Dear Investor,

DMXASF’s NAV increased 2.7% for the month of December, continuing its recent recovery and ahead of the broader market which itself was very mixed with the ASX 200 Total Return Index up 1.2%, but the ASX Emerging Companies Index falling 5.2%.

Commentary

Detractors this month included Careteq and EDU Holdings, each falling 14%. Careteq reversing some of its prior gains as this thinly-traded nano-cap bounces around on not very much; while EDU languished in a challenging environment where for-profit educators are only very slowly recovering student enrolments. Field Solutions too continued its decline, falling a further 10% in the wake of its poorly-received debt raise. Frontier Digital reversed some of its recent recovery, declining 15%, while retailer Michael Hill fell 8% on the back of a guidance downgrade. Retail’s tough. Finally of note, SOCO Corp fell another 10% following its December trading downgrade.

Positive contributors though more than offset the declines, with EML Payments up 13% following the resolution of its disastrous Irish operations, while Kip McGrath rose 10% for no particular reason. MedAdvisor rose 30% in anticipation of a positive half-year report. The stand-out was Findi, the Australian holding company of a majority stake in an Indian ATM & fintech enterprise – up 57%. Findi had a substantial option exercise event in January with many investors selling some shares to fund the options exercise. This saw the shares fall from the $1.10-$1.20 zone in November to very near the 90c option exercise price. With that overhang cleared, focus has returned to its underlying fundamentals which appear very favourable, and saw the shares rise to $1.62 at month-end.

Activity

With the smaller company segment of the market having been so neglected in recent times, we’re looking very closely at all our portfolio exposures as we seek to direct capital to the most compelling of an expanded opportunity set. With so little cash to put to work, and so many opportunities both within the portfolio and in our pipeline of prospects, it’s a happy problem to have, but still a problem. Takeover activity has helped mitigate the problem, with Cirrus proceeds providing liquidity. We banked Shriro’s capital return in January, and have further trimmed our position here into continued subsequent price strength. Shriro remains an attractive holding for its cash generative nature and now much lower reinvestment risk profile, having returned its surplus cash to shareholders. But growth isn’t obvious and other opportunities are taking preference.

These funds have been useful as we’ve recently established two new small positions (each of which have low liquidity and we continue to seek to add to), and have continued to add to our Fiducian holding, bringing this to a fuller 4% portfolio weighting. Most meaningfully, we exercised our Findi options this month, bringing the position to a full 5% weighting which has expanded to over 8% at month-end. This sizing is a little unusual for us but we’re broadly comfortable given the value on offer even at these higher prices, and the strong operational execution & momentum the business is enjoying. We expect to trim to control sizing not too far from where it is now, but believe it’s useful to highlight as we might expect a little more than usual volatility to the fund in the event of material movements to such large positions’ stock prices in the short term.

The DMX Capital Partners report’s theme this month is the challenge many companies are facing in needing to achieve or maintain reasonable profitability in the near-term, while seeking to invest heavily for long-term growth and value creation. Three positions – all also owned by DMXASF – are highlighted with commentary included in an Appendix: Ansarada, Knosys and Careteq.

Summary

Despite some trading downgrades with a few key holdings, we’re pleased on the whole with developments across the portfolio. Our opportunity set is rich, and we’re seeking to be as exposed as we can to the most prospective of these, while adhering to basic portfolio diversification principles. Takeover proceeds, when received, together with selective trimming and exiting are providing a stream of cash which we don’t seem able to hold on to, as under-valued existing holdings as well as interesting new names compel the capital. A pleasing environment to be in, and we look forward to playing out the periods ahead with such an attractive backdrop.

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.