Dear Investor,

 DMXASF’s NAV increased 1.9% for the month of February, adding to its recent recovery and slightly ahead of the broader market with the ASX 200 Total Return Index up 0.8%, but failing to keep pace with the ASX Emerging Companies Index which reversed its January losses, up 5.0% for the month.

Commentary

It’s been a very mixed half-year reporting season for us with a number of disappointments. Our positive outcome for the month attributable really to the continued strength in now-outsized Findi (up 37% on a large position), together with a takeover off for Ansarada (up 36%). Despite the mixed bag of portfolio company developments and share price action, as we drill down into some of the action at the individual company level, we do remain very enthused about the prospects for the portfolio from these – in many cases – severely marked-down prices.

Thematically, our education companies suffered for various reasons. Kip McGrath (down 38%) is suffering with higher costs and a spread-too-thin operating platform. The DMXCP report includes a few choice words on this one. We’re hopeful of some freshening up and re-focus on what should be a strongly profitable core business will yield a positive outcome in the periods ahead. The international student sector, which includes our holdings Academies Australasia and EDU, is under pressure with a high level of student Visa rejections impacting the post-COVID return of students and improvement to occupancy. Academies Australasia was down 19%, with its results being impacted by high Visa rejections together with ongoing council issues at their new Sydney campus. EDU’s results were encouraging, helped by their domestic-student focused Ikon business, but its shares still fell 17%, perhaps reflecting negative sentiment toward the sector.

Finally of note in terms of adverse developments was the 40% decline to SOCO Corporation’s share price as that company suffers for an over-investment in staffing to support growth that hasn’t eventuated. The company has a long track record of strong performance, has very strong insider ownership among key executives. Its CEO has recently resigned, with one of the founders stepping back into this role on an interim basis. We’re comfortable with the risk/reward set-up from these levels as the business remains well-positioned to capitalise on increasing IT spend over the longer-term, once we get through the current lull.

While we took a few knocks this month, there are some clear bright spots. While the retail sector remains challenging for many, Joyce Corporation reported positively thanks to the continued strong performance of its principal asset, a 51% stake in KWB Kitchens. KWB fuelled continued sales growth for the group, as well as a bump to gross margins. Expenses across the group are well-controlled, resulting in a healthy bump to group-wide EBIT and NPAT margins. Its dividend was increased 37% as a consequence, and the outlook is for the positive trajectory to continue, notwithstanding the uncertain consumer environment. Joyce Corp (and KWB in particular) highlight the importance of focusing on quality businesses with a demonstrable track record of success through the macroeconomic and consumer cycles, and the benefits of not worrying too much about those cycles when you’re invested in such good businesses.

Also of note as a bright spot that has assisted us in recent times, Findi continued its recent rally, up another 37%. We’ve held our position through this re-rate, bringing the weighting to an outsized 11% of the portfolio at 29^th February. We’ve now commenced trimming, bringing it back to 10% of the portfolio at present. Depending on our opportunity set, we may pull it back more aggressively (our next largest positions are 5% of the portfolio – to give a sense for the sizing approach). As mentioned last month, investors should be mindful for now of this outsized position size.

Fiducian Group rose 11% on the back of strong results, while RPMGlobal jumped 24% as investors are increasingly focusing on the strong operating leverage the company is enjoying and what this will likely mean for profitability in the years ahead. EML Payments ticked up another 11%. Finally of note, Ansarada rose 36% on the back of a takeover offer. We’re comfortable enough with the pricing. We’re also pleased to receive cash as we do have other compelling opportunities. But conceptually, we reiterate previous comments that it’s a shame these companies and substantial shareholders are seemingly so willing to deal. The short-term sugar hit is too compelling, and we often overlook the potential for these interesting (software in particular) companies to scale on a global stage.

The DMX Capital Partners report includes an interesting thought-piece on Unlisted Positions and the concept of very small ASX-listed companies delisting. Tambla is highlighted as one of our largest holdings that was previously listed but has made solid progress in a less public and more nimble unlisted environment. This commentary is included in an Appendix to this report.

Summary

A positive month in terms of fund performance, and despite some negative developments with a few holdings, many holdings reported positively and are well-placed for the period ahead. Everything comes back to pricing, and for the most part, positive share price movements have been justified, prospects remain very favourable, and positions maintained. Negative price action has for the most part been justified too, but magnitudes of some the declines we believe represent an overreaction, with pricing down to levels that imply highly favourable risk/reward set-ups from here. For the portfolio as a whole, we remain enthused about the potential for strong returns over the medium to long-term. Our enthusiasm can be evidenced, too, in our cash weighting which is persistently near zero. We’re constantly looking for liquidity to pursue attractive new opportunities and to add to existing holdings. We look forward to participating in the journey for many of our great companies for years to come.

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.