Dear Investor,

DMXASF’s NAV increased 9.3% (after fees and expenses) for the month of July, as markets staged a rebound following a strong sell-off into 30^th June financial year-end. The broad-based ASX 200 Total Return Index rose 5.7% for the month, while the ASX Small Ordinaries recovered strongly, up 11.4%.

With markets stabilising, and recovering to some degree, we’re experiencing the mixed sensation of being wary and mindful that the worst may not be behind us (is this the eye of the storm?); while also being very enthusiastic about the prospects for our portfolio constituents despite some of the bounce-backs. The latter really on account of a range of positive and reassuring updates we’ve enjoyed since 1^st July. As we set out last month, and in a separate email to investors in June, we don’t have any strong conviction that a bottom is in and it’s all rosy from now on. Instead, we are focused on ensuring we own appropriately diversified portfolios of a range of quality smaller-company opportunities. If we own good businesses, ably-managed by well-incentivised people, and we own those at attractive prices, we’re confident in the potential to generate respectable returns over the medium to long-term.

Portfolio Commentary

We didn’t have any meaningful detractors this month, and the portfolio benefitted from a number of partial recoveries. Among them are companies that we believe were sold-off for tax loss harvesting reasons, and have gone on to report positively in July. Examples are Ansarada (up 10%), AVA (up 47%), Knosys (up 69%), ELMO Software (up 24%), CV Check (up 32%), Frontier Digital Ventures (up 33%), and PropTech (up 21%). Despite the recoveries, many of these still trade well below their recent highs and our initial entry points. Each of these companies has reported positively in July, and consequently our confidence is maintained at these higher levels. This basket of names is probably a good example of how we’ve responded on a case by case basis to the indiscriminate sell-off: ELMO, Frontier and PropTech were all added to in June (and July, in the case of ELMO), reflecting our confidence and the value on offer. Others were maintained as revenue wins and progress in general are more lumpy and risky. AVA and Knosys are good examples where the potential over time is significant, but our conviction isn’t as strong as for other holdings. To add in the face of that uncertainty would carry undue risk, and irrespective, we’d deployed all our available liquidity into opportunities we were more comfortable with.

Other holdings that had also been weak and have enjoyed a good bounce in July include Academies Australia, Credit Clear, and DDH1 (each up 24%), while Diverger and Smartpay were up 11-13% each. Each of these companies has reported positively, though Diverger – we believe – is a bit of a mixed bag with the company announcing an offer to effectively merge with Centerpoint Alliance in a transaction we believe to be very much in the latter’s favour. Diverger is discussed in detail in the DMX Capital Partners’ commentary, in the Appendix, below.

Relationship-Driven Deal Flow

One of the key value-adds we believe we bring to investors in the smaller company space is the relationships we’ve fostered with a network of brokers and broker-analysts. These relationships, developed over many years, have certainly been very helpful with accessing capital raisings, and significant lines of stock. This has certainly been the case of late as we participated in a line sale of ELMO shares at a handsome discount to the then market price, bringing this back to a meaningful position at a very attractive price point. We’ve been able to add to holdings recently in PropTech and 8Common by purchasing significant lines – again, at discounts to the prevailing market price.

We’re also pleased to have been included as a sub-underwriter for a capital raise currently being conducted by MedAdvisor. MedAdvisor is a med-tech business with proprietary software technology that helps patients manage their medication, including adherence and re-ordering. The software connects patients and their pharmacists. The company has a significant business across Australia, and is growing into the US market (through the prior acquisition of Adheris). During July, the company announced the strategic acquisition of GuildLink from the Pharmacy Guild of Australia in an all-equity deal which sees the Guild becoming a substantial shareholder in the overall business. Concurrent with this, a rights issue is being conducted to raise growth capital and position the group for the years ahead. This is an underwritten rights issue, with sub-underwriters including the Guild, other institutional investors, as well as DMX funds. We have taken our share under the rights issue, and we’re hopeful of acquiring additional stock via the sub-underwrite toward the end of the capital raise process, later this month.

So far, this batch of activity has added value, as we’ve increased positions at distressed prices. Funding for this activity has been achieved mainly from the ~5% of new capital inflow at 30^th June (thank you again to those who have added to investments in June, and now July), together with the sale proceeds from reducing still-attractive but not-as-attractive other names. It’s challenging and interesting to be working out where to harvest capital to take advantage of the rich pipeline of opportunities we face.

Positive Updates

The DMXCP report this month highlights our focus on cashflows, including companies that have strong current cash-flows, as well as a range of interesting opportunities in companies that are on track to become strongly cashflow positive in the short to medium-term. We’re particularly interested in companies that are attractively priced relative to strong current cashflows, and where there are clear opportunities for growth. Within the DMXASF portfolio, companies like FSA Group and Michael Hill are good examples. These businesses trade for modest multiples of current earnings/cashflows, and each has the potential to reinvest some of those earnings into high-return growth. And while we wait for that growth to come through, and for the shares to re-rate, we enjoy dividend yields of ~5-6% each.

Among companies commonly-held with DMXCP, Diverger and DDH1 are good examples. The DMXCP report includes detailed commentary on each of these which we’ve included as an Appendix to this report. Additional brief commentary on a number of other commonly-held names is also included in the Appendix for your easy reference.

In Summary

After the declines of the previous few months, it’s pleasing to report a strong July. While the macro-economic environment remains uncertain and carries an unusual degree of risk, the fundamentals for our businesses remain strong and the medium to long-term potential very positive. We don’t have any sense as to short-term direction, and do feel what we can be increasingly confident in is a degree of volatility we’ve not had for some time. But volatility can be our friend, as we seek to take advantage at the stock-by-stock level within the portfolio: rotating out of the least prospective holdings, and into the most. We believe patience will continue to be required, but for those who are patient and disciplined in their allocation to investments such as these, the rewards over time can be meaningful.

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.