability. The market is beginning to understand this dynamic.
Similarly, Resmed (+13%), CSL (+11%) and ARB (+6%)
demonstrated strong profitability, delivering healthy share price
gains. In the case of ARB the company posted its strongest
sales growth in seven years. CSL is benefitting from a “good”
flu season in the Northern hemisphere, producing a better
than expected margin performance in its Seqirus business.
Resmed continues to gain share in the obstructive sleep apnea
(OSA) market on the rollout of new masks and, in our view, its
connected OSA management platform has created a sustainable
competitive advantage
The biggest negative for the quarter was the share price
performance of logistics software provider Wisetech (-33%)
which, despite posting profit growth of 32%, lagged bullish
market expectations. To put this in context, and even with
February’s steep share price fall, Wisetech shares have risen 68%
in the past twelve months.
We continue to be very comfortable with our investment in
the firm. Wisetech is a global leader in providing cloud-based
software to help customers in the highly competitive freight
forwarding industry improve efficiency. Given the razor sharp
margins in this industry efficiency is a critical customer need. The
company addresses a significant market opportunity, has high
quality management and a clear multiyear growth strategy. We
will be looking to add to Barramundi’s investment on further
weakness.
Portfolio changes
Over the course of the quarter we used share price weakness to
add to positions in both Domino’s»Pizza and Credit»Corp.
In both cases we felt the market had over reacted to results.
For Domino’s the first half was soggy but this is something we
expected. The Australasian business should post strong growth
in the second half, Japanese sales performance has picked up
markedly after a first half misstep and the solid momentum in
European sales is expected to continue.
Credit»Corp was “guilty” of not raising guidance. Investors
have got used to CEO Thomas Beregi beating expectations
and setting the bar even higher. That wasn’t the case this time.
There was something much more interesting in this result in
our view. The company is beginning to gain real traction in its
RESMED
+13
%
CSL LIMITED
+11
%
RAMSAY
HEALTHCARE
-10
%
CREDIT CORP
-12
%
WISETECH
GLOBAL
-33
%
BRM NAV
$
0.65
SHARE PRICE
$
0.58
DISCOUNT
10.9
%
as at 31 March 2018
1
¹ S&P/ASX200 (hedged 70% to NZD)

2
Company News
Dividend Paid 29 March 2018
A dividend of 1.38 cents per share was paid to Barramundi
shareholders on 29 March 2018, under the quarterly distribution
policy. Interest in Barramundi’s dividend reinvestment plan (DRP)
remains high with 37% 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.
Performance
as at 31 March 2018
3 Months
3 Years
(annualised)
5 Years
(annualised)
Corporate Performance
Total Shareholder Return(2.6%)+4.7%+4.5%
Adjusted NAV Return(2.9%)+6.2%+4.5%
Manager Performance
Gross Performance Return(2.9%)+8.9%+7.8%
Benchmark Index¹(4.7%)+9.8%+5.2%
1
Benchmark Index: S&P/ASX Small Ords Industrial Gross Index until 30 September 2015 & S&P/
ASX 200 Index (hedged 70% to NZD) from 1 October 2015
Non-GAAP Financial Information
Barramundi 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 hedging of currency movements, 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 including 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 Barramundi Non-GAAP Financial Information Policy. A copy of the
policy is available at http://barramundi.co.nz/about-barramundi/barramundi-policies/
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 Barramundi 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 Barramundi 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.
Barramundi Limited
Private Bag 93502, Takapuna, Auckland 0740
Phone: +64 9 489 7074 | Fax: +64 9 489 7139
Email: enquire@barramundi.co.nz | www.barramundi.co.nz
COMPANY
% Holding
ANSELL
4.2%
APN OUTDOOR
1.5%
ARB CORPORATION
4.5%
AUB GROUP
3.5%
BHP BILLITON
2.7%
BRAMBLES
3.9%
CARSALES
6.1%
COMMONWEALTH BANK
4.7%
CREDIT CORP
3.4%
CSL
7.7%
DOMINO'S PIZZA
3.0%
GATEWAY LIFESTYLE GROUP
1.4%
INGENIA COMMUNITIES
1.5%
LINK ADMINISTRATION HOLDINGS
4.1%
NANOSONICS
2.1%
NATIONAL AUSTRALIA BANK
5.0%
NEXTDC
3.2%
OOH! MEDIA
2.6%
RAMSAY HEALTH CARE
3.9%
RESMED
3.4%
RIO TINTO
1.9%
SEEK
6.5%
SONIC HEALTHCARE
4.2%
TECHNOLOGY ONE
2.3%
VIRTUS HEALTH
0.9%
WESTPAC
3.0%
WISETECH GLOBAL
2.2%
XERO
2.3%
EQUITY»TOTAL
95.8%
AUSTRALIAN DOLLAR CASH
1.5%
NEW ZEALAND DOLLAR CASH
1.8%
TOTAL»CASH
3.3%
CENTREBET RIGHTS
0.1%
FORWARD FOREIGN EXCHANGE CONTRACTS
0.8%
TOTAL
100.0%
Portfolio Holdings Summary
as at 31 March 2018
Frank»Jasper
Chief Investment Officer
Fisher Funds Management Limited
23 April 2018
US business. The US Purchased Debt Ledger market is 10 times
the size of the Australian market. Credit Corp is now on-track to
create a business that is of similar size to its Australian operation.
At this level it would have a US market share of around 4%. We
believe it could readily grow beyond this providing a significant
growth option for the company over years to come.
Despite a reasonable result delivered on the back of cost savings
and a good share price bounce we made the decision to begin
exiting IVF provider, Virtus. We have become increasingly
concerned that competitors offering low cost IVF treatments
will cannibalise Virtus’s full service premium priced offering.
Ultimately there is a risk that Virtus will need to lower the price
of their offer affecting future profitability. To compound this risk,
Virtus has expanded offshore and its operations in Singapore and
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Ireland have been indifferent performers to date. Management
has doubled down on this strategy. We don’t share their
confidence that this is the right step forward for the business.
During the quarter we added Xero to the portfolio. With
Xero’s move to a sole listing on the ASX, it now fits within
Barramundi’s fishing pond. We regard Xero as a well-run, high
quality business with a global growth opportunity. It is an
obvious portfolio candidate.