Dear Investor,

DMXASF’s NAV increased 0.3% for the month of August, slightly ahead of the ASX 200 Total Return Index which declined 0.7%. The smaller company sector hasn’t been able to maintain its July recovery momentum, with the Emerging Companies Index falling 4.3% for the month. Most of our portfolio constituents fell in sympathy with the broad market, but a couple stand-out positives propped the average resulting in a flat month for us.

Commentary

August marked the end of the full year reporting season for most of our companies. Mostly, results were pre-announced or pre-warned, so newsflow wasn’t too surprising. But it has been good to receive outlook commentary, and to be able to engage directly with many of our management teams in recent weeks to be able to help assess and re-confirm prospects for the period ahead and beyond.

Some prior detractors such as Knosys, Schrole and Skyfii continue to cost us with declines of 38%, 25% and 28% respectively. But these have fallen to become such small positions that their impacts now are fairly contained. Each represent interesting value in our estimation, but with many wonderful opportunities and virtually no cash, we are being very careful with how we prioritise our valuable capital. Academies Australia though was an impactful decliner, with shares of this larger holding down 30% on the back of a poor result. On the flipside, we benefited from a takeover offer for Energy One which rose 32%. Unlike some of the takeover/take-private deals we experienced last year, this set-up is interesting. Energy One is an attractive global software and services business that could have any number of logical suitors. The offer currently tabled has been publicly rejected by at least one key shareholder (with many others underwhelmed by the prospect of this sale). The company is primarily owned by private individuals’ interests, many of whom may be motivated to sell for the right price. Our expectation from here is the deal will either fail in its current form, in which case we would be glad to continue to own the asset. Or, the current offer may tease out competing bids with the potential for a meaningfully better outcome in an eventual sale.

Other key updates during the month included:

EML Payments

EML has been a costly mistake for us in the DMXASF portfolio. We first acquired shares in early 2022 for more than $3 each, and averaged down a little as the stock drifted into the $2-range before it went on to fall a further ~80%. We were initially attracted to the company’s global gift cards & payments businesses, including its significant ‘float’ which looked set to generate meaningful interest income as cash rates began to rise. Ultimately, we found ourselves seduced by the story, and various factors including regulatory issues, a revolving door for management & directors, and the sheer complexity/opaqueness of the beast led to a collapse in its share price. Having seemingly found a bottom, and with the company hanging up the for sale sign, we regained some confidence in the risk/reward and did add to our position in the 60c range, taking advantage probably of significant tax loss selling pressure coming into the June financial year end. This helped maintain the position’s relevance for us, and with the company reporting positively this month – and providing an encouraging update on its sale process – the shares recovered 50% for the month, and remain buoyant so far heading into September. We hope to manage out of this mistake successfully, and as with many such situations in markets, we take the lesson and keep moving forward.

Consumer-facing Core Holdings

Two of our three largest holdings are Michael Hill and Shriro (each at 5% weighting), and we have a decent position in Joyce Corporation (3%). We’ve met with the management teams of two of these, and will meet with the third next week. The consistent theme across each has been that the consumer environment remains weak, and each faces challenges for the period ahead. But with each, managements are responding very well with costs being reduced and investments to drive longer-term growth being maintained. Capital management has been a positive theme across the trio with a combination of strong regular dividends, one-off special dividends, and the prospect for value-adding stock buybacks to help drive value creation. Investment within the respective businesses continues to be well-considered and cautious. The three trade at single-digit multiples of sustainable earnings which together with the prospect for modest growth in the years ahead, strong current dividend yields, and potential eventual multiple re-rates, should help drive meaningful total returns over time. For the month, the group was helpful, with Michael Hill flat, but Shriro and Joyce up 11% and 21% respectively.

The DMX Capital Partners report includes an updated summary on 10 of its core holdings, highlighting profit results for the 2023 financial year, and our estimates for the year ahead. Nine of these are also owned by DMXASF, and all of these are similarly meaningful positions. Summaries for the nine are included as an Appendix to this report, together with brief commentary on a number of other overlapping positions.

Summary

With reporting season now behind us, and more clarity around how our companies are managing through this difficult macroeconomic environment, we’re pleased with both current performance and the longer-term growth potential for most of our holdings. Following a substantial de-rating to the smaller companies sector in particular, the prevailing prices for most of our holdings are very attractive. The underlying earnings yield of our portfolios together with modest growth, and the potential for multiple expansion from these low bases, we expect, will help underwrite strong returns in the years ahead.

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 michael.haddad@dmxam.com.au or 02 80697965.