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Dear Shareholder,
DMXCP’s NAV increased 1.2% (after all accrued management fees and expenses) for August 2022. The NAV as at 31 August 2022 was $2.6552 compared to $2.6237 as at 31 July 2022. Following the bounce in July, the market was more cautious in August – the All Ordinaries was up 0.7% during the month while the Small Ordinaries was up 0.3%.
August portfolio developments
August was a busy month with the majority of our portfolio companies releasing their full year results. With most of our results having been well flagged through pre-announcements and guidance, there weren’t too many surprises. Key contributors during the month included PTB Group (ASX:PTB) which received a takeover offer during the month and was up 35%, while Laserbond (ASX:LBL) increased 22% on the back of a strong second half result. Joyce Corp (ASX:JYC) reported another solid result and an encouraging outlook and was up 17%.
Reporting across the portfolio and the market generally was positive, however supply chain concerns, input and wage inflation were commonly referenced as headwinds, while navigating the Omicron Covid wave that hit Australia at the start of 2022 proved challenging for some companies.
This was the case with Australian Family Lawyers (ASX:AFL) which was the key detractor of the portfolio in the month, falling 28% after a disappointing performance in the second half of the financial year. A combination of increased staff turnover and significant sick and annual leave (holidays being taken again), and the associated workload disruption, impacted AFL’s billable hours, staff productivity, revenue and margins. We expect that many of these headwinds for AFL to have now peaked, while increased charge out rates and promotions from 1 July will provide some revenue tailwinds.
FY23 Outlooks
Given the uncertain broader macro conditions facing many companies, and, as valuations are very much a function of future earnings and cash flows, we were particularly focused on growth outlooks for FY23. Across the bulk of the portfolio, companies continue to grow strongly organically, supplemented by in-organic growth in some holdings. Various holdings articulated their confidence in significant earnings growth through FY23, including People Infrastructure (ASX:PPE) (strong FY23 guidance), Credit Clear (ASX:CCR) (accelerating revenue growth with operating leverage emerging) and LBL (as it heads towards its $60m revenue target). Headwinds were called out by Shriro (ASX:SHM) (consumer demand) and Datadot (ASX:DDT) (Ukraine war, European car manufacturing) – although these are both smaller weighted positions.
We provide below an update of our portfolio’s 10 largest ASX positions as at 31 August 2022, briefly noting how they reported and how we view their outlook and valuation. We believe this demonstrates the attractive combination of value and growth on offer within the portfolio, with a number of our key holdings trading on sub 10x FY23 PE multiples, whilst offering strong growth profiles. Eight of the top 10 holdings are now paying dividends.
DMXCP’s NAV increased 1.2% (after all accrued management fees and expenses) for August 2022. The NAV as at 31 August 2022 was $2.6552 compared to $2.6237 as at 31 July 2022. Following the bounce in July, the market was more cautious in August – the All Ordinaries was up 0.7% during the month while the Small Ordinaries was up 0.3%.
August portfolio developments
August was a busy month with the majority of our portfolio companies releasing their full year results. With most of our results having been well flagged through pre-announcements and guidance, there weren’t too many surprises. Key contributors during the month included PTB Group (ASX:PTB) which received a takeover offer during the month and was up 35%, while Laserbond (ASX:LBL) increased 22% on the back of a strong second half result. Joyce Corp (ASX:JYC) reported another solid result and an encouraging outlook and was up 17%.
Reporting across the portfolio and the market generally was positive, however supply chain concerns, input and wage inflation were commonly referenced as headwinds, while navigating the Omicron Covid wave that hit Australia at the start of 2022 proved challenging for some companies.
This was the case with Australian Family Lawyers (ASX:AFL) which was the key detractor of the portfolio in the month, falling 28% after a disappointing performance in the second half of the financial year. A combination of increased staff turnover and significant sick and annual leave (holidays being taken again), and the associated workload disruption, impacted AFL’s billable hours, staff productivity, revenue and margins. We expect that many of these headwinds for AFL to have now peaked, while increased charge out rates and promotions from 1 July will provide some revenue tailwinds.
FY23 Outlooks
Given the uncertain broader macro conditions facing many companies, and, as valuations are very much a function of future earnings and cash flows, we were particularly focused on growth outlooks for FY23. Across the bulk of the portfolio, companies continue to grow strongly organically, supplemented by in-organic growth in some holdings. Various holdings articulated their confidence in significant earnings growth through FY23, including People Infrastructure (ASX:PPE) (strong FY23 guidance), Credit Clear (ASX:CCR) (accelerating revenue growth with operating leverage emerging) and LBL (as it heads towards its $60m revenue target). Headwinds were called out by Shriro (ASX:SHM) (consumer demand) and Datadot (ASX:DDT) (Ukraine war, European car manufacturing) – although these are both smaller weighted positions.
We provide below an update of our portfolio’s 10 largest ASX positions as at 31 August 2022, briefly noting how they reported and how we view their outlook and valuation. We believe this demonstrates the attractive combination of value and growth on offer within the portfolio, with a number of our key holdings trading on sub 10x FY23 PE multiples, whilst offering strong growth profiles. Eight of the top 10 holdings are now paying dividends.
Our top 10 positions have been relatively stable in recent months, reflecting our confidence in these names and our long term thinking here, where we believe there is significant upside from these names to play out over time. Recent additions include DDH (price increase and recent purchases) while AFL has fallen out of the top 10 following its price decline.
We believe there are multiple ways to win from these above names. Several of them are on track for break-out years in relation to profit growth (KME, LBL, CCR and SEQ), and we are enthused by their potential. Names like KME, SEQ, DDH and DVR remain unloved (unfairly in our view) by the market, despite favourable tailwinds and outlooks. In our experience, these are the set ups that offer attractive re-rates from very low multiples as they transition from being out of favour to more popular. Further, companies such as CCR, LBL and also KME have the opportunity to further take their unique Australian developed technology and IP into much larger global markets.
We hope the above disclosure is helpful to investors in illustrating our investing approach and describing what we own, and why we own it.
Outside of the top 10, among our next sized grouping of holdings, companies such as Proptech (ASX:PTG) and AVA Group (ASX:AVA) are on track for significant increases in NPAT in FY23, while others such as the recently purchased Cirrus Networks (ASX:CNW) and PPE remain clearly cheap on less than 10x NPAT multiples despite strong growth outlooks. As mentioned above, we own a diversified portfolio of compelling small company names supported by strong growth and value theses, which we have, and continue to, be long term supporters of. No doubt there will be further market and macro bumps along the way, but we remain very enthused with our diversified portfolio as we continue our long term investing journey in attractively valued, growing small companies.
We look forward to updating you again in October.
We believe there are multiple ways to win from these above names. Several of them are on track for break-out years in relation to profit growth (KME, LBL, CCR and SEQ), and we are enthused by their potential. Names like KME, SEQ, DDH and DVR remain unloved (unfairly in our view) by the market, despite favourable tailwinds and outlooks. In our experience, these are the set ups that offer attractive re-rates from very low multiples as they transition from being out of favour to more popular. Further, companies such as CCR, LBL and also KME have the opportunity to further take their unique Australian developed technology and IP into much larger global markets.
We hope the above disclosure is helpful to investors in illustrating our investing approach and describing what we own, and why we own it.
Outside of the top 10, among our next sized grouping of holdings, companies such as Proptech (ASX:PTG) and AVA Group (ASX:AVA) are on track for significant increases in NPAT in FY23, while others such as the recently purchased Cirrus Networks (ASX:CNW) and PPE remain clearly cheap on less than 10x NPAT multiples despite strong growth outlooks. As mentioned above, we own a diversified portfolio of compelling small company names supported by strong growth and value theses, which we have, and continue to, be long term supporters of. No doubt there will be further market and macro bumps along the way, but we remain very enthused with our diversified portfolio as we continue our long term investing journey in attractively valued, growing small companies.
We look forward to updating you again in October.
