SEPTE MB ER 2015 For personal use only - ASX2015/09/07 · Arowana strongly suggests that investors consult a financial advisor prior to making an investment decision. This presentation

S E P T E M B E R 2 0 1 5

MARKET UPDATE

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Disclaimer

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This presentation has been prepared by Arowana International Limited (ACN 103 472 751) (Arowana) with respect to the Arowana Australasian Value

Opportunities Fund (AAVOF), a proposed listed investment company. The information contained in this presentation is for information purposes only and has

been prepared for use in conjunction with a verbal presentation and should be read in that context. This presentation is intended only for persons in Australia

and/or New Zealand and it is provided to you on the basis that you are a person to whom an offer of securities may be made without disclosure under the

securities laws of these jurisdictions.

The information contained in this presentation is not investment or financial product advice and is not intended to be used as the basis for making an

investment decision. Please note that, in providing this presentation, Arowana has not considered the objectives, financial position or needs of any particular

recipient. Arowana strongly suggests that investors consult a financial advisor prior to making an investment decision. This presentation is strictly confidential

and is intended for the exclusive benefit of the institution to which it is presented. It may not be reproduced, disseminated, quoted or referred to, in whole or in

part, without the express consent of Arowana.

No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information, opinions and

conclusions contained in this presentation. To the maximum extent permitted by law, none of Arowana, its related bodies corporate, shareholders or

respective directors, officers, employees, agents or advisors, nor any other person, accepts any liability, including, without limitation, any liability arising out of

fault or negligence for any loss arising from the use of information contained in this presentation.

This presentation may include “forward looking statements” within the meaning of securities laws of applicable jurisdictions. Forward looking statements can

generally be identified by the use of the words “anticipate”, “believe”, “expect”, “project”, “forecast”, “estimate”, “likely”, “intend” and other similar

expressions. Indications of, and guidance on, future earning or dividends and financial position and performance are also forward-looking statements. Such

forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, many of which

are beyond the control of Arowana and its officers, employees, agents or associates, that may cause actual results to differ materially from those expressed or

implied in such statement. Actual results, performance or achievements may vary materially from any projections and forward looking statements and the

assumptions on which those statements are based. Readers are cautioned not to place undue reliance on forward looking statements and Arowana assumes

no obligation to update such information.

This presentation is not, and does not constitute, an offer to sell or the solicitation, invitation or recommendation to purchase any securities and neither this

presentation nor anything contained in it forms the basis of any contract or commitment. This presentation does not constitute an offer to sell, or a solicitation

of an offer to buy, any securities in the United States.

NOT FOR DISTRIBUTION IN THE UNITED STATESFor

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Agenda

Performance and Portfolio

2

Key Holdings

Investment Approach

Market Perspective

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AAVOF: Listed Investment Company

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AAVOF overview

Shares - Ticker AWQ

Share Price 1 $0.99

NAV (pre / post tax) $1.01 / $1.00

Mkt cap (A$m)1 $48m

Options - Ticker AWQO

Options Price 1 $0.035

Options – Strike $0.98

Options - Expiry 30 June 2016

Quoted on 5 Jan 2015

- Comprised of ordinary share and

free option

- Starting NAV (post tax) of $0.98

- Starting NAV (pre tax) of $0.97

Fundamentally orientated value investment focus

Australia / New Zealand mandate

Absolute return mindset

Largest stockholder cohort is Arowana board and management

1. Last close as at 31 August 2015

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Performance (to 31 August 2015)

Fund inception was 5 January 2015

Hardest stage of a fund’s life is initial

implementation

Headline small outperformance

- Fund up 4.0%

- S&P/ ASX 200 Accum Index up 0.3%

- S&P / ASX 200 Index down 3.8%

However its early days in fund life

At 31 August 2015, 66% of the gross

portfolio was still in cash

- Well positioned to take advantage

of opportunities

4

Since Inception Returns1

AAVOF1 S&P/ASX 200S&P/ASX 200

Accum

Jan 2015 0.12% 3.28% 3.28%

Feb 2015 0.14% 9.57% 10.39%

Mar 2015 0.30% 8.88% 10.33%

Apr 2015 1.03% 7.00% 8.45%

May 2015 3.32% 6.77% 8.88%

Jun 2015 1.94% 0.89% 3.10%

Jul 2015 4.07% 5.33% 7.64%

Aug 2015 4.02% (3.77%) 0.31%

1 Measured as gross returns on portfolio value for index comparability

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Performance (to 31 August 2015)

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One Month Returns

AAVOF1 S&P/ASX 200

S&P/ASX 200 Accum

Jan 2015 0.12% 3.28% 3.28%

Feb 2015 0.02% 6.09% 6.89%

Mar 2015 0.16% (0.63%) (0.06%)

Apr 2015 0.73% (1.72%) (1.70%)

May 2015 2.26% (0.22%) 0.40%

Jun 2015 (1.34%) (5.51%) (5.30%)

Jul 2015 2.09% 4.40% 4.40%

Aug 2015 (0.04%) (8.64%) (6.81%)

NAV $/share After tax Before tax

Jan 2015 $0.98 $0.97

Feb 2015 $0.97 $0.97

Mar 2015 $0.97 $0.97

Apr 2015 $0.98 $0.98

May 2015 $1.00 $0.99

Jun 2015 $0.98 $0.98

Jul 2015 $1.00 $1.01

Aug 2015 $1.01 $1.00

1 Measured as gross returns on portfolio value for index comparability

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Portfolio (as at 31 August 2015)

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Total Portfolio Weightings

0% 10% 20% 30% 40% 50% 60% 70%

Cash (AUD)

Equities

Equities Portfolio Weightings

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Silverchef (SIV)

Elders Hybrid (ELDPA)

Elders Common (ELD)

Ardent Leisure (AAD)

Australian Pharma (API)

US Dollar ETF (USD)

5 out of 6 holdings are delivering positive performance

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Agenda


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Key Holdings

Investment Approach

Market Perspective

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Silverchef

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Silverchef overview

Ticker SIV

Price1 $8.50

Mkt cap (A$m)1 $260m

P/E (FY16F)2 14.0x

RoE (FY16F)2 21.2%

Yield (FY16F)2 4.7%

AAVOF position size 9.4%

Silverchef does what the banks typically won’t do

– Leases equipment to cafe owners with no property collateral

– High risk sector

What do the banks think of this?

– 3 of the “Big 4” just granted new loan facilities and extended tenor to 3 to 5 years (previously <2 years)

Why would banks lend to Silverchef to do what the banks won’t typically do?

– Business model drives credit loss rates lower than a bank would see

– Silverchef has lower cost to serve as a result; significant barrier to entry

1. Last close as at 31 August 20152. Based on available Bloomberg consensus forecasts

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Silverchef (cont.)

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Why we own it

Massive addressable market = ability to compound

– Hospitality segment in Australia is “mature” (still growing high mid teens!)

– Non hospitality segment in Australia has rapid growth albeit lower return profile

– New Zealand opened in 2011; clearly profitable and growing

– Canada opened 2013; profit inflexion 2016. Going extremely well with capacity to grow very fast at very high rate of return

– Logical extension is for Silverchef to enter the USA. No business model like it there currently; good customer crossover at franchisor level. Company has goal of 4 countries by 2017…

– Canada + USA = massive addressable market 15x size of Australian market. If Silverchef can execute, earnings can compound ~20%pa. Should then drive re-rating

High organic returns relative to the price

– Analysts who think its negative free cashflow aren’t normalising for growth vs replacement capex

– Equity raisings have funded dividend payments and franking release for the charitable foundation. Net, the business is self funding at very high growth rates

Financial sector compounder. Better value than banks. Higher RoE. We believe it can double. Can bank stocks double?

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Elders Perpetual Preferred (“hybrid”)

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In 2013 Elders was nearly a broken

business

– 5 years of consecutive losses

– $1.3bn of accumulated losses from

disastrous diversification

– Terrible operating conditions

– Reliant upon banks to survive

Hybrid was issued in 2006 at $100/security

– Elders suspended distributions in

2009

– Nothing forcing Elders to ever

resolve the situation

A perpetual zero coupon bond...but with

a dividend stopper

Elders overview

Ticker ELDPA

Price1 $74.00

Mkt cap (A$m)1 $83m

P/E (FY16F)2 10.1x

RoE (FY16F)2 27.9%

Yield (FY16F)2 0.0%

AAVOF position size 7.5%For

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Elders Perpetual Preferred (“hybrid”) (cont.)

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We dislike Hybrids when trading at par (100c in the dollar). Equity downside /credit upside

not attractive

Once trading well below par, hybrid was safest place in capital structure

Elders despite 5 years of losses was a household name. Core agricultural services business

when run well is high RoE operation through the cycle

2014 new CEO. New Turnaround plan. Clearly defined and executable. 2014 clear signs

of earnings traction and clear intention to drive return on capital higher

Elders we reasoned had 4 choices with improving profitability and cashflow:

1. Do nothing. But Hybrid has “dividend stopper” clause; cannot pay dividends whilst

Hybrids are non performing

2. Exchange Hybrids into common stock. But highly dilutive to common

3. Recommence Hybrid distributions. But very expensive (cash yield near 10%)

4. Buy the Hybrids back. Like a share buyback, but better because purchase discount is

accretive to common shareholders. This was our view

14 August 2015 Elders announced partial buyback at $80/share. We think in time Elders buy

the rest of the issue back…first tranche is usually the cheapest

Why we own it

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Elders shares (“Common”)

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We typically only buy one part of the

capital structure

However when Elders fell below

$2.50/share in early 2015 we bought

– Buyback of the Hybrid highly

accretive to common and not

factored into any analyst models

– Clear line of sight to dividend

resumption

– Strong exposure to falling AUD/USD

– Earnings growth and capital

optimisation progressing faster than

we expected

– At $2.50/share we believed Elders

had potential to more than double

Elders overview

Ticker ELD

Price1 $3.99


P/E (FY16F)2 10.1x

RoE (FY16F)2 27.9%

Yield (FY16F)2 0.0%


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Ardent Leisure

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Ardent runs a Leisure business (theme

parks, bowling, marinas, gyms)

In October 2014 Ardent was a “market

darling”

– Trading at all time high P/E and Price

to Book value

A bad result in the gym business resulted

in a fall of ~40%

The question becomes:

– Was the bad result a one off or

systemic?

– Even if the issues in the gym business

are systemic (we suspect they are),

does it matter given it’s an

increasingly small part of the

business?

Ardent Leisure overview

Ticker AAD

Price1 $2.45

Mkt cap (A$m)1 $1,040m

P/E (FY16F)2 17.0x

RoE (FY16F)2 10.3%

Yield (FY16F)2 6.0%


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Ardent Leisure (cont.)

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The Gym business appears structurally challenged to us…but its an increasingly small part of the pie and thus increasingly irrelevant

The main event here is “Main Event”

– Entertainment concept that has exceptionally strong growth and returns and is based in the USA (same store sales 8.3%)

– Main Event is a mixed entertainment offering with huge roll out potential across middle America

– US comparable stocks trade at 30x plus (almost double the price)

– US based Main Event is now the largest segment, will be more than half of earnings in ~1 years time (faster if the AUD goes lower)

– At that point the logical question is why is it listed on ASX?

Strong leverage to falling AUD/USD

– Lower AUD increases value of USA earnings stream (stock is cum upgrade given AUD moves to date)

Why we own it

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Australian Pharmaceutical Industries (API)

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API historically a pharmaceutical

wholesaler

– Challenging business due to PBS

driven price deflation

API is now more a Franchisor for the

Priceline retail network

– Regulation precludes anyone but a

pharmacist owning a pharmacy

– Pharmacists have caps on store

numbers

– Only way to scale in this fragmented

industry is via Franchise model

– API have strong model driving high

like for like sales growth

Australian Pharmaceutical Industries overview

Ticker API

Price1 $1.63


P/E (FY16F)2 16.9x

RoE (FY16F)2 8.9%

Yield (FY16F)2 3.3%


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Australian Pharmaceutical Industries (API) (cont.)

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Strong like for like sales growth in high single digits

– Structurally driven. Even though category is low single digit growth at best…

– …because market share is “tipping” from small independents. We think Priceline has front of store sales productivity significantly higher than most competitors

– This means Priceline can deal with PBS deflation because most of its sales come from front of store, not dispensary

– Priceline is effectively a disruptive business model. One analogue is Aldi and impact on Metcash and Woolworths.

– Market share capture by a good disruptive business model is almost inexorable; these can be incredibly powerful relative value trades

Priceline has what is probably the oldest loyalty scheme in Australia (20 years+)

– Priceline Sister Club

– Almost 5 million members! High level of activity

– Drives sustained positive SSS or Same Store Sales growth

Upshot is we expect API should be a compounder for 3-5 years

Why we own it

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Betashares US dollar ETF (USD)

171. Last close as at 31 August 2015

Why does a stock picking LIC own an

ETF?

– Wealth is relative; protecting AUD capital only is somewhat myopic

– For anyone wanting to take their kids or grandkids to Disneyland its now 43% more expensive than when AUDUSD = 1.00

– AUDUSD depreciation isn’t over yet – look at Asian FX and Reserve flows

We are long only; no derivative

mandate. Constrained mandate limits

ability to effectively protect our capital

and profit from downside

Physical rather than synthetic backing;

good custodian and manager

Betashares USD overview

Ticker USD

Price1 $13.68


P/E (FY16F) n/a

RoE (FY16F) n/a

Yield (FY16F) n/a


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Agenda


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Key Holdings

Investment Approach

Market Perspective

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Broad overview of Arowana approach

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Value Based Value does not just mean low P/E; more to it than this

Value only definable in retrospect (did you make money?)

Deep Fundamentals Only way to understand a company is to understand its industry

History matters; International analogues matter

Data Driven No views or statements without reference to data

Anecdotal observation is interesting but no basis for extrapolation

Concentrated Portfolio concentrated. Best ideas offering best asymmetry

Should translate into greater strike rate over time

Should translate into performance if we stick with the process

Proprietary Hard to make money if you only read other people’s research

Work from first principles. Good research is inherently creative

Absolute Return Focus Purpose of investment is to compound wealth

Mathematically derive upside / downside. There’s a big difference

between a “good company” and a good stock

Will not deploy cash unless proposition is compelling

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Broad overview of Arowana process

Generally internally generated ideas (but not always – if you have a great idea let us

know!)

– Typically from screening; some of them novel

We follow macroeconomics, but we are not macro investors

– Use macro to identify the sandpits we want to play in…and avoid the quicksand

Core focus is on finding stocks with highly idiosyncratic drivers of earnings upside

– Put simply, we don’t want to rely on the tailwind of a good economy for our upside

Emphasis placed on framing of a logical thesis which is data driven

– Most investment errors driven by logic framing, not data sufficiency

– Process is iterative, we live in a world of imperfect information. So when the data changes

the view can change too. We are not wedded to anything we own

Emphasis on basic math of upside / downside

– Expected return decomposition

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We are mindful that industry cycles can be very long…

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Iron ore cycle of the 1960’s and 1970’s: Japan Steel production peaked in 1973

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…and if history doesn’t repeat, maybe it does rhyme

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Iron ore cycle of 2000: China Steel production peaked in ?

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Agenda


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Key Holdings

Investment Approach

Market Perspective

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The market is 15% off its April 2015 highs, but is it cheap enough yet ?

Key question in any market correction:

– Does whatever is causing this sell off impact the earnings of the stocks we own

If the answer is “no” then the market multiple is the only thing changing

– Our stocks are getting cheaper; we can buy more

– Typically the case

If the answer is “yes” then we need to reassess

– Rare events but they do occur

– Timing becomes more important

– Protection of capital becomes critical

– We need to think about how we price in events to determine the point of maximum

opportunity

– Study analogues to learn from history

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We remain cautious on the Australian and NZ markets

Australian and New Zealand markets remain expensive relative to earnings growth

prospects

Broad sections of the Australian market are structurally challenged

– Resources

– Banks

– Some consumer staples

AUDUSD has ongoing structural downside, in common with many Asian currencies

Australia’s largest trading partner, China, is structurally challenged and slowing and

represents the largest single risk to the outlook for our markets

The US rate move has been telegraphed well. The US is the first major economy

clearly exiting QE. Higher US rates are perversely a threat to Asia / emerging markets

Opportunities do (always) exist, and we seek to methodically exploit them within the

context of our mandate

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Buying market dips is usually the right idea, but..

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Buying the 2008 correction 20% down meant you waited 5 years to see recovery

Similar story for other markets in other major cycles

1929 Dow peak – not surpassed until 1954

Thailand has never regained its pre 1997 Asia crisis highs

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

S&P/ASX 200 20% down from 2007 peak

Buying 20% down from the 2007 peak: A wait of 5 years to see recovery

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The current global equity market sell off has been attributed to China

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Shanghai A-share index

-

1,000

2,000

3,000

4,000

5,000

6,000

2010 2011 2012 2013 2014 2015

Source: Bloomberg

China A share market rose ~150% from its June 2014 trough to June 2015 peak

– Largely driven by a rapid rise in margin lending

No other major markets rose in tandem

So why should we think the recent ~40% decline is driving global markets lower?

– China A share market is not widely held

We don’t think the Chinese stock market in isolation is driving the correction

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Asian trade data is extremely weak, signaling further contraction

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Historical link of Asian exports vs. US imports has decoupled1

(25.0)%

(15.0)%

(5.0)%

5.0 %

15.0 %

25.0 %

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ASIAN EXPORT VOLUMES ROLLING OVER

Asian Export Volume USA Import Volume

1. Source: Netherlands Bureau of Economic Policy analysis

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Origins of current issues have genesis in China’s massive 2008 stimulus

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2008: China’s response to the GFC – add more debt1China: Wasteful investment – incremental Capital

Output Ratio deteriorates2

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

China - loan growth YoY

1. Source: Bloomberg2. Source: Morgan Stanley

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Wasteful investment led to overcapacity and falling producer prices

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China’s PPI data is indicative of overcapacity…1 …which has spilled over into weaker Asian trade2

1. Source: China National Bureau of Statistics2. Source: CEIC, Morgan Stanley Research

(10.0)%

(5.0)%

- %

5.0 %

10.0 %

15.0 %

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

China Producer Price Index YoY

China Producer Price Index YoY

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FX reserve capital flight is occurring in China and Malaysia

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MALAYSIA FX RESERVES (US$m) CHINA FX RESERVES (US$m)

Source: Bloomberg

(50,000)

(40,000)

(30,000)

(20,000)

(10,000)

-

10,000

20,000

30,000

40,000

50,000

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,00020

03

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20

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20

08

20

09

20

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20

11

20

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20

13

20

14

20

15

Malaysia YoY change (RHS)

(400,000)

(200,000)

-

200,000

400,000

600,000

800,000

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

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China YoY change (RHS)For

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What happens with China trade matters to Australia like never before

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Australia: China Share of Merchandise Exports

Source: Bloomberg

(30.0)%

(20.0)%

(10.0)%

- %

10.0 %

20.0 %

30.0 %

40.0 %

50.0 %

60.0 %

- %

5.0 %

10.0 %

15.0 %

20.0 %

25.0 %

30.0 %

35.0 %

19

96

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97

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98

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99

20

00

20

01

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20

13

20

14

20

15

China share of Australian Merchandise trade (LHS)

YoY change in Merchandise exports to China (RHS)

China represents ~25% of Australian

merchandise exports

– ~6x larger share than in late 1990s

– Huge driver of historical GDP growth via

investment, exports

Now in severe contraction

– Represents a risk to outlook to extent it

transmits to growth

– Key transmission vulnerability via

aggregate nominal household income

– Key shock absorber has to be AUD

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Summary

Market timing is inherently difficult

Our perspective is that the market overall is not cheap enough yet

Risk via Asia is tangible

All market corrections produce opportunities; ultimately the bigger the correction the

bigger the opportunity

– Just need to have capacity to deploy capital when opportunity knocks

Obvious example are stocks leverage to further AUD downside

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Documents

SEPTE MB ER 2015 For personal use only - ASX2015/09/07 · Arowana strongly suggests that investors consult a financial advisor prior to making an investment decision. This presentation