AIK research report March 2015 No 2

GORDON CAPITAL PTY LTD Lvl 9, 440 Collins St, Melbourne, Vic, 3000  Ph: (03) 9607 1371  www.gordoncapital.com.au
ARMIDALE INVESTMENT CORPORATION LIMITED (AIK)
Rights issue and placement
DIRECTORS
KEY POINTS
Bruce Hatchman, Chairman
Andrew Grant, Executive Director
Mark Smith, Non-Executive Director
Steve White, Non-Executive Director
MARKET DATA
ASX Code:
Current Price
52 week Share Price Range:
Market Capitalisation:
CAPITAL STRUCTURE
Shares on Issue (listed):
260.1 million
FINANCIAL SUMMARY
Y/E June
AIK
$0.105
$0.07 - $0.12
$27.3 million
2013(A)
2014(A)
Net Profit ($m)
11.1
3.7
EPS (c)
NTA (c)
6.4
14.2
1.7
14.3
1.8
0.8
6.8
0.8
PER (x)
P/NTA (x)
SHAREHOLDERS
GEGM Investments
Citicorp Nominees
One Managed Investment Funds
SENIOR ANALYST
Michael Gordon
(03) 9607 1371
March 2015
Gordon Capital Pty Ltd
33.1%
17.1%
5.0%

1:2 Rights Issue to raise $11.7 million.

Any shortfall will be placed with other investors

In the short term, funds will be used to boost HAL’s
financing capability but may be utilised to fund an
acquisition, in due course.
INVESTMENT PROPOSITION
Armidale Investment Corporation has a relatively small
portfolio of interests and may be characterised as operating
more as a holding company and private equity investor
rather than as a traditional fund manager. Its interests cover
some diverse business activities including lease finance,
telecoms sales channels and retail, which provide sound
opportunities for growth and income generation.
As Armidale is an investment company, its primary valuation
metric is NTA which is currently 36% above its current share
price. Further, a recently published independent experts
report concluded that the NTA was at the lower end of its
valuation.
Armidale’s share price has consistently traded at a
substantial discount to NTA due to poor visibility of the
underlying investments and a lack of transparency regarding
their performance and business profiles. This is now
changing as management provides greater insight into the
operations of its various investments, engages with the
investment community and drives growth through its leasing
operations and seeks new investment opportunities.
Accordingly, a higher profile and greater visibility should be a
catalyst for a marked narrowing in the gap in the share price
discount to a growing NTA.
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Event
Armidale Investment Corporation has announced a pro rata 1 for 2 non-renounceable rights offer of new fully
paid ordinary shares in the Company, at $0.09 per New Share raising approximately $11.7 million in new capital
before the costs.
It is the Company’s intention to conduct a subsequent placement to sophisticated investors for any New Shares
not taken up by existing shareholders of AIK under the Rights Issue.
The proceeds of this Rights Issue will be used for the purposes of funding of leases under Hal Data Services (Hal),
development of further funding avenues (including its costs of establishment) and other investment acquisition
opportunities. Funds raised will also be used to cover the costs of the Issue and to provide working capital. If
acquisitions do not occur in a timely manner, proceeds from the offer can be used to increase the quantum of
leases funded by Hal. These additional leases can then be “on sold” to other funders should cash need to be
realised for a subsequent acquisition.
Analysis and Comment
After having spent some three years restructuring the company’s core investments, Hal Data Services and Leading
Edge Group (Riverwise), and rebuilding value, Armidale is now in growth mode. The company’s capital base will
increase by about 31% following this raising and significant resources will be available to expand its investment
portfolio.
As Armidale recently reported that HAL’s lease book is growing rapidly, with a three-fold increase in new lease
origination in the December 2014 half year compared with the same period in the prior year, and additional
funding will support sustained growth. However, we expect that the new capital will be used to fund a further
acquisition(s). Whilst further boosting its investment in HAL will be profitable and generate interest income and
contribute to valuation growth, it will also increase the dominance of HAL in its investment portfolio (about 70%
of the value of Armidale’s investments is attributable to HAL). Moreover, with HAL having secured a range of
external sources of finance, it is no longer dependent on Armidale to sustain its operations or for growth.
Accordingly, an acquisition would broaden Armidale’s investment portfolio and diversify risk.
In December 2014, Armidale made a small $200K investment in The Reading Room Inc, an online social forum and
ecommerce site. Although the investment is quiet small, it nonetheless tapped into management’s skill sets in
retailing and strongly suggests that other acquisitions will similarly be, at least partially, driven by management’s
operational experience and the potential to add value at an operational level. Management has demonstrated
experience in finance, technology and communications and retailing and these would seem to be the most logical
areas where investments may be sought.
Armidale is better characterised as a holding company with a private equity leaning rather than as a traditional
portfolio investor. Over the past three years, it has been an active investor having taking management control of
its two core investments to drive a turnaround in operational performance. Whilst we don’t believe it is looking
for investments where it can gain management control, or where restructuring is required, we think it likely that
future investments will be strategic and where it can influence and mentor to drive growth.
Armidale typically undertakes an independent valuation once a year and the next is due before the end of June
2015. At this time a valuation gain is anticipated reflecting the substantial growth in the HAL lease book and an
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increased holding in RIverwise. The current rights issue will have some short term impact on NTA per share, due
to the discounted issue price, but this should be more than made up over the medium term as the new capital is
invested.
BUSINESS OVERVIEW
Armidale Investment Corporation is a listed investment company and has significant interests in the finance,
telecoms, and retail industries through direct investment in two companies. Its primary investments are equity
and loans to Hal Data Services (98% owned) and Riverwise (32% owned). ). Its strategy is to maximise returns
through passive, strategic and active management and by providing funding support for their respective growth
strategies and in this regard it also provides management services to both companies.
Hal Data Services was established in 1993 and provides equipment lease finance to small and large businesses,
corporations and governments. There are over, 4,000 lease agreements in place with a lease book currently at
about $50 million (original equipment cost). The business ran into difficulties in the post GFC environment and
struggled to secure funding but after several years of winding down the portfolio and restructuring its debt, HAL is
once again growing its lease book and is expanding its origination activities.
HAL has a number of funding sources including several banks, and generates cash flow from the sale of
receivables, lease rentals and sale of equipment at the end of the lease. Almost all leases typically extend beyond
the initial term and most of the company’s profit is generated from these additional rentals and the final sale of
the equipment.
Whilst, Armidale owns 98% of HAL, it is entitled to approximately 95% of its cash available for distribution (surplus
operating cash flow) as a result of the 2009 restructuring of the investment in equity, loans and debentures in
HAL. This restructuring pre-dates the current management team at what is now Armidale.
The underlying performance of HAL is unclear in the Armidale accounts as a variety of cash flow streams are
generated as a consequence of this legacy structure. Nonetheless, the underlying value of HAL is essentially the
embedded profit (primarily the excess equipment rents plus profit on the sale of the equipment) in the lease
book; and this lease book is now growing.
Riverwise’s sole investment is a 100% interest in Leading Edge Group (LEG), which operates business to business
sales channels for Telstra (Australia), Spark – formerly Telecom NZ and BT (UK) as well as a leading retail buying
group supporting about 1,000 independent retailers in numerous market segments. Annual revenue is
approaching $300 million and comprises sales commissions, services and membership fees, and supplier rebates
as well as sales of goods. FY 2014 EBITDA was $5.5 million
The telecoms businesses primarily sell hardware, services and increasingly data to small and medium sized
businesses in their respective markets. The company operates in specific regions in Australia (Melbourne and
Sydney) and the UK (3 regions in the south west). In New Zealand, Spark has outsourced to LEG all sales to
medium sized businesses (30-50 seats).LEG also owns and runs 7 Spark retail stores and operates 7 Spark Hubs for
SME business sales (30 seats and below).
Leading Edge is one of Australia’s largest retail buying groups. Key market segments are jewellery, electronics,
telecoms, appliances, music, video and books. It is especially well represented in regional and rural towns which
have generally been less threatened by the impact of online retailing. The Leading Edge model enables small
retailers to enjoy the advantages of a group buying whilst maintaining high levels of independence. Leading Edge
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operates a central buying office in Sydney and purchases inventory on its own account but all purchases are
shipped directly to the retailer. Under a service agreement with Riverwise, the CEO and CFO of Armidale jointly
manage Leading Edge for which Armidale is paid both a management fee and a profit based incentive fee. The
incentive fee is paid in shares in Riverwise.
BUSINESS DRIVERS AND GROWTH PROFILE
The underlying performance and growth profiles HAL (lease finance) and Leading Edge Group (business to
business telecoms and retail) are the key drivers of Armidale’s valuation. A rapid expansion of the HAL loan book,
off a relatively small base, will be the main driver of short to medium term growth. Most of the other business
units are relatively mature, with pockets of solid growth, such as telecoms data and services. Strategic bolt on
acquisitions and market expansion opportunities could emerge, which may also accelerate growth.
HAL provides equipment lease finance to small and medium sized businesses, corporations and governments with
a value proposition based on flexibility and tailored solutions and the preparedness to finance a wide spectrum of
assets. Access to funding is the principal constraint on growth. Since the GFC, funding has been difficult to secure
but over the past two years, the company has secured new sources of finance, which together with additional
capital provided by Armidale, has markedly increased HAL’s funding capacity. Loans are typically written with a
three year life and funding is matched against those loans.
Loan origination is driven by a number of BDM’s in Sydney and Melbourne and distribution is through brokers and
agents. Loan origination doubled in FY 2014 to $14 million and is on track to double again in FY 2015.
Whilst demand for finance generally matches the economic cycle, a very small market share coupled with a
relatively high exposure to small and medium sized businesses and a benign economic environment are
favourable factors in terms of HAL’s short to medium term growth objectives.
Leading Edge operates business to business sales channels for telecoms in Australia (Telstra), New Zealand (Spark
- formerly Telecom NZ) and the UK (BT). Whilst each of the telecoms have outsourced these sales channels they
tightly control their operating parameters. New Zealand is the largest business unit followed by Australia.
In Australia, Leading Edge operates Telstra’s largest Business Centre, in Melbourne’s eastern suburbs and another
relatively small office in Sydney. These offices sell products and services only to companies listed on databases
provides by Telstra. In the UK, the company operates 3 regions in the south west, with the largest centred on
Bristol.
Leading Edge is one of Australia’s largest retail buying groups with over 1,000 independent retail members across
a wide variety of segments The large number of market segments serviced by Leading Edge as well as the
relatively high exposure to regional and rural areas provides a degree of protection against some of the trends
that have disrupted retailing in metropolitan markets. For example, the books, music and video markets are in
long term decline due to the impact of the internet and online retailing. Whilst these trends are evident in
regional and rural Australia they are generally occurring at a slower pace. Further, in some sectors such as
appliances and computers, relative stability is also provided by the absence of or limited large scale competition
(such as Harvey Norman), whilst other market segments such as jewellery are relatively stable and highly
fragmented. Accordingly, although there is wide variation in trends and performance between the various market
segments, they tend to balance out and the overall performance is relatively stable.
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GENERAL ADVICE WARNING: The information contained in this Report is only of a general nature and does not
constitute personal financial product advice. In preparing the advice no account was taken of the objectives,
financial situation or needs of any particular person. Therefore, before acting on the advice readers should
consider the appropriateness of the advice with regard to their particular objectives, financial situation and
needs. Readers should obtain and consider any relevant Product Disclosure Statements before making any
decisions about the subject matter of this Report and should seek independent professional advice.
DISCLAIMER: Although every attempt has been made to verify the accuracy of information contained in this
Report, Gordon Capital Pty Ltd (Gordon Capital) and Pearce Callahan & Associates Pty Ltd (Pearce) make no
warranties about the accuracy or completeness of any advice or information. The officers, agents, related
affiliates, related body corporate and employees of Gordon Capital and Pearce accept no liability for any loss or
damage whatsoever arising from any investment decisions or use of the information or advice in this Report. All
information and advice contained in the Report are subject to change without notice.
All investment decisions are subject to risks. Past performance should not be taken as an indication of future
performance. Any ‘forward looking statements’ contained in this Report are based on current expectations about
future events. Words such as “anticipate”, “believe”, “expect”, “project”, “forecast”, “estimate”, “likely”,
“intend”, “should”, “could”, “may”, “target”, “plan” may identify forward looking statements. Such forward
looking statements are based on views held at the date of publication of this Report and are not guarantees as to
future events. Forward looking statements are subject to risks, uncertainties and other factors beyond the control
of Gordon or Pearce. Therefore, actual results may differ from those referred to in such statements.
DISCLOSURE: This publication has been prepared by Gordon Capital Pty Ltd, AFS Authorised Representative ASIC
No. 338899, as Authorised Representative of Pearce Callahan & Associates, ABN 90 053 868 410, Australian
Financial Services Licence No. 288877. The registered office of Pearce Callahan & Associates Pty Ltd is Level 1, 2
Main St, Greensborough, VIC 3088.
Please note that Gordon Capital has been retained by ARMIDALE INVESTMENT CORPORATIONLIMITED to
provide this report for a fixed fee. Gordon Capital does not provide specific investment recommendations and
does not receive any additional benefit for the provision of this report. Gordon Capital aims to provide a balanced
and objective analysis in this report.
MICHAEL GORDON the analyst responsible for this report does not receive any indirect benefits or assistance
from ARMIDALE INVESTMENT CORPORATION LIMITED. Our remuneration is not linked to the views expressed in
this report.
Please see our Analyst Qualifications and Financial Services Guide, available at www.gordoncapital.com.au or by
calling 03 9607 1371 for further information.
Gordon Capital Pty Ltd
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