KFL – December 2018 Quarterly Update Newsletter

1
Notable Returns in the Quarter
»»A»tough»quarter,»with»most»of»the»volatility»occurring»during»
October;»
»»Despite»the»unpleasant»end»to»the»year,»the»2018»calendar»
year»delivered»a»positive»+5.2%»on»a»gross»performance»
basis»for»Kingfish»investors,»significantly»outperforming»more»
volatile»global»markets;»
»»We»took»advantage»of»the»volatility»to»add»to»high»quality»
names,»Fisher»&»Paykel»Healthcare»and»a2»Milk;»and
»»Core»portfolio»holding»Restaurant»Brands»received»an»
attractive»takeover»offer.
NZX Market News
The S&P/NZX50 had its worst quarter in two years and the third
worst quarter since the global financial crisis. The Kingfish portfolio
fell 7.0% on a gross performance basis for the quarter compared to
the S&P/NZX50 which fell 5.8% for the same period.
It was a quarter for low growth defensive names. The
Utilities sector (+3.4%), Real Estate sector (+2.0%) and the
Telecommunications sector (+0.2%) were the only sectors up for
the quarter and all sharply outperformed the market, and are
sectors which do not suit our more growth oriented style.
While most of the quarter’s fall occurred in the month of October
(S&P/NZX50 -6.4%), November (S&P/NZX50 +0.8%) and December
(S&P/NZX50 -0.1%) still seemed fragile given the ongoing extreme
turmoil experienced by global markets. December especially was
an odd month, with the New Zealand sharemarket an island of
calm in a storm, with flat performance and very low intra-month
volatility compared to global stock markets that had extremely
elevated levels of volatility and fell sharply.
The S&P/NZX50 performance for the full calendar year has been
+4.9% which compares favourably to the -8.4%
2
that global
equity markets delivered. It’s also important to note that the
NZ equity market has delivered average annual market returns
of approximately 13% for the past decade, and that market
corrections, similar to the volatility experienced over the last
quarter are an inevitable part of global share market cycles.
The good news is that the valuations of some of the core portfolio
holdings are looking much more attractive. The question we
always ask ourselves is: Has anything significant changed with
regards to the fundamentals of the company? Is this still a
company we would be proud to own in 5 years time? If the answer
to those questions is yes, then the market has just thrown up an
opportunity to add to quality companies at more attractive prices.
We took advantage of the severe volatility in October to add to
quality companies Fisher & Paykel Healthcare and a2 Milk.
MICHAEL HILL
INTERNATIONAL
-34
%
FLETCHER
BUILDING
-25
%
PUSHPAY
HOLDINGS
-23
%
RYMAN
HEALTHCARE
-23
%
SUMMERSET
GROUP
-18
%
Key Portfolio Movers
Mexican financial investor Finaccess made a partial takeover offer
for 75% of Restaurant»Brands (+7%) in October at $9.45 per share
(24% above the previous close of $7.60). The offer is attractive
as it is at a premium to our best case valuation, which implies
strong value in future risky or unproven growth options, including
expansion into the US, KFC in Hawaii, or Taco Bell in Australia
(NSW) and New Zealand. Finaccess is a Mexican private equity
fund that has a shareholding of almost 60% in AmRest Holdings
SE, a large Polish-listed fast food operation that includes the
Yum! brands KFC and Pizza Hut. AmRest appears to be a credible
player. Any offer would be subject to the Overseas Investment
Office and Yum! Brands approval. At $8.29, the share price is
implying an approximately 50% probability of success, which in our
opinion seems low. An alternative way of looking at it is assuming
100% probability of success, the 25% Finaccess is not bidding for,
(the rump) is trading at an implied price of around $4.80 which
is quite attractive. Restaurant Brands also announced during the
quarter it is bringing Taco Bell to both NZ and NSW Australia. Taco
Bell is a brand the company has sought in this part of the world for
a long time and Taco Bell, under Restaurant Brands ownership, is
trading solidly in Hawaii.
Infratil (+4%) had a very busy quarter. It sold its under-performing
asset NZ Bus, it showcased its high-quality data centre assets CDC
in Canberra to investors and analysts, it continued to negotiate
the full take-over of Tilt with its partner Mercury, it announced
major value accretive transactions at its Longroad investment and
it reported a strong result. There are many reasons why Infratil
continues to be one of the largest portfolio holdings, including
the significant degree of upside optionality that the portfolio
manager continues to drive into the Infratil portfolio. We travelled
to Canberra during the quarter to visit Infratil’s key growth asset,
Canberra Data Centre (CDC) and came away very impressed with
management, CDC’s cost advantage in deploying data centres,
and the ongoing growth in data centre demand. Demand for
CDC’s services is accelerating with CDC contracting space in
unbuilt data centres faster than in the past.
Michael»Hill»(-34%) had an extremely poor quarter. The company
announced first quarter 2019 financial year sales, which revealed
a sharp -11% decline in same store sales growth (SSSG), as it
Quarter Update Newsletter
1 October 2018 – 31 December 2018
NAV
$
1.40
SHARE PRICE
$
1.32
WARRANT PRICE
$
0.04
as»at»31»December»2018
DISCOUNT
1
5.3
%
¹ Share price discount/(premium) to NAV (including warrant price on a pro-rated basis)
2
Global Benchmark Index S&P Large Mid Cap/S&P Small Cap Index (hedged 50% to NZD).

2
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, New Zealand
Phone: +64 9 489 7094 | Fax: +64 9 489 7139
Email: enquire@kingfish.co.nz | www.kingfish.co.nz
If you would like to receive future
newsletters electronically please email
us at enquire@kingfish.co.nz
Performance
as at 31 December 2018
3 Months
3 Years
(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder Return(3.3%)+12.0%+10.5%
Adjusted NAV Return(7.1%)+10.7%+10.8%
Portfolio Performance
Gross Performance Return (7.0%)+13.2%+13.4%
S&P/NZX50G Index(5.8%)+11.7%+13.2%

Non-GAAP Financial Information
Kingfish uses non-GAAP measures, including adjusted net asset value, adjusted NAV return, 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 after fees and tax,
»adjusted NAV return – the net return to an investor after fees and tax,
»gross performance return – the Manager’s portfolio performance in terms of stock selection,
before fees and tax, 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, adjusted NAV return, 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://kingfish.co.nz/about-kingfish/kingfish-policies/
LISTED»COMPANIES
%»Holding
Auckland Int Airport5.6%
Delegat Group4.0%
Fisher & Paykel Healthcare13.4%
Fletcher Building2.5%
Freightways10.1%
Infratil7.0%
Mainfreight10.4%
Meridian Energy3.0%
Michael Hill International2.5%
Port of Tauranga3.5%
Pushpay Holdings2.0%
Restaurant Brands NZ4.6%
Ryman Healthcare6.1%
Summerset5.7%
The A2 Milk Company11.5%
Vista Group International4.3%
Equity»Total96.2%
New Zealand dollar cash3.8%
TOTAL100.0%
Portfolio Holdings Summary
as at 31 December 2018
Company News
Dividend Paid 21 December 2018
A dividend of 3.04 cents per share was paid to Kingfish
shareholders on 21 December 2018 under the quarterly
distribution policy. Interest in Kingfish’s dividend reinvestment
plan (DRP) remains high with 44% 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.
Sam»Dickie,»Senior Portfolio Manager
18 January 2019
cut back its practice of allowing store staff the autonomy to
discount to close sales. This was only slightly offset by a modest
improvement in gross margin (up by 1.5%, i.e. the gross margin
increased from 63.1% to 64.6%). This move was part of its change
in strategy to move away from price-based competition on generic
product and towards more unique collections. We were very
disappointed by the worse-than-expected decline. The company
had previously advised that it expected a 5% to 6% SSSG decline,
which would be offset by a 2.5% increase in gross margin. The
company has flagged a greater promotional pipeline in the
important December quarter, which is expected to improve results.
We have almost halved the portfolio weighting in Michael Hill
and we further cut the weighting in the December quarter, (as we
are yet to be convinced that the new strategy is the correct one).
The new CEO Daniel Bracken has an impressive CV and we look
forward to meeting him in January.
Portfolio Exit
In October, we exited the portfolio position in Abano»Healthcare.
On-going disappointing same store sales growth from its Australian
dental business (Maven) and limited margin improvement has
meant Abano has been on watch over the last year and we
have progressively been decreasing the investment. Two of the
key attractions of a roll-up (the purchase of other similar small
businesses), are the ability to take organic market share and the
delivery of operating leverage via scale and Abano continues to
struggle to deliver on both of these. As always, capital is precious
and we have better uses for the capital currently.