Eco Investor April 2015

Core Securities

Environmental Investments Pay, Says August Investments

February 2015 was one of the best months ever for the increase in shareholder value for August Investments. Managing director Damien Lynch said "Our share valuation was up 5.8 per cent for the month. So far this financial year, our share valuation (adjusted for the dividend in December) is up 15.3 per cent."

The 5.8 per cent increase exceeds the 5.3 per cent increase in the All Ordinaries Index for February – and August has only 70 per cent of its portfolio in listed equities, he said.

"Who says green investments don't pay?" he asks.

Some of the half year results for August's larger investments were, in order of size in the portfolio:

Investment Increase in Profit* Increase in Dividends
Capilano Honey 73% 33%
Tassal Group 41% 22%
Mighty River Power 15% 8%
Blackmores 51% 54%
Beacon Lighting 35% 41%

(*Net Profit after Tax per share compared to December 2013. Some profit figures have been adjusted to exclude abnormal items.)

August has made an initial investment in Ingenia Communities Group which owns, operates and develops a growing portfolio of affordable holiday and seniors communities. Mr Lynch said "They have 58 sites with over 4,700 accommodation units. While most estates are for the ‘budget conscious', they also have eight ‘quality' estates. Different levels of accommodation are provided as Active Lifestyle Estates, Garden Villages and Settlers Lifestyle communities. They also manufacture mobile homes. We see Ingenia as providing a valuable social service. There is a strong need for reasonably priced holiday and retiree accommodation and Ingenia is providing this service on an ongoing basis where many other such estates are being closed."

"The Group is emerging from a major restructure and is not quite the usual high value investment we seek. But we believe they are moving in that direction and the service they provide is not only worth supporting but is in growing demand. We see this as a long term investment opportunity."

Mr Lynch said that August will be selling down its stake in Qube Holdings. "The financials are not impressive. For the current calendar year earnings yield is 3.6 per cent (to put that in context, you can get that from a term deposit); dividend yield is 1.9 per cent (fully franked of course, combined with the credits that would be a yield of 2.7 per cent) and cashflow yield of 7.1 per cent. Return on Equity is 8.2 per cent." The balance sheet is OK, as is the growth in profit figures, which is moderate.

In themselves, the above would make it a hold, but the share price recently hit an all time high of $3.05, and although it has retreated back to $2.85 it is looking very weak. Mr Lynch says further falls back to $2.55 are on the cards if the market generally turns around.

A bigger long term concern is that Qube's logistics business is mainly bulk and a large part of that is minerals, including coal and iron ore. "There has been much in the press lately about coal and even iron ore mines closing, yet having to continue to pay for cartage of coal etc not being mined because the cancellation fee is even greater than the ongoing costs. Arrium is one example. Qube is one of the beneficiaries of this largess - being paid but not providing the service. This situation is just starting, but it is adding to current profits. However, this happy circumstance will end in one or two years time when the contracts run out or it becomes cheaper for the miners to close out the contracts."

"Qube does have other businesses (general rail and port freight), but the cream is the mining contracts. I can't see their profit increasing for some time, and it may fall. Given the current mediocre financials, and the chance of share price falls, I see them as a sell. No point in being stuck in at lower prices," he says.

Mr Lynch said he once had high hopes for Ceramic Fuel Cells and its ground breaking technology for converting natural gas to electricity and heat using a chemical process rather than burning the gas. Although the company achieved high energy conversion rates and economies, it was unable to generate enough sales to remain viable.

August sold down most of its holding before the company's recent voluntary administration. A small number of shares from the capital raising last year remain and their write off will have no material impact on August's share valuation.





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