19 May Why this fundie doesn’t mind a bruising fight to boost returns

Source: Financial Review

By: Gus McCubbing

Sandon Capital founder Gabriel Radzyminski is in the throes of hand-to-hand combat with the board of Southern Cross Austereo.

As an activist investor, Radzyminski has made a living by buying into companies that he believes can be improved using shareholder rights to influence the board – or get them replaced. It’s a strategy he likens to renovating the worst house on a good street. And while it doesn’t win him many friends, it can offer some lucrative returns.

“Our view is that boards will ultimately bend to the will of the shareholders,” Radzyminski told The Australian Financial Review. “We do try to engage privately as part of our process when we raise issues. But if we think we’re unable to convince a board, we take it to shareholders more widely.”

With his latest target, radio and television broadcaster Southern Cross – which owns FM stations including Triple M – Radzyminski believes the shares at 75¢ each are trading at a substantial discount to its potential, which will only be realised with a change to its board and management.

The activist investor fired off his first public shot on May 7, issuing a letter that pushed back on the broadcaster’s decision to resume paying dividends and the new executive incentive scheme, describing both as a “thinly veiled bid for short-term shareholder support”.

Two days later, Sandon issued a section 203D notice calling for the removal of Southern Cross chairman Heith Mackay-Cruise and three other directors, just weeks after it appeared on the register with a 5.05 per cent stake.

Southern Cross shot back on May 12 with an ASX statement that dismissed the campaign as “considerable distraction” and said the board had the backing of major shareholders. It also noted that since Sandon first bought shares in October 2024 at 51¢, the stock had climbed about 40 per cent.

“All we’re doing is exercising our rights as shareholders – nothing more.”

— Gabriel Radzyminski, Sandon Capital

Sandon escalated the campaign again on Friday when it applied to the Australian Takeovers Panel for permission for ARN Media to vote in its upcoming spill against the Southern Cross board.

The Sydney-based fund manager won’t comment on the brewing contest, so it’s unknown if Sandon and ARN are united in the bid to overturn the board, but it could come to a head either at Southern Cross’ annual general meeting later this year, or if an extraordinary general meeting is called, earlier.

“Unlike a private equity firm, we’re not looking for control, we’re looking for influence,” Radzyminski said, speaking more broadly. “We’re trying to build influence with shareholders to change things in a particular direction. All we’re doing is exercising our rights as shareholders – nothing more.”

Radzyminski has run 50 campaigns since Sandon was launched in 2008 and typically stays invested for at least three to five years – the fund is a buyer of businesses, not “renters of pieces of paper”, he says.

Despite having taken on Magellan and steelmaker Bluescope in the past, the firm mainly targets smaller companies where there is typically more mis-pricing and a better chance of making change because there are fewer shareholders to convince.

Investor presentations frequently include a line from Benjamin Graham’s famous book The Intelligent Investor, which calls for investors to show a more “energetic attitude” to management.

“Graham believed that shareholders took the greatest risk and therefore deserved the greatest return. That’s something we subscribe to too,” Radzyminski says.

The fund manager says he was drawn to activist investing to have greater control and influence over investments. (He also, incidentally, only targets companies with known problems and a devalued share price.)

“We’re trying to shape the direction in which our investments go as opposed to just buying them, crossing our fingers, and hoping things work out.”

The fund’s performance has had a resurgence this year amid the global shockwaves and volatility emanating from the White House. For the year to May, the fund returned a huge 30.7 per cent versus 9.8 per cent for the benchmark S&P/ASX 200 index.

Over three years, it’s a different story, with the fund up just 5.2 per cent against the market’s 7.2 per cent, hinting at a tougher 2022 as performance dipped. Over five years, it’s up 15.9 per versus 12.1 per cent.

Radzyminski blames the three-year performance on the brutal sell-off in small-cap stocks as central banks increased interest rates to tame rampant inflation. Another factor was womenswear retailer City Chic, which he quips is both his best and worst investment.

Sandon first invested in Specialty Fashion Group in January 2017, as it was known then, when the share price was 50¢ and backed the company’s May 2018 deal when it sold Millers, Katies, Autograph and Rivers businesses to Noni B for $31 million.

Radzyminski sold about half of Sandon’s City Chic stake just before its September 2021 peak of $5.51, but held the rest of the shares as they nosedived to $1.24 in 12 months. They last traded at just 8.8¢.

Among his best investments over the past year have been timely bets on ASX-listed small cap modular building manufacturer Fleetwood Australia, along with COG Financial Services, Global Data Group and livestock shipping company Wellard.

Sandon first invested in Fleetwood in September 2015, when the shares were languishing at around $1.40. They campaigned for board changes, the sale of non-core assets, and improved management, before going public in 2016 with analysis showing poor operational performance, a lack of strategic focus, and making recommendations for change.

While Fleetwood sold off its caravan manufacturing business in August 2018, Radzyminski says they took too long and burnt significant capital in a “futile exercise” to turn around the non-core assets before the sale.

He says the continued underperformance prompted more shareholders to buy into Sandon’s campaign, which led to chief executive Brad Denison resigning in November 2020 and chairman Phillip Campbell bringing forward his retirement in early 2021.

After the company struggled through the pandemic, Radzyminski says he is now happy with its direction under current chairman John Klepec and CEO Bruce Nicholson.

And despite the shares already doubling in the past 12 months, he says there’s plenty more room to run given the role that Fleetwood can play in helping to ease Australia’s housing crisis.

In the West Australian mining town of Karratha, for example, Fleetwood has a 1300-room modular accommodation village that Radzyminski says is booming as more people move to the Pilbara region for work. The median weekly house rents have skyrocketed from $400 in 2016 to $1100.

“There’s huge opportunity in manufactured housing, with an increasing acceptance that modular building can be part of the solution to lowering the cost of housing,” the fund manager says.

Fleetwood is Sandon’s biggest investment, along with COG Financial Services. The firm’s top five holdings, including Coventry Group, Global Data Centre Group and Wellard, account for nearly 60 per cent of the roughly $220 million in funds under management.

Other major investments include pharmaceutical manufacturer IDT Australia, BCI Minerals and Karoon Energy, an Australian oil and gas producer with operations in Brazil and the US.

“Our returns tend to be very idiosyncratic,” he says when asked about the broader macro environment. “They’re driven by what happens specifically in the companies we’re invested in, as opposed to getting taken along for the ride with the market.”