Dear Investor,

 DMXASF’s NAV increased 1.3% (after fees and expenses) for the month of January, continuing its recovery in absolute terms but lagging a very strong broad market as reflected in the ASX 200 Total Return Index’s 6.2% return.                                                                                       

While a number of our key holdings performed well over the month, the head-wind from disappointing updates and share price de-ratings to a few others meant the overall portfolio wasn’t able to keep pace with the broad market. Despite the short-term lag, we’re pleased with developments across the portfolio which have generally been positive.

Portfolio Commentary

The biggest detractors for the month in terms of NAV impact were Pureprofile and Sequoia. In the case of Pureprofile, it’s shares fell 11% to give back most of its prior-month gains. Sequoia fell 16% on the back of a business update and profit downgrade. We remain confident in the medium to long-term prospects for each of these businesses and continue to expect good things from each in the years ahead.

More positively, we enjoyed positive updates and continued upward momentum – both operationally and in terms of share price performance – for a number of holdings. Academies Australia rose 13%, building on its recovery of the past year. While operations will take some time to normalise, with the return of foreign students, the market is – we believe – rightly and increasingly discounting an eventual recovery which is becoming closer by the month. Gentrack continued its re-rate, rising 14%, while Smartpay rose 23% and reported exceptional growth numbers. Finally, of note, and expanded on below, Frontier Digital recovered 31% possibly as investors wind back some of the emerging markets discount that had previously been priced in.

The DMX Capital Partners report includes comprehensive updates on several commonly-owned holdings, on the back of quarterly reports and business updates for these. Highlighted companies are Advanced Braking Technology, Medadvisor, Sky-Fii, and Sequoia. This content is included as an Appendix to this report.

In terms of DMXASF-specific holdings, two interesting companies to provide updates are Frontier Digital and Michael Hill:

Frontier Digital Ventures

Frontier owns 100% of key digital assets in Latin America, and the Middle East/North Africa. It additionally owns strategic minority, or controlling stakes in a number of businesses across Asia, the most important of which being its 30% stake in Pakistani online property portal, Zameen. The investment has been costly for us since we invested in 2021 with its shares effectively halving over that timeframe. January saw a 31% uptick to its depressed share price as market sentiment toward higher-growth companies improved. Frontier has a strong track record of growth, and has been successful in developing a wide footprint with market-leading digital properties in interesting emerging markets. Growth has been slowing, but the company is focusing strongly on cost control as it eyes cashflow profitability in the medium term. A factor, we believe, that has weighed on Frontier’s share price in recent times has been outstanding contingent payments for acquisitions made and the potential requirement for a further capital raising to settle these in due course. But we’re comfortable that the magnitude of any outstanding obligations is sufficiently small relative to Frontier’s market value that any raise would be modest and only negligibly dilutive, assuming it doesn’t simply resolve these through present cash reserves and other portfolio optimisation options (divestments). Of concern to us though is the sovereign risk with this investment, and in particular around Pakistan which has suffered a material currency devaluation. Given Zameen’s overall materiality to the group, we are mindful of our exposure to this business, but are very much attracted to the long-term potential for value creation through participating in this digital land-grab in fast-growing emerging markets.

Michael Hill International

Michael Hill is a long-established jewellery retailer, originally from New Zealand but now Australia-based and operating a network of 282 stores across Australia (148 stores), New Zealand (48), and Canada (86). With a more than 40 year history of success, growth, and strong returns on invested capital (the vast majority of which as a listed company), it’s perplexing that the market rates the company so lowly. Having fallen ~20% in 2022, its shares continued to languish in January despite fairly strong December half-year results. The company continues to grow its revenue, and EBIT is guided to tick up modestly. Margins have been managed very well, with gross profit improvements over the past few years being sustained. The company has a pristine balance sheet, with – we estimate – around 10% genuine surplus cash. Despite its long history of success, and in particular the clearly successful rejuvenation under its current CEO and management team, its shares trade for just 8-9 times earnings. Management and the Board are mindful of the value on offer here, with the company implementing an on-market buy-back programme, and buying as aggressively as possible. In the two months from the commencement of the buy-back in September, until pausing for the company’s trading black-out period, the company repurchased over 2% of its shares outstanding. A solid achievement for a fairly tightly-held stock. The company is nearing the end of its 3-month black-out period, but has announced it expects to resume the buy-back once it’s reported in late February.  

We rate the company’s long-term track record, now-proven management, and rational approach to its undervalued stock. While the consumer environment is undoubtedly challenging, and expected to become more so in the period ahead, we believe the market is over-discounting this concern with Michael Hill and overlooking its high quality and very attractive valuation.

In Summary

The portfolio continues to inch up, slowly recovering much of the drawdown of early 2022. While experiencing some operational and earnings headwinds in the short-term, leading to some pricing impact on the likes of Sequoia, we remain confident in the medium to long-term potential for the companies across our portfolio. We own a good number of quality, differentiated, and very attractively priced companies that together hold the prospect of strong returns on average over 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.

Thanks for your trust and support.