DMXASF Monthly ReportApril 2021 – DMX
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An investment company managed by
DMX Asset Management Limited AFSL 459 120 13/111 Elizabeth Street, Sydney, NSW 2000 Trustee & Administrator Fundhost Limited AFSL 233 045 |
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Dear Investor,
DMXASF’s NAV increased 2.55% (after fees and expenses) which compares to the ASX 200 Total Return Index’s 3.47% gain. Our second month of operations for the Fund has been progressive, with cash falling to 28% (from 46%) by month-end, and the number of holdings expanding from 25 to 32. We’ve moved a little faster than we’d have expected a couple months back, and this reflects a combination of being able to implement a significant overlapping exposure with DMX Capital Partners, as well as a steady flow of interesting additional companies.
Portfolio Structure
As outlined in our Information Memorandum, and reinforced in last month’s report, we seek to construct a diverse portfolio with different thematics at play. Owning fundamentally different assets is important from a risk management perspective, and gives the portfolio the best chance of earning respectable returns over time and through various market environments. Further, we don’t wish to be overly exposed to any individual company or type of company. Being ~70+% invested across a diverse range of ~30 opportunities is something of a ‘base camp’ for our portfolio structure. And we look forward to carefully deploying the balance of our cash (as well as harvesting cash where a story has played out, or a thesis has been broken or proven wrong (this will feature and is to be expected in any portfolio)).
By mandate we can hold up to 40 different stocks, and we’re certainly heading in the direction of this upper bound. But we can certainly see a situation where the number is consolidated down to as few as 20, and together with cash being effectively fully deployed. Such an investment posture would most likely reflect a broadly undervalued market environment together with having higher conviction in a smaller number of names. We have the intention and flexibility to reposition the portfolio over time to reflect an evolving opportunity set. For now, we’re pleased with our broader approach, casting the net a little wider, while retaining meaningful cash to execute on potentially even more attractive opportunities in the future.
This month’s DMX Capital Partners (DMXCP) report includes an interesting summary of its top-10 holdings. We own eight of the 10 (albeit, not all at such large sizes). To avoid repetition given many of this report’s readers will digest both reports, we’re including DMXCP’s report summary of the eight as an appendix to this report. We’ll likely follow this format in future, too, where we wish to highlight relevant content from DMXCP’s report.
Implementation Update
We added a number of additional names to the portfolio in April, including Capral, Gentrack (NZ), ELMO Software and RPM Global. These are all stocks not owned by DMXCP, though DMXCP established a small position in Capral subsequent to our purchase. In terms of DMXCP stocks, we initiated small positions in Ansarada and CV Check.
As outlined last month, we’re diligently adding exposure to a diverse range of companies also held by DMXCP. As at 30 April, approximately 49% of the 72% invested is in stocks also held by DMXCP. The process for selection considers both liquidity as well as the nature of other holdings being considered for DMXASF, and how they all blend together from an investment thematic and risk profile perspective across the DMXASF portfolio.
This report’s appendix borrows brief summaries on eight of DMXCP’s top-10 holdings, in which we also have a position. To round that content out and provide some additional useful insights into the DMXASF portfolio, we note (in alphabetical order) our current top-5 holdings which each representing 4 to 4.5% of the Fund: Capral, Easton Investments, FSA Group, Michael Hill International, and PTB Group. Each of these companies trades for prices that are attractive in relation to current normalised earnings and/or assets. None require heroic assumptions in order to expect solid returns from these levels over time. And importantly, they’re all quite fundamentally different from each other which is an important feature of our risk management process.
Capral Limited: Benefitting from this Environment, and Targeted by Private Equity
We took a full-sized position in Capral during the month on the back of an announced takeover and a subsequent conversation with one of their competitors. Capral is Australia’s largest extruder and distributor of aluminium products. We paid around $7.45 per share versus a $7 takeover price. Capral is enjoying a very favourable trading environment that includes strong demand and protection from Chinese anti-dumping. We believe Capral is very undervalued in relation to its assets (trading close to NTA) and earnings profile (circa 3X EBITDA). While the offer was on the basis of the company distributing valuable franking credits on its balance sheet, our view was the agreed takeover price of $7 was far too low, and that there was a material chance of a much-improved offer. (Or, the offer would fail, and the company would be re-focused on delivering in this favourable environment – an outcome we believe has a good chance of seeing the shares much higher over the next 12-24 months.) One interesting aspect of the takeover offer was that it had garnered the early support of the Board, indicating the deal was friendly and that the company is very much for sale. While the deal has been terminated on the back of shareholder dissatisfaction with the price, we believe the company remains very much ‘in play’ and watch with interest.
Our base case with Capral is that the company is attractively priced in relation to assets and cashflow, and we intend to hold for the long-term. We’re not explicitly investing in anticipation of an improved takeover price. But it is worth noting that in this environment of low interest rates and either well-financed private equity operators, or other industry participants looking to drive consolidation and improve their own strategic positioning, appropriate targets can end up being acquired at very attractive (high) prices. We’re also fortunate in Australia that many institutional investors have a strong value-bias and are reluctant to sell for less than a full appropriate price. And in the case of Capral, we’re pleased a majority of its shareholder base (by size) has outright rejected what we consider to be a lowball offer. Interesting examples of favourable developments with two other ASX-listed companies being acquired are McPherson’s, and Mainstream. In the case of McPherson, a $1.34 per share bid was trumped by a competing bid at $1.60. While more spectacularly, Mainstream agreed to a deal to be sold for $1.20 per share. This was trumped by another party at $2 per share. That higher offer was revised up to $2.25 ahead of yet another competitor entering the fray with a $2.35 which was matched, but then beaten again at $2.55. Capral doesn’t hold the strategic interest for a number of global operators in the way Mainstream does. But the case of Mainstream (which is unfolding as we write) is an interesting example of the potential from these sorts of situations.
In Summary
We’re ever-mindful that we’re working for you, helping to preserve and grow your hard-won capital. We appreciate the confidence you’ve shown in us, and are delighted to welcome a number of new investors this month, as well as to receive some top-ups from existing investors.
In terms of progress with putting your capital to work, we’re pleased with the breadth, quality and prospectiveness of the portfolio we’ve constructed to date. Many of our companies represent very attractive value in relation to current earnings (which are high quality and have something of a growth profile), while some others are investing heavily to underwrite meaningful growth over the medium to long-term.
We welcome the opportunity to speak with existing or potential investors at any time.
DMXASF’s NAV increased 2.55% (after fees and expenses) which compares to the ASX 200 Total Return Index’s 3.47% gain. Our second month of operations for the Fund has been progressive, with cash falling to 28% (from 46%) by month-end, and the number of holdings expanding from 25 to 32. We’ve moved a little faster than we’d have expected a couple months back, and this reflects a combination of being able to implement a significant overlapping exposure with DMX Capital Partners, as well as a steady flow of interesting additional companies.
Portfolio Structure
As outlined in our Information Memorandum, and reinforced in last month’s report, we seek to construct a diverse portfolio with different thematics at play. Owning fundamentally different assets is important from a risk management perspective, and gives the portfolio the best chance of earning respectable returns over time and through various market environments. Further, we don’t wish to be overly exposed to any individual company or type of company. Being ~70+% invested across a diverse range of ~30 opportunities is something of a ‘base camp’ for our portfolio structure. And we look forward to carefully deploying the balance of our cash (as well as harvesting cash where a story has played out, or a thesis has been broken or proven wrong (this will feature and is to be expected in any portfolio)).
By mandate we can hold up to 40 different stocks, and we’re certainly heading in the direction of this upper bound. But we can certainly see a situation where the number is consolidated down to as few as 20, and together with cash being effectively fully deployed. Such an investment posture would most likely reflect a broadly undervalued market environment together with having higher conviction in a smaller number of names. We have the intention and flexibility to reposition the portfolio over time to reflect an evolving opportunity set. For now, we’re pleased with our broader approach, casting the net a little wider, while retaining meaningful cash to execute on potentially even more attractive opportunities in the future.
This month’s DMX Capital Partners (DMXCP) report includes an interesting summary of its top-10 holdings. We own eight of the 10 (albeit, not all at such large sizes). To avoid repetition given many of this report’s readers will digest both reports, we’re including DMXCP’s report summary of the eight as an appendix to this report. We’ll likely follow this format in future, too, where we wish to highlight relevant content from DMXCP’s report.
Implementation Update
We added a number of additional names to the portfolio in April, including Capral, Gentrack (NZ), ELMO Software and RPM Global. These are all stocks not owned by DMXCP, though DMXCP established a small position in Capral subsequent to our purchase. In terms of DMXCP stocks, we initiated small positions in Ansarada and CV Check.
As outlined last month, we’re diligently adding exposure to a diverse range of companies also held by DMXCP. As at 30 April, approximately 49% of the 72% invested is in stocks also held by DMXCP. The process for selection considers both liquidity as well as the nature of other holdings being considered for DMXASF, and how they all blend together from an investment thematic and risk profile perspective across the DMXASF portfolio.
This report’s appendix borrows brief summaries on eight of DMXCP’s top-10 holdings, in which we also have a position. To round that content out and provide some additional useful insights into the DMXASF portfolio, we note (in alphabetical order) our current top-5 holdings which each representing 4 to 4.5% of the Fund: Capral, Easton Investments, FSA Group, Michael Hill International, and PTB Group. Each of these companies trades for prices that are attractive in relation to current normalised earnings and/or assets. None require heroic assumptions in order to expect solid returns from these levels over time. And importantly, they’re all quite fundamentally different from each other which is an important feature of our risk management process.
Capral Limited: Benefitting from this Environment, and Targeted by Private Equity
We took a full-sized position in Capral during the month on the back of an announced takeover and a subsequent conversation with one of their competitors. Capral is Australia’s largest extruder and distributor of aluminium products. We paid around $7.45 per share versus a $7 takeover price. Capral is enjoying a very favourable trading environment that includes strong demand and protection from Chinese anti-dumping. We believe Capral is very undervalued in relation to its assets (trading close to NTA) and earnings profile (circa 3X EBITDA). While the offer was on the basis of the company distributing valuable franking credits on its balance sheet, our view was the agreed takeover price of $7 was far too low, and that there was a material chance of a much-improved offer. (Or, the offer would fail, and the company would be re-focused on delivering in this favourable environment – an outcome we believe has a good chance of seeing the shares much higher over the next 12-24 months.) One interesting aspect of the takeover offer was that it had garnered the early support of the Board, indicating the deal was friendly and that the company is very much for sale. While the deal has been terminated on the back of shareholder dissatisfaction with the price, we believe the company remains very much ‘in play’ and watch with interest.
Our base case with Capral is that the company is attractively priced in relation to assets and cashflow, and we intend to hold for the long-term. We’re not explicitly investing in anticipation of an improved takeover price. But it is worth noting that in this environment of low interest rates and either well-financed private equity operators, or other industry participants looking to drive consolidation and improve their own strategic positioning, appropriate targets can end up being acquired at very attractive (high) prices. We’re also fortunate in Australia that many institutional investors have a strong value-bias and are reluctant to sell for less than a full appropriate price. And in the case of Capral, we’re pleased a majority of its shareholder base (by size) has outright rejected what we consider to be a lowball offer. Interesting examples of favourable developments with two other ASX-listed companies being acquired are McPherson’s, and Mainstream. In the case of McPherson, a $1.34 per share bid was trumped by a competing bid at $1.60. While more spectacularly, Mainstream agreed to a deal to be sold for $1.20 per share. This was trumped by another party at $2 per share. That higher offer was revised up to $2.25 ahead of yet another competitor entering the fray with a $2.35 which was matched, but then beaten again at $2.55. Capral doesn’t hold the strategic interest for a number of global operators in the way Mainstream does. But the case of Mainstream (which is unfolding as we write) is an interesting example of the potential from these sorts of situations.
In Summary
We’re ever-mindful that we’re working for you, helping to preserve and grow your hard-won capital. We appreciate the confidence you’ve shown in us, and are delighted to welcome a number of new investors this month, as well as to receive some top-ups from existing investors.
In terms of progress with putting your capital to work, we’re pleased with the breadth, quality and prospectiveness of the portfolio we’ve constructed to date. Many of our companies represent very attractive value in relation to current earnings (which are high quality and have something of a growth profile), while some others are investing heavily to underwrite meaningful growth over the medium to long-term.
We welcome the opportunity to speak with existing or potential investors at any time.
