The following is a brief introduction to each of our portfolio companies, with a description of why we believe they deserve a position in the Kingfish portfolio.
Abano Healthcare is now predominantly an active investor in dental practices in Australasia. It owns more than 200 dental practices making it one of the largest Australasian dental groups.
We are attracted to Abano’s strategy of growing a well-resourced Australasian dental network, focusing on private revenue streams. In particular, we like its goal of achieving a 10% share of the Australasian dental market over the next 10 years, suggesting it has many years of growth ahead of it.
Auckland International Airport (AIA) owns and operates New Zealand’s major gateway as well as 1500 hectares of land surrounding the airport. AIA operates under a ‘dual till’ regulatory regime, meaning that the company’s aeronautical operations are subject to rate of return regulation, whereas the other non-aeronautical operations are unregulated. Over 50% of AIA’s revenue is derived from non-aeronautical operations, such as retail, parking, hotel accommodation and property rental.
AIA is well-positioned to benefit from New Zealand’s positive long-term tourism outlook, particularly tourists from China. With aspirations for 40 million total passengers per annum by 2044, combined with a strengthening consumer business and leveraging its land bank, AIA’s non-aeronautical operations are expected to continue to deliver attractive returns on invested capital into the future.
Delegat Group produces and distributes super-premium wine internationally under the Oyster Bay brand. Oyster Bay is the number one selling New Zealand wine brand in the UK, Australia and Canada, and is growing quickly in the USA. The company operates a vineyard in the Barossa Valley which broadens its wine portfolio.
Delegat continues to grow its profits annually despite currency fluctuations. The company is investing for growth by expanding its winery capacity and increasing vineyard plantings to meet its goal of achieving 7.5% per annum growth in case sales over the next five years. The majority of the growth is likely to be driven by the still relatively immature US market.
EBOS Group is Australasia’s largest diversified pharmaceutical and medical care products group, focusing on wholesaling, logistics, sales and marketing of medical products. The company typically has a number 1 or number 2 market position in each market segment it operates in. EBOS also operates in the animal care sector as a veterinary wholesaler, distributor and retailer of animal healthcare products, pet accessories and premium foods across Australasia.
EBOS’ scale and market position means that it is a low-cost operator right across the medical care supply chain segments it operates in. The sector has a tailwind from ageing demographics and the increasing prevalence of chronic diseases. Its animal care operations are complementary and scalable.
Fisher & Paykel Healthcare is a leading designer, manufacturer and distributor of innovative medical devices for patients who require acute respiratory and obstructive sleep apnoea care. Over 95% of its products are sold outside New Zealand from dedicated manufacturing facilities in Auckland and Mexico.
We are attracted to the latent demand for Fisher & Paykel’s innovative care products as the worldwide population ages and the incidence of chronic respiratory diseases and obesity rises. Through its own research and development, Fisher & Paykel has continued to develop products that significantly expand its potential patient base, while maintaining high returns on invested capital.
Freightways operates nationwide express package and business mail operations with brands including NZ Couriers, Post Haste and DX Mail. The company has also developed an information management business on both sides of the Tasman encompassing document and data storage and document destruction.
Freightways is one of two dominant players in the New Zealand courier market and its information management business has a footprint across Australasia. The company has an impressive track record of value-accretive acquisitions that leverage off its existing infrastructure. Earnings have been resilient in times of recession, and are growing at least as strongly as the domestic economy in more buoyant times.
Infratil invests in a diverse range of infrastructure businesses encompassing renewable energy, air and road transport, aged care, and more recently, data centres with a focus on co-investment within Australasia. It is externally managed by an experienced management team.
We are attracted to Infratil’s portfolio of infrastructure assets that are not easily replicable. Infratil’s goal of a 20% per annum after tax return to shareholders over the medium term meets our expectations and its track record since listing has been strong.
Mainfreight is a global supply chain logistics company. It is a specialist freight forwarder and distributor, with interests spanning managed warehousing, transportation of hazardous substances, international freight, full truckload and less than container load freight. Its operations span New Zealand, Australia, USA, Asia and Europe.
Mainfreight is a very well-run company with a special team culture. It continues to open new trade lanes as it spreads its logistics footprint ever wider. Growth should come organically and through judicious acquisitions as it works towards its goal of becoming a global logistics provider.
Meridian Energy is New Zealand’s largest electricity generator, producing approximately 30% of the country’s electricity in an average year, sourced 100% from renewable hydro and wind resources. The company also has a dominant retail business, operating under the Meridian and Powershop brands.
Meridian is a well-run company, with a portfolio of long-dated quality renewable generation assets which provides Meridian with the advantage of being amongst the lowest cost marginal electricity producers. Meridian is favourably positioned over the long term to benefit from key sector event risks and is generating increasing free-cashflows given its decreasing capital expenditure requirements.
Michael Hill International is a specialist jewellery retailer, manufacturing most of its own diamond jewellery. The company operates stores in New Zealand, Australia, Canada and the USA.
Michael Hill’s Australasian business has continued to perform solidly through its policy of controlled profitable growth no matter the economic backdrop. Its Canadian business is rapidly taking market share as competitors fall by the wayside. Michael Hill remains ahead of its competitors in embracing the opportunity/threat presented by online retailing.
Port of Tauranga is the natural gateway to and from international markets for many of New Zealand’s major businesses. It is in close proximity to many important exporters in the forestry, dairy, meat and fruit industries. Its investment in port facilities in Timaru and an inland port near Christchurch opens up the South Island hinterland for exports to be hubbed out of Tauranga.
Port of Tauranga continues to grow in importance as a leading shipping port in New Zealand for both exports and imports. It has many natural advantages, including excellent access for road and rail, large land holdings and, more recently, a deep harbour for bigger ships to call. It has an important strategic 10-year agreement with Kotahi which underwrites its investment in Primeport Timaru and its Metroport near Christchurch.
Restaurant Brands has exclusive franchise agreements for international fast-food brands in New Zealand including KFC, Pizza Hut, Starbucks and Carl’s Jr. More recently, it has begun an offshore expansion with the purchase of 42 KFC stores in New South Wales, and also 37 Taco Bell stores and 45 Pizza Hutt stores primarily in Hawaii. KFC is the predominant earner for the group, representing over 80% of operating earnings.
Restaurant Brands has a long history of achieving attractive returns on invested capital and has successfully delivered increasing same store sales and margins in its KFC division (including in Australia), while changes in strategy have improved profitability of Pizza Hut and Starbucks. Restaurant Brands is in the middle of a growth phase via its offshore expansion.
Ryman Healthcare was formed in 1984 to develop, construct and operate retirement villages in New Zealand. It now has 30 retirement villages around New Zealand and is in the early stages of replicating its model in Melbourne, having successfully opened its first village and is in the process of developing its second. Ryman is the largest owner and developer of retirement villages in New Zealand.
Ryman has stuck to its winning formula since inception. Industry dynamics are attractive, and Ryman continues to lift its build rate of units and beds to meet latent demand from an ageing population. Melbourne represents an area of considerable upside with a similar ageing demographic to that in New Zealand. It plans to have five retirement villages open in Melbourne by 2020, and plans to ultimately build at the same rate there as in New Zealand.
Summerset is an integrated retirement village builder, owner and operator. The company has over 20 retirement villages around New Zealand and is the second largest developer and the third largest owner of retirement villages in New Zealand.
Summerset successfully operates a continuum of care model with aged care integrated into its villages. Summerset has consistently lifted its build rate of new units and beds, whilst expanding its development margin. This indicates that it is executing its business model well, and has a large land bank to continue the roll-out of its sought-after villages.
The a2 Milk Company sells ‘a2’-branded fresh milk and infant milk formula internationally. As the name suggests, its products contain only A2 beta-casein protein, on the basis that it is more comfortably digested than normal milk (which contains a mix of both A1 and A2 proteins). In recent years, it has grown sales and market share rapidly in Australia and China and is currently also focused on its growing businesses in the US and UK.
The a2 Milk Company has a small but fast growing share of the very lucrative Chinese infant formula market. Management have capably executed on its growth plans to date and we expect its market share to continue growing across a range of distribution channels. In addition, there is potential for further upside from new products and geographies.
Trade Me is a leading online business with market leading positions across a broad range of categories. It has become New Zealand’s leading general retail trading and auction internet platform, and has leveraged its brand into market leading ‘vertical’ positions in motors, property and jobs.
Trade Me is asset-light, with modest working capital and capital expenditure requirements. Consequently, there is a high conversion of profits into free cash flow. Although it has many competitors, its ‘moat’ is a combination of its market position, brand, infrastructure platform, diverse revenue streams and service culture. It has started to see decent earnings momentum after investing in the business for three years.
Vista Group is an innovative and profitable IT company providing sophisticated software to cinema exhibitors. It has a 38% worldwide market share with clients in over 80 countries. Its integrated software systems allow cinema exhibitors to run wide-ranging functions such as ticketing, food and beverage sales and re-ordering, staff and film scheduling, loyalty schemes, digital signage as well as external customer interfaces like websites, mobile apps and call centres.
We are attracted to Vista’s profitable core business of providing sophisticated software to cinema operators of all sizes. We believe that this business has many years of growth ahead of it, particularly in undeveloped countries. Additionally, it has developed adjacent data analytics businesses which have exciting growth prospects albeit that these are fledgling businesses at this stage.
Xero is the market leading provider of cloud based accounting software for small-to-medium businesses and their accountants in NZ, Australia and the UK, with growing presences in the USA and other markets such as South East Asia and Africa.
Xero’s software is consistently rated as best in class and it continues to pioneer innovative new functionality to attract and retain customers. As a result, Xero has a significant share of the cloud based accounting software market and is growing subscriber numbers rapidly. The size of the ultimate opportunity for Xero is significant and there are many years of material growth ahead given the industry is only in the early stages of migration to the cloud. Xero is now on the cusp of profitability and its business model means revenue growth will translate strongly into earnings growth in the future. Xero’s 1.2 million small and medium size business customers globally has been difficult and expensive to acquire but the flip side is the customer base represents a significant sustainable competitive advantage.