I think there is a lot to like about FAN and I increased my...

I think there is a lot to like about FAN and I increased my holding yesterday at $2.68 accordingly.

What I like:
- Stable business with little debt.
- Quality management with a large ownership stake in the business.
- Potential for future EPS growth: Expansion in WA, roll out of the OMF brand, largely fragmented industry with few large players.
- Good property assets, particularly the Dandenong development. Historical cost is circa $30m, updated market value should be included in notes the full year accounts and I suspect there will be some upside there.
- Potential for capital management opportunities going forward with potential divestment of non-core Dare Gallery, Le Cornu and properties.
- Good return on equity.

I think it’s interesting how analysts and the media seem to focus on the poor decisions to acquire Dare Gallery and Le Cornu during the crisis. I think if you look at how Julian Tertini acquired Fantastic and turned it around, it’s quite clear why these acquisitions were made. In aggregate (from memory) these acquisitions cost less than $2m to buy and were effectively call options (little downside, potentially substantial upside)… I understand that in hindsight that these assets haven’t performed well, have no doubt distracted management and will now most likely be divested, but that was always a possibility.

The sales of those businesses will free up working capital invested across the 13 stores that make up DG and LC.

The falling AUD may be a head wind for the company going forward, but FAN should be more insulated than some of its competitors due to its domestic manufacturing. There is also some risk around continued softness in the retail sector and the investment in Vietnam manufacturing.

All in all, I think FAN offers a good risk-reward opportunity. Looking forward over a medium-long horizon I believe we will see EPS growth and most likely P/E expansion. In the meantime I will happily collect the fully franked dividends.

FAN is now my largest holding and I intend to be holding these shares for a long time.

Interested to hear other opinions…