Dear Investor,

 DMXASF’s NAV again declined, down 3.6% (after fees and expenses) during March, and again underperforming the ASX 200 Total Return Index which fell only 0.7%.

Our portfolio is clearly performing differently from the indices, which is good in a sense, but we’d clearly like to be on the other side of the ledger. We’ve suffered for idiosyncratic reasons of late, with many of our companies having operational stumbles and/or material de-rates to their market prices. Despite some fundamental shortfalls versus our expectations, the medium to long-term outlook for our diverse group of businesses remains positive, and – in our estimation – very attractive.

Commentary

Following on from their February performance, most of our companies again declined, and some significantly. Decent but moderately challenged companies like Kip McGrath and Shriro each fell 10%, while Joyce Corporation fell 19%. Higher growth companies with longer-dated cashflow profiles similarly fell, with Ansarada and Pureprofile each down 18%, while Frontier Digital Ventures slipped 7% ahead of a larger fall on the back of a capital raise announced since month-end.

Mitigating some of the broad damage was a helpful bounce to AF Legal (up 59%), and strength in Indian ATM operator, Findi (up 19%), and a 20% recovery to Sequoia on the back of that company’s announced sale of an 80% stake in its securities clearing business, Morrisons.

The DMX Capital Partners report includes interesting commentary on each of three commonly-owned positions that are meaningful weightings for us: Sequoia, Tambla, and Soco Corporation. Together with notes on Advanced Braking which is also owned by DMXASF, albeit in smaller quantity, these are included in an Appendix to this report.

An Interesting Theme: The Delayed Reopening Trade with International Education Companies

We have been following the listed international education sector for many years, and are attracted to the economics of the industry. Over the past year or so we have become increasingly interested in the space as we perceive investors are underappreciating the recoveries yet to be enjoyed by these companies as it takes quite some time to rebuild enrolments.

By way of background, COVID-induced border closures crippled the industry in 2020 with student enrolments falling significantly. Enrolments have only started to tick up in 2022 and so far into 2023 remain well below their peak. Importantly though, the sector has been forced to rationalise its cost base through COVID and as top-line numbers normalise we expect profitability to be robust, too.

The two companies we own (across both DMX funds) are Academies Australia and EDU Holdings:

Academies Australia has 16 licensed colleges across Australia and one in Singapore, with the vast majority of revenue coming from International students. The well published bottleneck in visa processing has impacted the company. It was set to have a strong 2023 with enrolments up significantly, however the visa processing delays meant they had to refund $4.2m to students who could not start in their desired timeframe, or had received mixed messages from the Department of Home Affairs. This hiccup is material to current performance of the business, but is just that: a hiccup, and really the delayed ultimate benefit of borders reopening. The company has very strong insider ownership, and directors continue to add to their holdings on-market.

EDU is building a high quality, higher education business focused on providing career-focused qualifications and training in the high job growth health and community services sectors. As with Academies Australia, International students account for the vast majority of EDU’s business (~75%). Last year EDU made an accretive acquisition of a nurse training business. Additionally, EDU is leveraging its Higher Education brand Ikon Institute to deliver Bachelor of Early Childhood Education which commenced in 2021. This is providing organic growth momentum. This organic growth together with the expected continued ramp to International student numbers will help fill EDU’s significant classroom capacity (currently less than 50% utilised) driving operating leverage and profit growth over the next couple of years.

Academies Australia and EDU Holdings were both profitable pre-COVID and have managed to survive the downturn, while rationalising costs. Their share prices, however, have yet to recover or to reflect the strong prospects each has for the periods ahead. Given the structural bottlenecks that have slowed their operational normalisation, we believe this is one of the few remaining sectors to fully benefit from the reopening.

Summary

We continue to navigate a challenging time for our portfolios, but are enthusiastic about the medium to longer-term potential for our collection of good businesses that we perceive are available at increasingly attractive prices. We’re not alone with this experience with – as highlighted in the DMXCP report – the S&P/ASX Emerging Companies Index being down 23% over the past 12 months. Many investors have fled the smaller end of the market in favour of greater liquidity elsewhere. We’re unperturbed by this and simply remain focused on identifying and owning a diverse portfolio of quality companies at prices that discount the expectation of meaningful returns over time.

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.