Dear Investor,

 DMXASF’s NAV increased 3.5% for the month of November, recovering most of October’s decline, and lagging very slightly the broader market with the ASX 200 Total Return Index up 5% and the ASX Emerging Companies Index up 3.7%.

Commentary

While moving broadly with the market at the bottom line, as is often the case, the portfolio experienced a wide range of outcomes at the individual stock level. The principal detractor was EML Payments which declined 24%, handing back much of its recent recovery, on the back of a disappointing AGM update. On the other side of the ledger, Findi rose 63% as the company reported positive momentum on the ground in India while also attracting significant institutional co-investment into its Indian subsidiary on attractive terms. Chris Steptoe has produced a blog piece on the company which you can access here.

Elsewhere, movements were fairly muted though we note the 8% further increase to Diverger’s share price on the back of a materially improved offer from Count. Considering the desire of major shareholders (including Hub24), and of the Board & Management to get this deal done, we consider the improved pricing (just) brings the deal to a zone where we are comfortable to support. We’re not wild for the deal, and believe Count are getting a good deal here, but we acknowledge Diverger shareholders will also have the opportunity to share in the upside from cost-out upon merger through rolling into the combined entity (either accepting the default level of scrip, or electing to receive more scrip and less cash). We are conducting further work on Count at present and expect to decide in the new year which election we’ll make.

In terms of portfolio changes, we exited our small position in Credit Clear during the month. Our thesis for this company has not played out so there’s no basis for us to continue owning the company. We’ve taken our loss and are rotating that capital into higher conviction opportunities elsewhere. That liquidity is being augmented by the proceeds from the Cirrus Networks takeover which we expect to receive during December.

The DMX Capital Partners report includes more detailed commentary on both Findi and Diverger, each of which is included as an Appendix to this report.

Key Stock Updates: Smartpay and MedAdvisor

Smartpay reported its half-year results in November. Headline revenues were robust, increasing by 33%, but this did not fully translate to the bottom line due to increased costs. The rise in expenses are attributable to new key account management roles, executive positions, and growing compliance demands. The period also included the $1m cost of resolving a cyber incident. While the 33% growth rate sounds high, this was actually muted on account of weak economic conditions, with lower transaction revenue per terminal and higher churn. Net terminal adds dropped from 2800 in the previous corresponding period to 2000 this half.

During an investor conference call, CEO Marty Pomeroy discussed the impact of Lightspeed, an international point of sale (POS) provider, on their business. Lightspeed is entering the payments space with their own product. Customers who do not choose their payment product will incur additional charges for the core Lightspeed POS product. It’s worth noting that another ASX-listed POS provider, Task, is also entering the payment space. Lightspeed integration represents 1% of Smartpay’s annual revenue, while POS integrated terminals contribute 5-10% of revenue. We don’t view this development as being a major threat, and they’re certainly outweighed by the structural tailwinds that continue to support operators like Smartpay as clients move from the Big 4 banks.

Strategically, the Australian and NZ Android rollout remains on track, with a NZ release expected in the middle of 2024. This rollout will enable Smartpay to sell its transaction product in the NZ market, including to existing customers with approximately 20,000 terminals. There appears to be good progress both technically and contractually with their partner, Cuscal. We believe this is an exciting growth driver, and that the shares do not yet reflect the value uplift from a successful NZ rollout. So while operationally the environment is challenging at present, the strong structural growth and upside optionality on rolling out its high-margin transaction model in NZ continue to make Smartpay’s shares very attractive at these levels.

The AGM for MedAdvisor, a pharmacy-driven patient engagement solutions provider, was encouraging, with a forecast of 10-15% first half revenue growth for the group in addition to some interesting business developments. The US segment forecast of 8-13% revenue growth was particularly pleasing, considering that 40% of last year’s US revenue comprised COVID vaccination programs. There was concern that revenue would decline, but with only 20% of US revenue expected to be COVID-related this year, a more diversified vaccine program is driving this growth. Additionally, higher-margin digital revenue is trending up, accounting for 40% in the first quarter of this year.

In Australia, the 2022 deal with the Pharmacy Guild (now a 20% shareholder) to acquire Guildlink is paying dividends. In a less competitive market, they have been able to implement some price increases and grow health programs, resulting in an expected 15% increase in revenue. With the change to 60-day Australian dispense regulations, pharmacies are seeking new ways to generate revenue. In partnership with the Pharmacy Guild, MedAdvisor is working to help pharmacists manage these new revenue opportunities, and in turn, leading to greater revenue opportunity for MedAdvisor potentially in the next year or two.

Finally of note, to address its UK market opportunity while simultaneously arresting the losses MedAdvisor is generating through its fledgling direct operations in the UK, a strategic investment & license agreement has been entered into with local company, Charac. This sees MedAdvisor’s UK business rolled into Charac’s business there, the cessation of considerable operating losses MedAdvisor has been incurring in the UK, while on the upside, secures MedAdvisor a strategic relationship & platform through which to launch digital adherence into that substantial market. It also facilitates the distribution of Charac’s complementary products into the Australian market.

Summary

With AGM season behind us we’re heading into the seasonally quieter Christmas period. As we reflect on the past year and look to the year ahead we’re pleased really that on balance we’ve come through what’s been a difficult market environment relatively unscathed at the bottom-line. We’ve had some takeover activity that has assisted us performance and liquidity wise, and we’ve had a nice flow of opportunities to rotate into. The perceived inherent value across the portfolio is substantial, and while we can’t predict short-term returns, we’re certainly very enthused about the potential for the current portfolio to generate meaningful returns over the medium to long-term from here.

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.