Marlin Global Limited — Net Asset Value 2018

Apr 19, 2018

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Monthly Update April 2018

MLN NAV SHARE PRICE DISCOUNT $0.98 $0.84 14.1[%] as at 31 March 2018

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A word from the Manager

March was another volatile month for equity markets, with President Trump’s tariff proposals sparking fears of a trade war and doubts surfacing regarding the sustainability of the technology sector rally. During March the US S&P 500 Index and European Stoxx 600 Index fell 2.7% and 2.3% respectively.

We are watching US tariff developments closely, and while Trump’s proposed tariffs on steel, aluminium and a $50bn list of Chinese imports is still relatively small scale, any material escalation would be concerning. No one will benefit from a global trade war and an escalation would be destabilising for equity markets. We hope that Trump’s tariff agenda is simply posturing by a businessman seeking to achieve better terms with trading partners, rather than a longer term ideological shift.

The Marlin portfolio was flat in March, outperforming our global benchmark which fell 1.1%. While our exposure to technology companies like Alphabet dragged on performance during the month, some strong financial results and developments elsewhere in the portfolio (e.g. Adidas, Descartes and William Demant) helped offset the impact of our technology holdings. Our more defensive healthcare holdings also provided support.

For the three months to 31 March 2018, the Marlin portfolio was up 5.2%, 7.0% ahead of our global benchmark which was down 1.8% over the period.

Portfolio Company Developments

Adidas gained 8% in March after reporting financial results for 2017 that showed strong growth in China, the US and its ecommerce channel. On top of strong revenue growth, less discounting and good cost control drove significant margin expansion during the year. For the 2017 fiscal year revenue grew 15% and operating profit jumped 31%. We believe Adidas is well positioned to benefit from ongoing structural trends including healthier lifestyles, the casualisation of the workplace, and a growing middle class in emerging markets. We also believe Adidas has the potential to continue taking market share in the US, where its market share is still below 15%. CEO, Kasper Rorsted, has a reputation for cost discipline and we believe Adidas will further reduce operating costs by streamlining support services, automation and leveraging marketing expense.

Healthcare IT provider, Cerner, was down 10% in March due to concerns surrounding the signing of an estimated $10bn contract with the US Department of Veterans Affairs. While there had been some challenges finalising the contract prior to March, this was compounded as President Trump announced the departure of the Veterans Affairs secretary David Shulkin (via Twitter of course). Our expectation is that this contract will still go ahead, but that signing will be further delayed until the new secretary is in place. Longer term we see technology playing a critical role in the modernisation of the US healthcare system and management of escalating healthcare costs. As the leading healthcare IT company, we believe Cerner has a key role to play in this shift and should continue to take a larger share in the $100bn global healthcare IT market.

GST Update

Fisher Funds has historically charged Marlin GST at the standard GST rate on the provision of investment services. Last year the IRD confirmed that the lower GST fund manager rate could be charged to Marlin (and this rate has been applied since 1 August 2017). On 28 March 2018, Fisher Funds received confirmation from the IRD that they would receive a refund for overcharged GST of $1.7m plus use of money interest of $0.1m on the provision of investment services to Marlin for the eight year period from 1 August 2009 to 31 July 2017. On receipt in early April, Fisher Funds passed the refund and use of money interest to Marlin. The refund and use of money interest receivable from Fisher Funds has been recognised in the Marlin NAV from 28 March 2018 onwards.

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Other noteworthy news included eyewear and optical lens manufacturer Essilor receiving approval from US and European regulatory authorities for its proposed merger with Luxottica, which will create the world’s largest eyewear company. Subject to approval from Chinese authorities, we expect the merger to close later this year and believe there are significant synergies to be extracted from the combined business.

The threat of regulation weighed over the technology sector in March, on the back of news stories regarding a Facebook data breach and President Trump’s tweets accusing Amazon of not paying its share of taxes and hurting small businesses. While we don’t currently own Facebook in the portfolio, any regulation that impacts the use of user data by technology companies could have implications for our portfolio company Alphabet (Google’s parent company). Alphabet fell 6% in March and was the biggest detractor from portfolio returns.

Key Details as at 31 March 2018

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FUND TYPE Listed Investment Company
INVESTS IN Growing international companies
LISTING DATE 1 November 2007
FINANCIAL YEAR END 30 June
TYPICAL PORTFOLIO SIZE 25-35 stocks
INVESTMENT CRITERIA Long-term growth
PERFORMANCE Long-term growth of capital and
OBJECTIVE dividends
TAX STATUS Portfolio Investment Entity (PIE)
Fisher Funds Management
MANAGER
Limited
1.25% of gross asset value
(reduced by 0.10% for every 1% of
MANAGEMENT
FEE RATE underperformance relative to the
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 + 5%
15% of returns in excess of
PERFORMANCE FEE
benchmark and high water mark
HIGH WATER MARK $0.83
SHARES ON ISSUE 119m
MARKET CAPITALISATION $100m
None (maximum permitted 20%
GEARING
of gross asset value)
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Portfolio Changes

The only material change to the portfolio in March was the exit of hearing aid manufacturer William Demant. The company has delivered strong results since we initiated the position in March last year, with its new Oticon Opn range of hearing aids driving market share gains and better than expected organic growth (10% organic revenue growth and a 20% net income growth in 2017). With its share price up 55% since we added it to the portfolio, William Demant is now trading at an elevated valuation and we decided to exit our position and reinvest the proceeds in other opportunities.

We used the market weakness in March to add to our holdings in LKQ Corp and Cerner.

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Ashley Gardyne Senior Portfolio Manager Fisher Funds Management Ltd

Sector Split

as at 31 March 2018

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ENERGY
FINANCIALS
2 [%]
9 [%]
TECHNOLOGY
INDUSTRIALS 28 [%]
9 [%]
HEALTHCARE CONSUMER
24 [%] 26 [%]
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The Marlin portfolio also holds cash.

Geographical Split

as at 31 March 2018

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ASIA
WEST EUROPE
4 [%]
20 [%]
NORTH AMERICA
75 [%]
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March’s Biggest Movers in local currency terms

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

DESCARTES SYSTEMS ADIDAS WILLIAM DEMANT EBAY CERNER CORPORATION +8[%] +8[%] +7[%] -6[%] -10[%]

as at 31 March 2018 5 Largest Portfolio Positions

ALPHABET PAYPAL MASTERCARD LKQ ESSILOR 7[%] 5[%] 5[%] 5[%] 5[%]

The remaining portfolio is made up of another 20 stocks and cash.

Total Shareholder Return to 31 March 2018

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Share Price Total Shareholder Return
$1.80
$1.60
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
Nov Nov Nov Nov Nov Nov Nov Nov Nov Nov Nov
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Share Price/Total Shareholder Return
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Performance to 31 March 2018

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1 Month 3 Months 1 Year 3 Years Since Inception
(annualised) (annualised)
Corporate Performance
Total Shareholder Return (0.0%) +1.2% +18.1% +9.9% +5.7%
Adjusted NAV Return +0.9% +5.1% +22.1% +10.3% +6.5%
Manager Performance
Gross Performance Return (0.0%) +5.2% +26.4% +14.3% +10.2%
Benchmark Index^ (1.1%) (1.8%) +12.6% +12.5% +7.5%
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^Benchmark index: World Small Cap Gross Index until 30 September 2015 & S&P Large Mid Cap/S&P Small Cap Index (50% hedged to NZD) from 1 October 2015

Non-GAAP Financial Information

Marlin 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 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 Marlin Non-GAAP Financial Information Policy. A copy of the policy is available at http://marlin.co.nz/about-marlin/marlin-policies/

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About Marlin Global

Management

Board

Marlin 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 25 and 35 quality growing international companies (excluding New Zealand and Australia) through a single, professionally managed investment. The aim of Marlin is to offer investors competitive returns through capital growth and dividends.

Marlin’s portfolio is managed by Fisher Funds Management Limited. Ashley Gardyne (Senior Portfolio Manager), Chris Waters and Harry Smith (Senior Investment Analysts) have prime responsibility for managing the Marlin portfolio. Together they have significant combined experience and are very capable of researching and investing in the quality global companies that Marlin 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 Marlin 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 August 2010

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

• » Dividends paid by Marlin 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

• » Marlin 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

• » Marlin has a buyback programme in place allowing it (if it elects to do so) to acquire up to 5.9m of its shares on market in the year to 31 October 2018

• » 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

Warrants

• » On 16 April 2018, a new issue of warrants (MLNWC) was announced

• » Marlin shareholders will be allotted one warrant for every four shares held at record date (1 May 2018)

• » Each warrant gives shareholders the right, but not the obligation, to subscribe for one ordinary share in Marlin on the exercise date (12 April 2019)

• » The exercise price will be $0.83 less any dividends declared during the period up to the exercise date

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 Marlin Global 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 Marlin Global 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.

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Marlin Global Limited Private Bag 93502, Takapuna, Auckland 0740 Phone: +64 9 484 0365 | Fax: +64 9 489 7139 Email: enquire@marlin.co.nz | www.marlin.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

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