Dear Investor,

 DMXASF’s NAV rose 1.4% (after fees and expenses) against the ASX 200 Total Return Index which rose 5.3% for the month.  

Portfolio Commentary

While much of our portfolio enjoyed something of a bounce along with the broader market this month, the continued de-rating of smaller software, technology, and interest-rate sensitive high duration assets continued to weigh. Notably, Aeeris and Global Health fell 9-12% each, while Corum and Medadvisor each declined around 20%. Raiz continued its decline, falling 14%, while Knosys fell 6%. Our responses to these vary and reflect the evolving thesis for these very different businesses. In the case of Medadvisor and Knosys, for example, we have modestly added to holdings around recent lows. We’ve held useful management meetings with some of the others, and expect, on a case-by-case basis, to be adding to or exiting some of these in the periods ahead.

On the other side of the ledger, Vortiv and Xref each staged helpful recoveries, rising 22-23% each. And with an apparent technical overhang now resolved, Kip McGrath recovered some ground, rising 18%. As you know, we’ve been catching falling knives over the past couple months with new holdings in EML Payments and Nearmap, as well as adding to Frontier Digital Ventures. This month saw some recovery to each of these with EML rising 25%, Nearmap up 27% and Frontier up 11%. Elmo Software – thematically similar to Nearmap with its enterprise software nature, high growth, and continued cash losses expected over the next 1-2 years ahead of anticipated break-even – recovered 17%. Companies like Elmo and Nearmap are expected to be beneficiaries of the Australian federal budget’s tax breaks being given to companies to accelerate investment in these sorts of services.

The DMX Capital Partners report includes updated commentary on its Top 10 holdings, nine of which are also owned by DMX Australian Shares Fund. The relevant updates are included as an Appendix to this report.

Exiting MMA Offshore

In terms of DMXASF-specific holdings, we note that MMA Offshore was exited during the month. The company has benefited from a boom in energy-related stocks over the past few months, and has been a helpful counter-cyclical holding for the portfolio, recording gains in each of January and February (against a declining portfolio) and rising 11% in March to our average exit price of 53c. We invested in MMA Offshore in the 30c-range and at levels that reflected a very substantial discount to the company’s underlying asset value. In the 50c-range the shares remain attractively priced, but clearly not as attractively as at somewhat lower prices. While the shares may continue on to do quite well, the ‘easy’ or ‘lower risk’ money’s been made, and with little portfolio cash and a range of high-quality other opportunities to pursue, we preferred to exit this name. In terms of those other opportunities, with 45 holdings in the portfolio, our focus is mainly on existing positions. Proceeds from the MMA Offshore sale have been helpful as we augmented positions this month in each of EML, Nearmap, Frontier Digital, FSA Group & Shriro.

FSA Group commences its buy-back

We’ve previously highlighted FSA Group as an interesting business in the DMXASF portfolio. Aside from its two distinct, but interrelated business units: Services & Finance, we very much like the management & governance of this business, including two founder executive directors who own ~44% of the company and have overseen considerable value-creation over the past 20 years. The company’s time on the ASX has been very much a game of two halves, with the shares going nowhere for more than eight years now, compared to having been up 1000-2000% in the prior eight year period (~2005-2013). While the shares have tracked sideways for some time, the company’s paid an annual dividend of around 6% (fully franked), more than doubled its per share book value (adjusted for an accounting change), and roughly doubled its profitability. So while the outcome looks a bit ordinary to where the shares are now, we believe this reflects the combination of the shares perhaps being a little over-valued eight years ago, and being quite undervalued now.

As highlighted in our November 2021 report, the company is suffering for short-term headwinds with its Services business having contracted significantly since the onset of COVID. In short, with Services, the company provides debt management solutions to clients (including payment arrangements). COVID has seen the passing of consumer-friendly legislation that has made it harder to collect outstanding debts, and the flood of liquidity has kept businesses and individuals afloat. But growth in its niche Finance business has offset the Services decline, and running down the Services book has helped the company boost its balance sheet and cash position. Accordingly, its dividend has been increased, and the company is back in the market buying in stock, and aggressively so.

Companies often conduct buy-backs to signal to the market a positive view of the business’s prospects. These can be very value-adding. But they can also be used to support share prices in the short-term perhaps to boost the value of management options, or to boost confidence ahead of future capital raisings. For these reasons, on balance & in general, we don’t place too much emphasis on buy-backs in our analytical process. Occasionally however we see companies like FSA where management are highly-aligned with shareholders (long-term substantial owners of their business), and where there is no obvious or likely need to pump or promote the shares in the short to medium term. In these cases, we pay much closer attention to both the signal and economic impact of buy-backs, and with FSA’s latest buy-back, we have a very positive view. Having rarely bought back stock in the past, and with the shares now quite obviously cheap to our mind on fairly elementary and reliable measures of value, we’re pleased to see FSA commence its latest buy-back, and to do so aggressively. This endorsement of value, together with scooping up much of the trading float and adding value through doing so at attractive prices, we believe, are setting the stage for a long overdue re-rate to the shares of this quality little business.

In Summary

We continue to be virtually fully invested, are assessing a steady flow of prospective new opportunities, and are diligently managing the healthy tension between adding to presently-held companies, adding new names, and exiting or trimming marginal holdings.

We encourage you to review DMXCP stock updates in the Appendix below. These commonly-held nine companies comprise a significant allocation for DMXASF and give a very good feel for the composition of the portfolio including the breadth & value on offer.

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.