Dear Investor,

 DMXASF’s NAV increased 1.4% (after fees and expenses) for the month of December, again, building on its recovery of the past few months. The broad market was soft for the month, with the ASX 200 Total Return Index declining 3.2%.

Portfolio Commentary

Material detractors this month were EarlyPay (down 51% on bad news), ReadyTech (down 14% on a withdrawn takeover offer), and Xref (also down 14%, on no particular news). EarlyPay announced the voluntary administration of a key client and counterparty, and has taken a lead and active role in the process through appointing receivers to hopefully minimise the financial impact on EarlyPay. The market has punished the company with the halving of its shares. And unfortunately, at this stage, the genuine uncertainty means we’re all in wait and see mode. The market has possibly over-reacted to this news. But until we can obtain better information to be able to assess the financial impact, and the potential need/desire for EarlyPay to raise capital to shore up its balance sheet, we believe the prudent course of action is to wait rather than to either quit or add to our holding at this stage.

ReadyTech declined 14% as its private equity suitor withdrew its takeover offer. This either reflects an acknowledgement that the deal was going to fail with key shareholder Microequities Asset Management rejecting the bid, or the discovery of something off-putting through its due diligence process. We believe considering the nature of the business and strong historical financial performance it’s most likely due to the former. Indeed, the shares had been trading at a material discount to the takeover price ahead of its being pulled – reflecting the market’s expectation the deal would fail in its current form. We’re pleased with the outcome, look forward to remaining continuing investors in the business, and may look to opportunistically add to our position in the periods ahead.

Despite taking a hit on EarlyPay in particular, and the general softness in markets, our portfolio edged up thanks to gains in each of Medadvisor (up 24%), Pureprofile (up 21%), and one of our largest holdings – Sequoia (up 10%). We also benefited from the 50% rise in SOCO Corporation which IPO’d during the month and in which we were granted a significant cornerstone position. All of these are – in our estimation – quality companies with significant growth potential – both in Australia, and in the case of Medadvisor and Pureprofile, abroad. Each continues to trade at attractive levels relative to current earnings and/or their genuine potential.

New Positions & Top-Ups

During the month we participated alongside DMX Capital Partners (DMXCP) in the discounted sell-down of Advanced Braking Technology by its largest shareholder, as well as joining the SOCO Corporation register through its IPO process as a cornerstone investor. Each of these are discussed in detail in the DMXCP report and included here as an Appendix.

In addition, we continue to rotate the proceeds from the recent spate of takeovers into adding to favoured and highly prospective other holdings. This month, for example, we added to each of Kip McGrath, Michael Hill, Sequoia, and Shriro, each at prices that are well below recent highs, and on an absolute value basis, we consider are highly attractive. All the purchase activity this month was aided by trimming of Cryosite, reducing each of ELMO Software and PropTech (ahead of their almost certain takeovers in the period ahead), and exiting a small position in GenusPlus.

In Summary

Despite having absorbed some adverse outcomes at the individual stock level, a number of solid performances have offset these. Considering the portfolio heading into 2023, we’re pleased with the breadth of the opportunity set. We are effectively fully invested across a range of businesses, most of which share key attributes: good quality businesses, ably managed, and trading at attractive prices.

We continue to review our most marginal holdings as we seek liquidity to pursue new opportunities or add to other favoured holdings. This process is active, ongoing, and – we believe – healthy.

Fund flows have been minimal the past few months, with liquidity coming from trimming, exiting, and takeover activity. We will continue to generate liquidity internally in this fashion, and also are welcoming of top-up investment or new investors seeking to join us in the Fund. To this end, 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.

Thanks for your trust and support.