Dear Investor,

 DMXASF’s NAV fell 3.00% (after fees and expenses) against the ASX 200 Total Return Index which rose 2.14% for the month.  

Portfolio Commentary

In a continuation of the rout much of the smaller-company segment of the market has been in over the past couple of months, our portfolio again declined with many of our companies falling ~10-20%. Last month we highlighted CV Check, Schrole, Raiz, Knosys, Gentrack and Frontier Digital as having declined by this order of magnitude, and each managed to repeat this decline in February. This month though they were joined by Corum, 8Common, Janison, Xref, and newly-acquired EML Payments and Nearmap. As was the case in January, MMA Offshore rose (up 19%) as did a small handful of others, helping to mitigate the broader declines.

As highlighted in the DMX Capital Partners report, while the portfolio has sustained some repricing to the downside across many of its components, fundamentals are very attractive. Results and news-flow generally have been positive, with some notable bright spots. The DMXCP report notes Sequoia’s 50% increase in NPATA for the half year, and upgrade to full-year guidance. Its stock remains very attractive at less than 10 times cash NPATA and with strong short and long-term prospects for the business. Earlypay seems to be in the midst of a multiple-upgrade cycle. The company is clearly harnessing the benefits of technology across its niche finance platforms, with considerable operating leverage being enjoyed. At nine times NPATA and a 6% franked dividend, we believe the market is failing to recognise this great little business.

The DMXCP report includes interesting commentary on a couple very small companies – Cryosite, and DataDot, which are both also owned by DMXASF (albeit at smaller sizes). This is included as an Appendix to this report.

In terms of DMXASF-specific holdings, we enjoyed positive results, updates, and guidance from a number of holdings including:

• Michael Hill, which reported strong sales despite COVID challenges, and improving margins. The company has made great strides over the past 2-3 years with its transformation programme, and is emerging from COVID with a renewed focus on growth, a rock-solid balance sheet (including ~10-15% surplus cash) and an attractive current valuation at just ~10 times current earnings (ex cash). We look forward to a continuation of its current operating momentum, as well as the potential for an appropriate strategic acquisition utilising some of its cash hoard.
• Frontier Digital Ventures, which reported a pleasing combination of very strong revenue growth as well as improving profitability. FDV has been on a land-grab exercise the past few years, building out its portfolio of valuable digital assets in fast-growing emerging economies. This has often been done through acquiring partial ownership of assets and partnering with their local operators. As the platform matures, FDV has been consolidating ownership and facilitating more of the auto and property transactions. In this regard, 50% of the revenues are now transactional vs traditional advertising. Its shares are attractively priced relative to global peers, and together with the company’s secular growth profile, FDV is an ideal ‘bottom drawer’ type of set-up for the portfolio.
• Nearmap, which reported results and guidance that weren’t a negative surprise. Given the negativity, risk, and uncertainty that’s been priced into the stock (which has fallen ~60% from its highs to where we now find it quite interesting), we view the lack of negative news as quite a positive. The company isn’t experiencing any noticeable impact from litigation it faces in the US with US Annual Contract Revenue increasing 67% and cashflow breakeven becoming closer. We believe its balance sheet is adequate to reach cash profitability, and as that milestone is achieved the focus should turn very much toward its growth profile and potential to generate strong margins off a much larger revenue base in the future. While not without risk, we believe the upside/downside dynamic from here is favourable.

Portfolio Activity

With whole swaths of the market having sold off considerably; a broad mandate to invest in the most compelling opportunities across the entire smaller market cap spectrum; and not being restricted by the large capital base many other institutions need to manoeuver, we’re finding a lot we want to do. This includes adding new prospective and differentiated holdings to the portfolio, as well as add to existing holdings. With nearly 50 holdings and no cash, our focus is very much on finding ways to generate cash within the portfolio. The two logical pathways of course being to trim or to exit holdings. This month we did a little of both, exiting Shaver Shop, as well as trimming a couple names to simply generate cash for deployment into more prospective opportunities.

It’s not an easy task, but it’s important in maintaining focus and order in a portfolio context. Our objective is to own a 30-40 stock portfolio, and we’d ideally like to bring the actual number back closer to that range. One dynamic at play is our desire to have 3-5% of the fund invested in each of our favoured holdings. If the top-20 holdings represent, say, 60-70% of the fund, there really isn’t room to be owning more than 30-40 stocks in a way that would allow the smaller constituents to have any meaningful impact on performance.

An outcome from this dynamic is that we’re preferring existing holdings to potential new names. Is it more value-adding to add “1%” to 2-3 of our favoured holdings, or to add a new, different name to the portfolio? When the portfolio is 20-30 stocks, we think it makes sense to continue to build diversity and breadth. But at 40-50, the preference has clearly moved toward concentrating our focus and capital, and keeping holding numbers manageable.

In Summary

With the portfolio full and no shortage of great ideas, we’re focused on ensuring your capital is well invested across a broad – but not too broad – range of quality companies that are priced to deliver solid returns in the years ahead. Modest fund inflow together with selective trimming/exiting is providing a little liquidity to augment positions in stand-out opportunities, as well as initiate one or two new positions.

The fund continues to receive top-up investments from a number of investors who are averaging into their investments over time. If you’d like to discuss the portfolio or the potential to invest or add to an existing investment, please contact Michael at any time on michael.haddad@dmxam.com.au or Sydney 02 80697965.

Thanks for your trust and support.