Dear Investor,

DMXASF’s NAV decreased 6.0% (after fees and expenses) for the month of September. Having recovered some ground in July & August, the broad market again turned negative on the back of macro-economic concerns. The broad-based ASX 200 Total Return Index declined 6.2% while the ASX Small Ordinaries declined 11.8%.

Portfolio Commentary

With September being a quiet period in terms of news flow, the portfolio moved in sympathy with the broad market. Higher growth assets with longer duration expected cashflows have been most impacted. This is due to a rising interest rate environment and greater earnings uncertainty in a weakening economy. Conversely, lower risk, lower multiple, shorter duration assets have held up relatively well and mitigated some of the damage across the portfolio. Examples of the former include AVA Group, Corum, ELMO Software, Frontier Digital, Pureprofile and Xref which each fell 20-30%. While on the other side of the ledger, our education holdings (EDU Holdings and Academies Australia) rose 14-15% each as improving fundamentals are beginning to be reflected in their prices; and Joyce Corporation returned 20% (including dividend).

Buybacks Sending Positive Signals & Enhancing Value

With many of our companies enjoying strong current earnings and trading at attractive prices (especially in this weak market environment), it’s been pleasing to see a number of these companies not only talk about buying back shares, but actually executing on those promises. Buybacks send a positive signal to the market about the potential value inherent in the shares, and can also enhance per-share value if meaningful amounts of stock are ultimately retired at attractive prices. Current examples of what we consider to be rational and value-adding buyback programmes include:

• FSA Group. At a single digit multiple of earnings, the company repurchased nearly 4% of itself between March and June. An excellent outcome for a generally illiquid stock. Assuming the shares are trading around 2/3^rd of intrinsic value, this repurchase has enhanced per-share value by around 2%.
• DDH1 Drilling. Capital allocation is a particular strong point for DDH. At just over two months into its recently-announced buyback, the company has retired nearly 3% of itself. We (and management) believe the shares are very under-valued here, and this aggressive buyback programme is both enhancing value and increasing the odds of a material re-rate in the medium term future.
• Sequoia Financial Group. Another company that has capital allocation as a particular strong point is Sequoia. Management are diligent in assessing acquisitions on a value-basis in relation to where their own shares trade. And are rationally deploying capital to buy-in shares at relatively very attractive prices.
• Michael Hill. We’ve talked a fair amount about the operating momentum Michael Hill has enjoyed bouncing out of COVID, and noted its super-strong balance sheet with significant surplus cash at hand. Further, with a current trading multiple of around 10 times – a level we (and management) believe is too low – it’s pleasing to see the company commence a buyback during September. We expect any shares bought at these levels will both enhance value, and help set the scene for higher, more appropriate, pricing in the future.

Company Meetings

With reporting season behind us, we’ve taken the opportunity to meet with managements of many of our companies (and prospective companies). This has been either virtually, in person ‘in-office’, or in person ‘on-site’. With most of our company engagements taking place virtually over the past couple years, it’s been refreshing to be able to assess actual operations and learn more about what drives various businesses, and the challenges and opportunities they face. The DMX Capital Partners (DMXCP) report includes commentary on a number of our site visits. These are included in an Appendix to this report.

In Summary

As also noted in the DMXCP report, many of our companies are facing short-term operational challenges. Costs are increasing, labour shortages are hampering growth, and consumer demand is increasingly a perceived risk as the economy slows, inflation bites, and higher interest rates hurt many and flatten the mood of others. Nevertheless, our portfolios are overwhelmingly comprised of good businesses with favourable medium to long-term growth prospects, strong balance sheets, capable, well-incentivised management teams, and are trading at attractive prices.

The ride is proving to be bumpier than would be ideal, but the diversity across our portfolios is helping to soften some of this, while the opportunistic topping up and trimming of positions – we believe – will add value for long-term oriented investors. Those of the investor base who continue to dollar-cost-average into their investments can also benefit from the volatility as we continue to navigate this market environment.

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.