Manager’s Quarterly Commentary – David Barr – Q3 2014 – Pender Small Cap Opportunities Fund

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Fellow Unitholders,

Canadian and US markets were relatively flat during the quarter and the Fund performed similarly. It was down 0.29%1 while the benchmark was down 0.59%2. Volatility creates opportunity for those who are actively looking for value, and as such we are excited by the present conditions.

1 Refers to Class A units of the Fund.
2 S&P/TSX Capped Composite Total Return Index

Déjà vu – TIO Networks all over again?

We believe that the evolutionary stage of Northstar Healthcare, now called Nobilis Health Corp (NHC), looks very similar to TIO Networks (TNC) 12 months ago.

Over the past 18 months, there were several key developments at TIO, including an accretive acquisition, a major customer win and the turnaround of a significant customer that was in decline. These developments have set the company up to increase revenue growth and cash flow, making it a more attractive opportunity for investors. Similarly, Nobilis has announced several key developments over the past 12 months that we believe sets up the company for increased revenue growth and cash flow, characteristics we believe will attract new investors into the opportunity. These key developments include:

  1. Purchase of a Scottsdale outpatient surgery centre out of bankruptcy in December 2013.
  2. Closing of an acquisition of a Texas hospital group in September 2014. The hospital has the potential to drive US$40 million in annual revenue for the company – 50% more than the entire corporate revenue of 2013 (US$31 million) and nearly double its 2012 revenue (US$21 million).
  3. Acquisition of Athas Healthcare. May add potentially US$60 million to the company’s top line and should really signal to the market that this company has serious growth potential.

TNC’s share price was hovering around $0.30 prior to its first acquisition. As the market gained a better understanding of the financial impact of key developments at the company, the share price increased to $1.00. NHC started its pre-momentum journey around $0.90 and, while its December announcement saw some activity, it has settled back to around $2.50 and we believe that it still trades at a substantial discount to intrinsic value.

In both cases, the market judges these companies on past performance and not on new facts about the business. This is one of the big opportunities in the small cap world. You can gain an analytical edge by understanding the impact of key developments on a business ahead of the reported financial results.

Portfolio Updates

We added three new positions in the quarter, one of which that was acquired via a takeout. Four positions were exited in the quarter, including the aforementioned takeout. In addition to our initiations and deletions from the portfolio, the fund actively increased weightings in 3 names and saw no decreases. US exposure decreased to 12.04% from 13.80% in June of 2014. Cash remains significant at 11.01% of the portfolio. Nobilis Health Corp and Sierra Wireless (which we sold) were major contributors to the fund.

David Barr

December 1, 2014

 1 Source: CapitalIQ