DMXASF Monthly ReportAugust 2022 – 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 3.1% (after fees and expenses) for the month of August. The broader market was softer this month following a strong July, as investors awaited full year company results as well as guidance for the year ahead. The broad-based ASX 200 Total Return Index rose 1.2% for the month, while the ASX Small Ordinaries was flat at up 0.3%.
Portfolio Commentary
Full-year reporting and year-ahead guidance drove a mixed bag across our portfolio, with movements in both directions cancelling each other out. The market was underwhelmed with results from Academies Australia and Kip McGrath (though we thought each was ‘fine’), seeing their shares fall 13-14% each. AFT Pharmaceuticals fell 14% as it continues to face FDA hurdles for its Maxigesic product in the valuable US market. On the other hand, Laserbond rose 22% on strong results and the increasing sense that following COVID-disruptions, meaningful growth lays ahead. And domestic retailers Joyce Corporation and Michael Hill rising 17% and 8% respectively as each reported strong results. Each are evidently maintaining that momentum into FY23 despite perceived inflationary and consumer demand challenges, and each remains very attractively priced relative to their quality, cash earnings power, and high-return growth potential.
With most stocks wiggling around and cancelling each other out, returns for the month were effectively driven by takeover offers for each of PTB Group (up 36% on the offer) and Nearmap (up 50%). Conceptually, we view takeovers as something of a sugar hit. They can feel good in the short-term, but don’t really help in the long-term. Each of these offers have been met by Board support, and we don’t perceive a high likelihood of competing offers for either. Neither has a large blocking holder who could de-rail or extract a higher price. Our base case expectation is that each transaction is completed at the price offered. And if we’re to think in terms of where offers may be improved, we’d think there’s a small but decent chance of institutional shareholders banding together and extracting a modestly higher price for Nearmap. And of course, there’s always the risk that one or both deals fail. With over 9% of the fund exposed to the duo at month-end (and 0% cash in the portfolio), we’re now utilising these positions for portfolio liquidity, having sold around half of our exposure here since month-end.
Proceeds from trimming PTB Group and Nearmap are being used to add to other highly prospective existing and new holdings.
FY23 Outlooks
As investors we’re very focused on the longer-term opportunities and prospects for our companies. The August fullyear reporting cycle is particularly interesting though, where we receive not only finalised accounts for the year just been, but also interesting commentary on current operating momentum and corporate outlooks for the period ahead. On the back of this reporting cycle, the DMX Capital Partners monthly report includes a detailed summary of results and outlooks for its top 10 holdings. These are all held by DMX Australian Shares Fund (with about half of them in the DMXASF top 10). The commentary is included as an Appendix to this report, and a careful review is encouraged to have a sense for the value and continued positive momentum enjoyed across key portfolio holdings.
In addition to the DMXCP commentary, results and outlooks for DMXASF-specific holdings were interesting. FSA Group continues to struggle with its Services business declining and now, its Finance book (including consumer finance, asset finance and home loans) also declining. All segments have been challenged, and this looks set to continue in the short-term. Still, at 7-8 times earnings and with a pristine balance sheet, the market isn’t pricing in anything heroic in terms of business performance. The challenges it faces though are an interesting barometer for segments of the economy.
Michael Hill on the other hand reported strong reports for the year completed, and pleasingly continued strong momentum through July/August. We believe this coming Christmas trading period will be particularly interesting as the impacts of rising interest rates flow through to consumer sentiment. Nothing to date suggests any meaningful impact for the company. At around 9-10 times earnings and with surplus cash on the balance sheet which will be used to fund growth as well as buy back stock (under a recently announced buy-back plan), the shares remain an attractive value.
Nearmap reported in-line with expectations, but its outlook is looking increasingly positive (or less negative?). The company is very near an inflection point with cash burn expected to fall materially in the period ahead, and cashflow positivity guided for in the following year. Nearmap is a good example of what we highlighted a few months back as a key risk we now have to contend with with high-growth and cash-consumptive businesses very much falling out of favour. Nearmap had fallen from in excess of $3 per share a couple years back to around $1 recently. The market has lost patience with these companies that spend to grow and require additional capital. And now the risk we face is that ‘private equity’ with their long-term orientation and ample capital come along and cherry pick the best companies. In this case, Nearmap has agreed to be sold for $2.10 per share. A nice short-term bump for us, and we’ll utilise the proceeds for other attractive opportunities. So, ‘ok’ in a sense. But the reason why we invest in these sorts of companies is for the long-term multibag potential they have. Of course, they won’t always work out. But if the upside is 5-10X one’s investment, you can have some that are disastrous, some that work ‘ok’, some that are exceptional, and overall do quite well. That outcome becomes compromised though when the opportunity set is picked over by private equity and the best companies taken out.
In Summary
On the whole, a pleasing reporting season with our companies performing well in a challenging inflationary and rising interest rate environment. Takeover activity has helped short-term performance, but remove highly interesting and prospective businesses from our opportunity set. Fortunately, we’re experiencing no shortage of opportunities, with many companies across our portfolio, and a steady stream of new potential holdings, representing excellent value.
If you’d like to discuss the portfolio or the potential to invest or add to an existing investment, please contact Michael any time at [email protected] or 02 80697965.
Thanks for your trust and support.
DMXASF’s NAV increased 3.1% (after fees and expenses) for the month of August. The broader market was softer this month following a strong July, as investors awaited full year company results as well as guidance for the year ahead. The broad-based ASX 200 Total Return Index rose 1.2% for the month, while the ASX Small Ordinaries was flat at up 0.3%.
Portfolio Commentary
Full-year reporting and year-ahead guidance drove a mixed bag across our portfolio, with movements in both directions cancelling each other out. The market was underwhelmed with results from Academies Australia and Kip McGrath (though we thought each was ‘fine’), seeing their shares fall 13-14% each. AFT Pharmaceuticals fell 14% as it continues to face FDA hurdles for its Maxigesic product in the valuable US market. On the other hand, Laserbond rose 22% on strong results and the increasing sense that following COVID-disruptions, meaningful growth lays ahead. And domestic retailers Joyce Corporation and Michael Hill rising 17% and 8% respectively as each reported strong results. Each are evidently maintaining that momentum into FY23 despite perceived inflationary and consumer demand challenges, and each remains very attractively priced relative to their quality, cash earnings power, and high-return growth potential.
With most stocks wiggling around and cancelling each other out, returns for the month were effectively driven by takeover offers for each of PTB Group (up 36% on the offer) and Nearmap (up 50%). Conceptually, we view takeovers as something of a sugar hit. They can feel good in the short-term, but don’t really help in the long-term. Each of these offers have been met by Board support, and we don’t perceive a high likelihood of competing offers for either. Neither has a large blocking holder who could de-rail or extract a higher price. Our base case expectation is that each transaction is completed at the price offered. And if we’re to think in terms of where offers may be improved, we’d think there’s a small but decent chance of institutional shareholders banding together and extracting a modestly higher price for Nearmap. And of course, there’s always the risk that one or both deals fail. With over 9% of the fund exposed to the duo at month-end (and 0% cash in the portfolio), we’re now utilising these positions for portfolio liquidity, having sold around half of our exposure here since month-end.
Proceeds from trimming PTB Group and Nearmap are being used to add to other highly prospective existing and new holdings.
FY23 Outlooks
As investors we’re very focused on the longer-term opportunities and prospects for our companies. The August fullyear reporting cycle is particularly interesting though, where we receive not only finalised accounts for the year just been, but also interesting commentary on current operating momentum and corporate outlooks for the period ahead. On the back of this reporting cycle, the DMX Capital Partners monthly report includes a detailed summary of results and outlooks for its top 10 holdings. These are all held by DMX Australian Shares Fund (with about half of them in the DMXASF top 10). The commentary is included as an Appendix to this report, and a careful review is encouraged to have a sense for the value and continued positive momentum enjoyed across key portfolio holdings.
In addition to the DMXCP commentary, results and outlooks for DMXASF-specific holdings were interesting. FSA Group continues to struggle with its Services business declining and now, its Finance book (including consumer finance, asset finance and home loans) also declining. All segments have been challenged, and this looks set to continue in the short-term. Still, at 7-8 times earnings and with a pristine balance sheet, the market isn’t pricing in anything heroic in terms of business performance. The challenges it faces though are an interesting barometer for segments of the economy.
Michael Hill on the other hand reported strong reports for the year completed, and pleasingly continued strong momentum through July/August. We believe this coming Christmas trading period will be particularly interesting as the impacts of rising interest rates flow through to consumer sentiment. Nothing to date suggests any meaningful impact for the company. At around 9-10 times earnings and with surplus cash on the balance sheet which will be used to fund growth as well as buy back stock (under a recently announced buy-back plan), the shares remain an attractive value.
Nearmap reported in-line with expectations, but its outlook is looking increasingly positive (or less negative?). The company is very near an inflection point with cash burn expected to fall materially in the period ahead, and cashflow positivity guided for in the following year. Nearmap is a good example of what we highlighted a few months back as a key risk we now have to contend with with high-growth and cash-consumptive businesses very much falling out of favour. Nearmap had fallen from in excess of $3 per share a couple years back to around $1 recently. The market has lost patience with these companies that spend to grow and require additional capital. And now the risk we face is that ‘private equity’ with their long-term orientation and ample capital come along and cherry pick the best companies. In this case, Nearmap has agreed to be sold for $2.10 per share. A nice short-term bump for us, and we’ll utilise the proceeds for other attractive opportunities. So, ‘ok’ in a sense. But the reason why we invest in these sorts of companies is for the long-term multibag potential they have. Of course, they won’t always work out. But if the upside is 5-10X one’s investment, you can have some that are disastrous, some that work ‘ok’, some that are exceptional, and overall do quite well. That outcome becomes compromised though when the opportunity set is picked over by private equity and the best companies taken out.
In Summary
On the whole, a pleasing reporting season with our companies performing well in a challenging inflationary and rising interest rate environment. Takeover activity has helped short-term performance, but remove highly interesting and prospective businesses from our opportunity set. Fortunately, we’re experiencing no shortage of opportunities, with many companies across our portfolio, and a steady stream of new potential holdings, representing excellent value.
If you’d like to discuss the portfolio or the potential to invest or add to an existing investment, please contact Michael any time at [email protected] or 02 80697965.
Thanks for your trust and support.
