Dear Shareholder,

 DMXCP’s NAV increased 0.1% (after all accrued management fees and expenses) for April 2024. The NAV as at 30 April 2024 was $2.4134, compared to $2.4121  as at 31 March 2024.

Australian equity markets were weaker overall during April – the All Ordinaries was down 2.4% while the Small Ordinaries decreased 2.2% however the Emerging Companies Index continued its recent rise finishing up 2.6%.

Material contributors for the month included Joyce Corporation (ASX:JYC) which was up 16% on no news, while Findi (ASX:FND)  continued its recent strength.  Key detractors included Pure Profile (ASX:PPL) and Careteq (ASX:CTQ), which again fell during the month on weak sentiment.

Portfolio activity

Given the ongoing price strength in FND we continue to manage its  position size within the portfolio with some selling, but remain positive on its prospects. As we have previously highlighted, many illiquid small companies continue to trade around their multi-year lows and haven’t yet benefitted from a sentiment kick up seen elsewhere in the market, providing us with plenty of opportunity to recycle some of our FND proceeds into what we see as some very compelling opportunities. This buying activity also includes supporting/cornerstoning capital raises as an entry point for some otherwise illiquid positions.

Following a quiet last 12-18 months, April saw a marked pick-up in the number of companies looking to raise capital, and we reviewed a number of potential raising opportunities. We see this increased activity as positive for the micro-cap space and another indication of improving interest within the space. Of the various raising opportunities that we reviewed, we participated in two of them, including RPM Automotive Group (ASX:RPM) discussed below.

RPM Automotive Group (ASX:RPM)

During April, DMXAM became a substantial shareholder in RPM following its $4m capital raising. RPM owns a variety of automotive businesses that have been acquired (often by debt) over the last few years. Today it has a national footprint with 26 retail locations, 11 distribution centres and revenues of $130m+, selling wheel, tyre, accessories and apparel products to wholesale and retail customers.  While the business has been profitable and growing (albeit as a result of acquisitions), the roll-up strategy has resulted in RPM’s debt levels looking excessive relative to its sub $20m market cap, and the acquisition-led EBITDA growth hasn’t translated into EPS growth, given the large amount of shares issued to vendors of the acquired business over the years.

RPM’s Reported and Forecast Revenue and EBITDA by division since IPO

While the market has punished RPM heavily over the last 3 years (its share price has fallen from a peak of 45c to close to 6c currently), and sentiment towards the stock remains extremely negative, at close to $15m market cap, we consider RPM to be very much over-sold relative to its improving prospects. We believe there is evidence of some encouraging business momentum, that together provide improved confidence in RPM’s outlook:

• A new CEO: Guy Nicholls, became COO in September 2023 and CEO in March 2024. He is well-credentialed, bringing a strong operational skill set to the role. We are already seeing results of an enhanced operational focus and improved capital allocation, with some underperforming operations now sold and OPEX being contained, positively impacting gross and EBITDA margins.
• A focus away from acquisitions to internal growth initiatives: The most interesting growth initiative is tyre recycling. Since 2022, Australia has banned the export of waste or scrapped tyres, and currently, RPM pays to have used tyres disposed of. RPM is well progressed in its plans to build and own a tyre recycling plant with attractive economics to enable it to profit from tyre waste, rather than it being a cost. If successful and rolled out across the country, this could transform the business into a very strong circular economy driven, organic growth story.
• Improving margins / cash flows / EPS growth: RPM delivered a record half year profit for HY24 (NPAT of $2.2m – up 74%) on the back of improved gross margins and flat OPEX. A renewed focus on working capital and inventory management saw stronger levels of cash generated. Importantly, for the first time in several years we saw much improved EPS growth (+48%). We would ordinarily expect a record profit result to be rewarded by the market with a share price increase, but that was not the case here, with the debt concerns and negative sentiment continuing to weigh on the RPM share price.
• Profit upgrade cycle: On the back of this more focussed and stronger operational performance, RPM announced an earnings upgrade to its FY24 EBITDA to between $11m to $13m (previously $5m to $12m). In  FY25, Management is ‘targeting’ further EBITDA growth (to between $16m to $18m). While the FY25 target looks bullish to us, the earnings trajectory is confidently positive and, importantly, is now organic driven, rather than acquisition led as was previously. These EBITDA estimates translate to NPAT of ~$4.5m (FY24) and ~$8m (FY25), which looks attractive relative to RPM’s ~$15m market cap.
• Improved investor engagement: In our experience, companies/management are more likely to engage with the market and investors when there is positive news to tell (or, alternatively, they are about to undertake a capital raise!) as there is a natural inclination to want to talk publicly to shareholders about positives/successes than negatives. RPM is hosting an investor open day providing access to RPM’s senior management and directors, and showcasing its product range later this month. Given RPM has just completed a raise, we think this speaks to the confidence the company now has in terms of its prospects.

We acknowledge RPM’s net debt ($23m post the capital raise) continues to be on the high side, although this debt is backed by significant tangible assets including  ~$28m of inventory. We view the $23m net debt as manageable relative to RPM’s FY24 EBITDA guidance (~$12m) and FY25 EBITDA target (~$17m). And, if that profit growth doesn’t emerge, and debt continues to be a concern, RPM owns a non-core business (less than 10% of group revenue) which is Australia’s dominant supplier of motor-racing safety gear and performance accessories to motorsport competitors: Revolution Racegear. If RPM chose to sell this attractive business (non-core to the rest of the group given its niche, unique customer base)  we believe the value realised could come close to covering RPM’s net debt. Safety Dave, a market leader for many years in specialist safety products for caravans and campervans, such as rear vision systems & tyre pressure monitoring systems, is another attractive business within the RPM portfolio. This business was acquired by RPM for $10m in 2021 and is likely to be worth more than that now. While we don’t believe RPM needs to (or should) undertake any divestments, the company does have options available to if it wanted to strengthen its balance sheet.

After watching RPM from the sidelines since its IPO five years ago, we initiated with a ~2% portfolio position as part of RPM’s recent  capital raising. The funds from the $4m raising will ensure an upcoming expiring convertible note  is paid out/rolled over into less expensive debt,  and to provide growth capital for the tyre recycling equipment. As always, time will tell if the growth initiatives pay off, but with the stock trading on less than 4x FY24 PE and potentially less than 2x FY25 PE (if RPM meets its FY25 targets), investors are essentially pricing RPM as if it is in significant financial distress – we think the signs are there, that, in fact, there is a much stronger profit trajectory emerging and RPM’s debt is very much manageable.

With a re-focussed business under new leadership that is looking more internally at operational performance and now delivering improved margins, a record first half profit result (clean – no normalisations) and strong forward guidance, we think the market sentiment is overly negative here relative to what appears to be improving fundamentals and metrics. A sentiment change will deliver a strong multiple re-rate, while RPM has a number of interesting organic growth initiatives in FY25 and beyond to drive earnings growth and improve its debt coverage metrics.

Verbrec (ASX:VBC)

A very similar set up to RPM is VBC – an engineering and design firm, with a focus on electrification & energy storage projects and gas market transition,  growth areas supported by strong tailwinds. Like RPM, it has been very much beaten up over the last 3 years with its share price down from 25c to 10c, and undertook a recapitalisation that we participated in late last year. Similar to RPM, it is another stock where we have taken the view that the market is pricing in little success, and under-appreciating a significant turnaround that is in its early stages. Like RPM, this is a business with over $100m in revenue and is benefitting from a recent CEO change leading to a re-focus of the business, improving the margins and driving a stronger profit from its significant revenue base. As with RPM, small improvements in profit margins can lead to meaningful increases to profit. Its first half results, like RPM, were encouraging – EBITDA increased meaningfully from $1.3m to $5m (EV is $30m), on the back of an improvement in margins. If VBC can continue this trajectory, we think, like RPM, it is a strong candidate for a multiple re-rate, and continued improvement in earnings from here.

Whilst there has been improvement in recent months, sentiment towards illiquid micro-caps generally still remains low. We continue to take advantage of this opportunity to acquire meaningful positions in interesting opportunities, at what would appear to us to be close to the bottom of the cycle valuations,  and that we think over time will deliver us very attractive returns. The likes of VBC, RPM and other portfolio holdings such as Sequioa (ASX:SEQ) and Count (ASX:CUP) are all substantial ($100m+ revenue), profitable, growing Australian businesses that are under-earning relative to their current growing revenue base and potential 10%+ EBITDA/EBITA margins. Like other portfolio companies that the market is currently disinterest in, we are confident there is significant upside as they grow, and become better and more profitable businesses over time. We continue to see substantial inherent value throughout the portfolio and we are excited about what the earnings profile and valuations of our holdings such as RPM, VBC, CUP & SEQ will look like in the coming years.

We thank all our investors for their support and for the confidence you have shown in us and our strategy.