Dear Investor,

DMXASF’s NAV declined 5.4% (after fees and expenses) against the ASX 200 Total Return Index which declined 2.6% for the month. As has been the case for several months now, the broader index has held up well, propped by large and resource companies, while smaller industrial companies continue to fall significantly.

Brief Performance Commentary

While over the past few months our NAV has declined by more than that of the broad-based but very top heavy ASX 200 Total Return Index, we believe it’s important to note what’s been going on ‘under the surface’. When reporting results, we emphasise the ASX 200 as a benchmark as it’s a value-weighted index that best reflects the typical/average experience of most investors. Our decision to focus on smaller companies, and on industrials (rather than resources), is an active one and reflects our analytical capability as well as where we believe the best opportunities lie for creating value over the long term. To the extent we deviate from the ASX 200’s larger and resource company composition we expect our performance outcomes to also deviate. That can be in either direction, and potentially significantly so. We’re totally comfortable with that, accept it as an outcome of having a unique & highly differentiated portfolio, and believe the exposure adds value from a diversification perspective for investors while carrying the prospect of strong returns over time.

To illustrate the dispersion that’s occurring across the market, we note that the ASX Small Industrials index is down 7.5% for the month of May, and is down 21% from its month-end peak of September 2021. At the same time, DMXASF is down 14% from its October peak. Meanwhile, the ASX 200 Total Return Index is down just 1% from its December 2021 peak. This clear dispersion in particular between large and small companies, we believe, helps put into context the current decline, while also reinforcing the compelling value on offer with the smaller companies in which we’re invested.

Portfolio Commentary

As outlined above, the portfolio continues to be impacted by the very broad sell-off in smaller and industrial companies. Declines were recorded with Ansarada (down 16%), DDH (down 22%), Frontier Digital Ventures (down 20%), Kip McGrath (down 15%), Medadvisor (down 18%), and PTB Group (down 8%). With nearly half the portfolio’s constituents being down 5-20% for the month, a few bright spots again helped mitigate the broader portfolio decline. FSA Group rose 8% as it continues to aggressively scoop up shares via its buy-back programme; and thematically similar EarlyPay rose 7% as a previous suitor paid a premium price on-market to boost its ownership stake to 20%. Pureprofile recaptured some of its prior month losses, bouncing back 6%; while AFT Pharmaceuticals rose 12% as it posted results meeting guidance and reaffirming a strong profit outlook.

As usual, May was a generally quiet month in terms of news-flow. As noted in the DMXCP report, Laserbond has downgraded on account of supply chain issues impacting timing on key licensing deals. And Shriro, too, reported being impacted by supply chain issues including freight costs. Shriro’s updated full-year EBITDA guidance of $20-25m implies a very substantial contraction for the second half. Its shares are down 15% for the month, and while the company clearly has a large earnings gap in the short-term, its fundamentals remain intact and at these prices we see the shares on a 6-7 times earnings multiple, little implied goodwill considering tangible asset backing, a robust balance sheet with 15-20% surplus capital, and a fully-franked double-digit dividend yield. We’ve taken the opportunity to add to our holding in Shriro this month following its downgrade.

While many companies are ratcheting down earnings expectations, a few of our holdings reported very pleasing results which confirm our thesis, and reinforce the long-term value on offer with some of these share prices in this environment:

• AFT Pharmaceuticals. As mentioned above, AFT reported strong results for the 31^st March financial year, and is guiding to strong continued growth. The New Zealand-based company focuses on developing over-the-counter drugs and has a valuable portfolio of products which it sells directly to re-sellers in Australia & New Zealand, and licenses around the world. The company has a long track record of success, has been consistently growing its revenues by 15% pa, and all indications are that this momentum will continue for some time to come. Despite investing heavily to support product development and its global growth aspirations, the company is solidly profitable and expectations for this are to now increase significantly. A meeting with management at their Auckland head office post-result reaffirmed our conviction in the business and opportunity.
• Smartpay. It’s pleasing to report that Smartpay has reported its first profitable year since entering the Australian payments market. The company has a steady and profitable core EFTPOS terminal business in New Zealand and has for several years been using that cashflow (and then some) to build out a valuable, high-growth, payments operation in the substantial Australian market. As a disruptor, alongside Tyro and other emerging payment technologies, Smartpay has been winning business away from the Big 4 banks who generally are focused elsewhere and have been seemingly content to cede – in particular – the smaller independent merchant business. With the company now solidly profitable, an overall expected growth profile of 20-30% for at least the next few years, and that NPAT likely to grow even faster as it benefits from operating leverage, the outlook is very positive. Considering the ~$160m market value for the business, roughly half of which we assess is supported by its bread & butter NZ operation, the implied ~$80m valuation for its Australian business we believe is far too cheap.

Portfolio Strategy & Execution

Given the recent weakness in markets and across both our portfolios, we’ve spent time in the DMXCP monthly report reviewing our investment strategy, why we believe in it, what we’re seeing in the portfolio today, and commenting on our execution. Included within this is commentary on nano-cap companies Aeeris, Datadot, EDU Holdings, Knosys and 8Common – all of which are also owned by DMXASF.

The DMXCP report comments are broad, comprehensive, and we believe of utility to DMXASF investors as well. We include these comments as an Appendix to this report, and we encourage you to review them, if you haven’t already read the DMXCP report.

In Summary

Again, markets are going through a challenging period, and we’re not immune to this. While it’s never pleasant reporting consecutive NAV declines, we emphasise that we believe the portfolio is in very good shape with a diverse group of good businesses at increasingly attractive prices. The corollary of lower pricing – all things equal – is better value and higher expected future returns. Of course, things aren’t always equal, and clearly the economic environment and some negative newsflow has impaired the prospects and valuations for certain holdings. But on the whole, our assessment is that the portfolio has considerable embedded value and upside potential that we believe will help drive meaningful returns over the medium to long-term. We’re enthused about the potential to generate value in the years ahead, from this base, and with the process of continuing to execute on our time-tested investment strategy.

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 02 80697965.

Thanks for your trust and support.