NAC NTA Released for January - NAOS Asset Management

NAC Investment Report NTA Update January 2017

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The NAC Portfolio returned +0.35% for January, in what was a quiet month for the portfolio ahead
of reporting season. The gross exposure on the portfolio is currently sitting at around 105% and
the net exposure is around 80%. This is the highest level of exposure we have had for some time
now and is reflective of the number of opportunities we are seeing within our universe on both the
long and short side. Over the past 6 months there has been an increased level of volatility in
Australian listed mid-caps which has given us the opportunity to buy good businesses below what
we believe to be fair value.

During January we commenced a new position in Elders Limited (ASX: ELD). Elders has been in
existence for over 175 years and has built a strong brand in agribusiness, however in more recent
times had become the victim of poor management and poor capital allocation. This resulted in a
highly leveraged balance sheet, loss making businesses, and a complicated capital structure. In
2014 a new management team was implemented and a turnaround strategy put in place. The key
target of the new strategy was a minimum 20% return on capital, and any activity within the
business that was unable to meet that target would be exited. The turnaround strategy is now
coming to fruition with an FY16 return on capital for the business of 21.2%, up considerably from
the -10% achieved in FY13. However, the job isn’t done yet and we believe this is why Elders still
trades at such a considerable discount to its peers.

There are 3 catalysts we can see which will cause Elders to be re-rated by the market, the first
being an exit of their live export business which is up for sale currently. If successfully exited this
will see return on capital increase to 28.4% along with $17m in working capital freed up and
redeployed to higher returning activities. The second catalyst is a repurchase or a conversion of the
Elders hybrid notes (ASX: ELDPA). Elders currently owns 72% of these notes and it is our view
these will be dealt with one way or another within the next 12 months which will assist in cleaning
up the capital structure. The third catalyst will be a resumption in dividends which the company
flagged would happen during FY17. Elders currently trades on close to a 10x FY17 multiple with
peers trading between 14-16x earnings. If the final stages of the turnaround are executed, we
believe the share price could rise substantially from current levels.