Kingfish Limited — Interim / Quarterly Report 2018

Oct 15, 2017

Monthly Update October 2017

A word from the Manager – Quality Pays

Fisher Funds’ Chief Investment Officer, Frank Jasper explains what ‘quality’ means when looking to invest.

We talk a lot about “quality” when we consider potential investments for the Kingfish portfolio. The idea of quality is central to the STEEPP investment process which is the lens we use whenever we look at a company.

One of the most important measures of a company’s quality are the returns that it is able to generate on each dollar that it invests on behalf of shareholders. This is common sense. If a company can earn a 15% return on every dollar invested versus another company that only earns 5%, it is pretty obvious that the company generating the 15% return is a higher quality company.

While this may be obvious, it understates just how important high returns on invested capital are to creating future value for shareholders.

Let’s imagine two companies. Both of our mythical companies earn $100 profit this year. Typically a company would pay some of these profits out as dividends and retain some of these profits to fuel future growth.

For our example let’s assume that half of all profits are paid out. Let’s go one step further and assume one of our companies, Company 1, is high quality and generates a 15% return on every dollar invested. The other company, Company 2, is a lower quality company which has a 5% return on invested capital.

As Warren Buffett says “time is the friend of the wonderful company and the enemy of the mediocre.” The idea is aptly demonstrated by our two mythical companies. Company 1 generates strong returns on every dollar of capital it retains. These higher returns mean more profits over time. Company 1 is able to grow future profits rapidly. Company 2, the poorer quality company, grows future profits at a much slower clip.

The difference is stark. In our example, using our assumption of a consistent rate of return on invested capital and a 50% dividend pay out, the profits of Company 1 more than double over the next ten years. Comparatively, profits for the lower quality Company 2, rise only 28% over the same time.

==> picture [248 x 175] intentionally omitted <==

----- Start of picture text -----

Quality pays — Profits over time
220
Company 1 — High Quality
200
180
160
140
Company 2 — Lower Quality
120
100
0 1 2 3 4 5 6 7 8 9 10
Source: Fisher Funds
Profil ($)
----- End of picture text -----

It’s pretty clear which of these two companies you would want to own. Quality really does pay off in the long run and it’s these quality companies that we seek to own.

Speaking of quality, during the quarter we introduced Xero into the Kingfish portfolio. Xero is a great example of a quality company with a number of positive attributes. It is the market leading provider of cloud based accounting software for small-to-medium businesses and their accountants in New Zealand, Australia and the UK, with growing presences in the USA and other markets such as South East Asia, Europe and Africa. It has also achieved impressive subscriber growth to date and we believe that Xero will continue to be the innovator of the industry. We have been reluctant to own Xero historically due to the lack of bottom line profitability however we estimate that the Australian/New Zealand businesses were profitable in the 2017 financial year and that Xero is on track to achieve higher group earnings this year and in the future. We are pleased to have Xero in the Kingfish portfolio.

Frank Jasper Chief Investment Officer, Fisher Funds

1

as at 30 September 2017

Key Details

Sector Split

as at 30 September 2017

==> picture [550 x 396] intentionally omitted <==

----- Start of picture text -----

FUND TYPE Listed Investment Company CONSUMER
STAPLES
INVESTS IN Growing New Zealand companies
LISTING DATE 31 March 2004 INFORMATION
TECHNOLOGY 3 [%]
FINANCIAL YEAR END 31 March
ENERGY
TYPICAL PORTFOLIO SIZE 15-25 stocks
6 [%]
INVESTMENT CRITERIA Long-term growth 2 [%]
PERFORMANCE Long-term growth of capital and UTILITIES
OBJECTIVE dividends
TAX STATUS Portfolio Investment Entity (PIE) 11 [%]
Fisher Funds Management
MANAGER
Limited
INDUSTRIALS
1.25% of gross asset value
(reduced by 0.10% for every 1% of
MANAGEMENT
FEE RATE underperformance relative to the 29 [%]
change in the NZ 90 Day Bank Bill
Index with a floor of 0.75%)
PERFORMANCE Changes in the NZ 90 Day Bank
FEE HURDLE Bill Index + 7%
15% of returns in excess of
PERFORMANCE FEE benchmark and high water mark CONSUMER
DISCRETIONARY
HIGH WATER MARK $1.30
HEALTHCARE
SHARES ON ISSUE 189m
14 [%]
MARKET CAPITALISATION $242m
29 [%]
None (maximum permitted 20%
GEARING
of gross asset value)
----- End of picture text -----

The Kingfish portfolio also holds cash.

Performance

to 30 September 2017

==> picture [541 x 142] intentionally omitted <==

----- Start of picture text -----

1 Month 3 Months 1 Year 3 Years 5 Years
(accumulated) (accumulated)
Corporate Performance
Total Shareholder Return +1.5% +1.5% +3.5% +29.6% +91.0%
KFL Adjusted NAV +1.3% +4.0% +6.7% +40.2% +90.8%
Manager Performance
Gross Performance +1.6% +4.6% +9.0% +50.6% +121.7%
S&P/NZX50G Index +1.4% +4.2% +7.7% +50.9% +106.8%
----- End of picture text -----

Non-GAAP Financial Information

Kingfish uses non-GAAP measures, including adjusted net asset value, gross performance return and total shareholder return. The rationale for using such non-GAAP measures is as follows:

» adjusted net asset value – the underlying value of the investment portfolio adjusted for capital allocation decisions,

» gross performance return – the Manager’s portfolio performance in terms of stock selection and hedging of currency movements, and

» total shareholder return – the return to an investor who reinvests their dividends, and if in the money, exercises their warrants at warrant maturity date for additional shares. All references to including adjusted net asset value, gross performance return and total shareholder return in this monthly update are to such non-GAAP measures. The calculations applied to non-GAAP measures are described in the Kingfish Global Non-GAAP Financial Information Policy. A copy of the policy is available at http://kingfsh.co.nz/about-kingfsh/kingfsh-policies/

2

Total Shareholder Return

to 30 September 2017

==> picture [480 x 252] intentionally omitted <==

----- Start of picture text -----

Share Price Total Shareholder Return
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Share Price/Total Shareholder Return
----- End of picture text -----

September’s Biggest Movers

Typically the Kingfish portfolio will be invested 90% or more in equities.

VISTA GROUP FISHER & PAYKEL XERO RESTAURANT BRANDS MICHAEL HILL HEALTHCARE +9[%] +9[%] +7[%] +7[%] -7[%]

5 Largest Portfolio Positions as at 30 September 2017

MAINFREIGHT FISHER & PAYKEL FREIGHTWAYS INFRATIL RYMAN HEALTHCARE HEALTHCARE 13[%] 11[%] 9[%] 8[%] 7[%]

The remaining portfolio is made up of another 13 stocks and cash.

3

About Kingfish

Management

Board

Kingfish is an investment company listed on the New Zealand Stock Exchange. The company gives shareholders an opportunity to invest in a diversified portfolio of between 15 and 25 quality growing New Zealand companies through a single, professionally managed investment. The aim of Kingfish is to offer investors competitive returns through capital growth and dividends.

Kingfish’s portfolio is managed by Fisher Funds Management Limited. Sam Dickie (Senior Portfolio Manager), Zoie Regan (Senior Investment Analyst) and Matt Peek (Investment Analyst) have prime responsibility for managing the Kingfish portfolio. Together they have over 40 years combined experience and are very capable of researching and investing in the quality New Zealand companies that Kingfish targets. Fisher Funds is based in Takapuna, Auckland.

The Manager has authority delegated to it from the Board to invest according to the Management Agreement and other written policies. The Board of Kingfish comprises independent directors Alistair Ryan (Chair), Carol Campbell and Andy Coupe; and non-independent director Carmel Fisher.

Capital Management Strategies

Regular Dividends

• » Quarterly distribution policy introduced in June 2009

• » Under this policy, 2% of average NAV is targeted to be paid to shareholders quarterly

• » Dividends paid by Kingfish may include dividends received, interest income, investment gains and/or return of capital

• » Shareholders who prefer to have increased capital rather than a regular income stream have the opportunity to participate in the company’s dividend reinvestment plan (DRP)

• » Shares issued to DRP participants are at a 3% discount to market price

• » Kingfish became a portfolio investment entity on 1 October 2007. As a result, dividends paid to New Zealand tax resident shareholders have not been subject to further tax

Share Buyback Programme

• » Kingfish has a buyback programme in place allowing it (if it elects to do so) to acquire up to 7.7m of its shares on market in the year to 31 October 2017

• » Shares bought back by the company are held as treasury stock

• » Shares held as treasury stock are available to be re-issued for the dividend reinvestment plan and to pay performance fees

Warrants

• » Warrants put Kingfish in a better position to grow further, improve liquidity, operate efficiently and pursue other capital structure initiatives as appropriate

• » A warrant is the right, not the obligation, to purchase an ordinary share in Kingfish at a fixed price on a fixed date

• » There are currently no warrants on issue

Disclaimer: The information in this update has been prepared as at the date noted on the front page. The information has been prepared as a general summary of the matters covered only, and it is by necessity brief. The information and opinions are based upon sources which are believed to be reliable, but Kingfish Limited and its officers and directors make no representation as to its accuracy or completeness. The update is not intended to constitute professional or investment advice and should not be relied upon in making any investment decisions. Professional financial advice from an authorised financial adviser should be taken before making an investment. To the extent that the update contains data relating to the historical performance of Kingfish Limited or its portfolio companies, please note that fund performance can and will vary and that future results may have no correlation with results historically achieved.

==> picture [77 x 51] intentionally omitted <==

Kingfish Limited Private Bag 93502, Takapuna, Auckland 0740 Phone: +64 9 489 7094 | Fax: +64 9 489 7139 Email: enquire@kingfish.co.nz | www.kingfish.co.nz

Computershare Investor Services Limited Private Bag 92119, Auckland 1142 Phone: +64 9 488 8777 | Fax: +64 9 488 8787 Email: enquiry@computershare.co.nz | www.computershare.com/nz

4