DMXASF Monthly ReportAugust 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 3.20% (after fees and expenses), slightly ahead of the ASX 200 Total Return Index’s 2.50% gain. The month was busy with most companies reporting full-year results. While the portfolio as a whole advanced, underlying was a mixed bag with a number of companies declining 10-20% each, a good number rising by a similar magnitude, and a couple stand-outs rising 30-40% each and helping drive a strong overall outcome for the month.
Portfolio Commentary
A range of companies declined modestly on the back of slightly negative results & commentary, or for no particular reason. Quality industrial, Laserbond, with its unique value-adding technology and interesting growth avenues handed back 18% mainly due to disappointing earnings results. While its results were relatively weak, the company reaffirmed its positive outlook for the period ahead. Retailer Dusk declined 19% as the market weighed the impact of widespread COVID lock-downs. Dusk will continue to suffer with much of its store network closed. But its medium to long-term prospects remain intact. Software companies Gentrack and PropTech Group fell 8% and 18% respectively.
On the other hand, a number of companies reported positive results, and some surprisingly so given current COVID disruptions. Joyce Corporation rose 22%, mostly following a solid profit result for the year and positive commentary around the continued roll-out of its kitchen company subsidiary, KWB. Technology/software-driven holdings including Ansarada, AVA, and Raiz rose 14%, 15% and 18% respectively. Each reported positive momentum with their businesses and in the case of AVA, the sale of a business unit and substantial capital return. PTB Group jumped 14% on the back of its strong results and positive updates on its US growth plans. Of note, ReadyTech rose 40% on the back of continued strong growth and bottom-line results, together with a pivot in its communications with the focus shifting to longer-term growth ambitions and the target of more than doubling over the next few years.
Capral surprised both us and the market with its strong current numbers. Its shares returned 14% for the month and following this we’ve materially reduced our position (and may exit). Our original investment thesis for Capral was a hybrid value & merger arbitrage situation. The company had received a private equity takeover offer which put the spotlight on its value. We saw that value too, but were particularly interested in the potential for a higher deal price, knowing key large holders baulked at the original offer price. It turns out the gap between both parties was too large and the deal was cancelled. We held our shares, again, due to our assessment of value. But at these modestly higher prices, and with our portfolio cash levels as low as they are, we’re inclined to exit this position and hone in on higher quality and (long-term) more prospective businesses.
The DMX Capital Partners (DMXCP) report contains much relevant content for DMXASF investors, including detailed updates on three holdings which are large for each portfolio: Sequoia, Joyce Corporation, and Easton. Additionally, brief notes on three fast-growing interesting companies with global growth aspirations: Pureprofile, Janison Education, and Ansarada. To avoid repetition for readers of both these reports, the DMXCP notes are reproduced in an Appendix to this report, below.
SDI Enjoying Buoyant Conditions
Dental materials manufacturer and global distributor, SDI, rose 18% for the month on the back of strong results for the year and a positive outlook for the period ahead. The company manufactures a range of dental materials at its facility in Melbourne, and distributes around the world. With COVID disrupting the oral health routines of millions of people, SDI suffered through much of calendar 2020. But with much of the world reopening, cavities having compounded, and people anxious to improve their physical appearance including knocking a shade or two off their teeth, SDI has faced strong demand. Further, as has been the case for many industries, we believe some of the natural industry price competition has reduced in the face of challenging supply chains and product shortages.
SDI is controlled by its founder’s family and this has brought a degree of stability and prudence to its operations and capital management over time. But the corollary to this though has been, we believe, perhaps a little too much conservatism on the balance sheet management front. At current prices the shares trade for around 15 times normal earnings. As a result of growth being relatively low over the past decade, and the buildup of retained earnings, we consider the company has slowly gone from having an appropriate balance sheet structure to now being $20m, perhaps $30m, over-capitalised (versus a $120m market value). Management are keeping their cards close to their chests in terms of what they might do with their substantial cash and debt capacity. Incremental investments in plant & equipment, or modest increases to sales & marketing efforts will do little to address the position. Instead, we would like to see either a step-change in the business, perhaps with an appropriate acquisition of a smaller business that fits strategically well with its current product portfolio and geographic presence. Or, a meaningful return of capital to shareholders. We’ve articulated these views to management and will continue to do so. In the meantime, the shares remain attractively priced in relation to earnings, prospects, and the potential for its balance sheet to drive either a capital return or uplift in profitability in time.
In Summary
Results on balance were positive, and outlooks almost surprisingly also positive considering COVID disruptions to life and commerce. We continue to identify a thematically broad range of compelling opportunities to invest in. We’re only six months in with this new fund, and it’s been a strong six months in markets broadly. We do of course expect greater volatility in the future, and in both directions. Irrespective of what happens on a daily or monthly basis, we are focused on the long-term prospects for our individual companies and the portfolio as a whole.
Thank you for your trust and support.
DMXASF’s NAV increased 3.20% (after fees and expenses), slightly ahead of the ASX 200 Total Return Index’s 2.50% gain. The month was busy with most companies reporting full-year results. While the portfolio as a whole advanced, underlying was a mixed bag with a number of companies declining 10-20% each, a good number rising by a similar magnitude, and a couple stand-outs rising 30-40% each and helping drive a strong overall outcome for the month.
Portfolio Commentary
A range of companies declined modestly on the back of slightly negative results & commentary, or for no particular reason. Quality industrial, Laserbond, with its unique value-adding technology and interesting growth avenues handed back 18% mainly due to disappointing earnings results. While its results were relatively weak, the company reaffirmed its positive outlook for the period ahead. Retailer Dusk declined 19% as the market weighed the impact of widespread COVID lock-downs. Dusk will continue to suffer with much of its store network closed. But its medium to long-term prospects remain intact. Software companies Gentrack and PropTech Group fell 8% and 18% respectively.
On the other hand, a number of companies reported positive results, and some surprisingly so given current COVID disruptions. Joyce Corporation rose 22%, mostly following a solid profit result for the year and positive commentary around the continued roll-out of its kitchen company subsidiary, KWB. Technology/software-driven holdings including Ansarada, AVA, and Raiz rose 14%, 15% and 18% respectively. Each reported positive momentum with their businesses and in the case of AVA, the sale of a business unit and substantial capital return. PTB Group jumped 14% on the back of its strong results and positive updates on its US growth plans. Of note, ReadyTech rose 40% on the back of continued strong growth and bottom-line results, together with a pivot in its communications with the focus shifting to longer-term growth ambitions and the target of more than doubling over the next few years.
Capral surprised both us and the market with its strong current numbers. Its shares returned 14% for the month and following this we’ve materially reduced our position (and may exit). Our original investment thesis for Capral was a hybrid value & merger arbitrage situation. The company had received a private equity takeover offer which put the spotlight on its value. We saw that value too, but were particularly interested in the potential for a higher deal price, knowing key large holders baulked at the original offer price. It turns out the gap between both parties was too large and the deal was cancelled. We held our shares, again, due to our assessment of value. But at these modestly higher prices, and with our portfolio cash levels as low as they are, we’re inclined to exit this position and hone in on higher quality and (long-term) more prospective businesses.
The DMX Capital Partners (DMXCP) report contains much relevant content for DMXASF investors, including detailed updates on three holdings which are large for each portfolio: Sequoia, Joyce Corporation, and Easton. Additionally, brief notes on three fast-growing interesting companies with global growth aspirations: Pureprofile, Janison Education, and Ansarada. To avoid repetition for readers of both these reports, the DMXCP notes are reproduced in an Appendix to this report, below.
SDI Enjoying Buoyant Conditions
Dental materials manufacturer and global distributor, SDI, rose 18% for the month on the back of strong results for the year and a positive outlook for the period ahead. The company manufactures a range of dental materials at its facility in Melbourne, and distributes around the world. With COVID disrupting the oral health routines of millions of people, SDI suffered through much of calendar 2020. But with much of the world reopening, cavities having compounded, and people anxious to improve their physical appearance including knocking a shade or two off their teeth, SDI has faced strong demand. Further, as has been the case for many industries, we believe some of the natural industry price competition has reduced in the face of challenging supply chains and product shortages.
SDI is controlled by its founder’s family and this has brought a degree of stability and prudence to its operations and capital management over time. But the corollary to this though has been, we believe, perhaps a little too much conservatism on the balance sheet management front. At current prices the shares trade for around 15 times normal earnings. As a result of growth being relatively low over the past decade, and the buildup of retained earnings, we consider the company has slowly gone from having an appropriate balance sheet structure to now being $20m, perhaps $30m, over-capitalised (versus a $120m market value). Management are keeping their cards close to their chests in terms of what they might do with their substantial cash and debt capacity. Incremental investments in plant & equipment, or modest increases to sales & marketing efforts will do little to address the position. Instead, we would like to see either a step-change in the business, perhaps with an appropriate acquisition of a smaller business that fits strategically well with its current product portfolio and geographic presence. Or, a meaningful return of capital to shareholders. We’ve articulated these views to management and will continue to do so. In the meantime, the shares remain attractively priced in relation to earnings, prospects, and the potential for its balance sheet to drive either a capital return or uplift in profitability in time.
In Summary
Results on balance were positive, and outlooks almost surprisingly also positive considering COVID disruptions to life and commerce. We continue to identify a thematically broad range of compelling opportunities to invest in. We’re only six months in with this new fund, and it’s been a strong six months in markets broadly. We do of course expect greater volatility in the future, and in both directions. Irrespective of what happens on a daily or monthly basis, we are focused on the long-term prospects for our individual companies and the portfolio as a whole.
Thank you for your trust and support.
