Dear Shareholder,

 DMXCP’s NAV increased 6.2% (after all accrued fees and expenses) for June 2024. The NAV as at 30 June 2024 was $2.5824, compared to $2.4320  as at 31 May 2024.

Australian equity markets were mixed during June – the All Ordinaries was up 0.5% while the Small Ordinaries decreased 1.6%. The Emerging Companies Index was sold off 4.6%.  

June, as expected, saw some tax-loss selling which impacted some of our more illiquid positions. More positively, we again benefited from takeover activity in our portfolio, with our small position in Schrole (ASX:SCL) bid for by a private equity backed industry player, at a 200%+ premium to its last closing price. SCL was up 148% for the month. We also again saw strong contributions from Findi (ASX:FND) and Medadvisor (ASX:MDR). Ahead of the year-end audit of DMXCP’s annual accounts, and in accordance with our audit valuation framework, we marginally increased our 30 June 2024 valuation of our unlisted position, Tambla, and revalued our now unlisted Yellow Brick Road position to its net tangible asset backing, consistent with the approach of other professional investors.

In relation to portfolio news, during the month we saw an update from Kip McGrath (ASX:KME), highlighting a return to profit for that business, and a small but accretive acquisition from Pure Profile (ASX:PPL).

Review of FY24

DMXCP’s NAV increased 23.1% (after all accrued fees and expenses) for FY24.

FY24 again saw a high level of takeover activity with a number of portfolio positions bid for: Diverger (ASX:DVR), Cirrus Networks (ASX:CNW), Energy One (ASX:EOL – bid subsequently rejected), Ansarada (ASX:AND) and SCL. Whilst we often have mixed feelings seeing a position with upside potential leave the portfolio, we were particularly disappointed with the DVR offer. We were vocal and active in pushing back on the pricing of the offer made by Count (ASX:CUP) for DVR. Despite an increase in the nominal takeover consideration from $1.14 to $1.47, we still consider this to be a very poor outcome for DVR shareholders (and particularly considering the CUP share price performance post-merger) and believe the DVR board were too hasty to deal here.

More recently, the takeover of SCL at a  premium of 203% to its last closing price and a premium of 160% to the 30-day VWAP, in our view, again highlights the significant disconnect between the ASX pricing of small, illiquid companies; and the price at which trade buyers and private equity see value, and thus presenting opportunities for investors to capitalise on.

From a contribution perspective, FND was the best performing stock in the portfolio in FY24. Having supported the recapitalisation of FND when it had a market cap of less than $10m, we were pleased to see FND re-rate strongly through the year to its current $200m+ market cap. We think this is a good example of the opportunities available to us in investing in unloved, unknown smaller companies when their valuation is often at the most attractive, and to enable us to benefit from the upside re-rate potential as they grow and become more widely known. 

While FND and the aforementioned takeovers were positive for the portfolio in FY24, the majority of our positions experienced weaker share price performance during the year reflecting, in most cases, another year of challenging market conditions for small illiquid companies with broad dis-interest from investors. Several of our holdings have struggled operationally, deserving their market de-rating, in particular Kip McGrath (ASX:KME) and Soco (ASX:SOC). SOC, as a government focussed IT contractor, has been impacted by a pullback in government spending, which we expect has now bottomed.  In the case of KME we have been disappointed for some time by Management missteps and a lack of focus on profit. More recently, we have worked hard behind the scenes to have a new chair appointed to KME, representing the first board change at KME in seven years.

As DMXAM has grown its funds under management, we have been able to participate more meaningfully in capital raisings supporting the growth of small companies. With very few other institutional investors participating in raises of some of the very small companies that we are looking at, we have been able to secure sizeable positions at attractive prices through some of these opportunities. During June, we were the lead sub-underwriter of the capital raise of Prime Financial Group (ASX:PFG). In April we became a substantial shareholder in RPM Automotive (ASX:RPM) through corner stoning its capital raise.

In summary, FY24 has been busy and constructive, and that we think, positions us well for FY25.

Thoughts on FY25

We have taken the opportunity over the last couple of years to double down on many of our small company exposures to capitalise on the lack of interest in nano and micro-cap companies.

As noted above, we have participated in the underwriting / cornerstoning of capital raises to support the growth of these companies and establish/build meaningful positions at what we consider to be attractive prices. Combined with on-market buying through this prolonged period of pricing weakness experienced by micro/nano-cap companies since 2021, we believe we have constructed a diverse and prospective portfolio of attractively priced, growing, under-the-radar companies. We believe there is some significant upside and re-rate opportunities amongst the portfolio to generate positive outcomes in FY25.

We highlight below some of our sub $100m market cap positions (with portfolio weightings between 2% and 5% – holdings noted below in order or position sizing) that we are particularly enthused about as we head into FY25. In aggregate, these positions represent over half our listed equity exposure. These small but profitable companies all demonstrate both strong value and growth characteristics, a combination that we believe positions a portfolio well for long term success.  With a lack of investor interest in this smaller end of the market, despite growth and broad improvements in their fundamentals, the majority of these companies below have yet to participate in any small cap market recovery. And, as noted, almost all of them have clear pathways for ongoing strong growth in FY25.

• Sequoia (ASX:SEQ – market cap: $61m)– market cap backed by more than 50% in tangible assets, while the business should generate close to $8m of pre-tax earnings. We would expect to see SEQ participate in some form of corporate activity in FY25. Share-price is trading at 12 months lows.
• Verbrec (ASX:VBC – market cap: $42m)– well placed to build on strong operational momentum in FY24, and grow margins, with a strong FY24 NPAT result a catalyst for a re-rate. While its share-price is off its lows, it continues to trade on a mid single-digit PE multiple.
• Laserbond (ASX:LBL – market cap: $82m)– FY25 will benefit from an expanded Australian footprint from its Western Australian acquisition, putting LBL on track for ~$8m+ NPAT in FY25. Stock is at 12 months lows.
• Advanced Braking (ASX:ABV– market cap: $21m) – With the business maturing and getting scale, and new products being commercialised, we are expecting a strong FY25 from ABV. While the share price is off its lows, it continues to trade on ~10x FY25 PE multiple.
• Count (ASX:CUP – market cap: $88m) FY25 will benefit from the full year contribution from DVR and, while there is execution risk, CUP should deliver a $10m+ NPAT result for FY25. Trading at multi-year lows.
• Prime Financial (ASX:PFG – market cap: $49m). FY25 will see PFG achieve its near-term revenue goal of $50m, with 25%+ EBITDA margins being targeted. Share-price is at 12 months lows.
• RPM Automotive (ASX:RPM – market cap: $18m) – the strong operational performance under new management is expected to continue with a strong FY24 NPAT result a catalyst for a re-rate. Trading close to multi-year lows.
• EDU Australia (ASX:EDU– market cap: $15m) – recent IKON growth rates of 244% underpin a return to profit and cash generation in CY24 for EDU. Trading at all time lows.
• AFL Legal (ASX:AFL – market cap: $12m) – FY25 to benefit from contribution of the recently acquired contested wills and estates practice which is accretive and helpful from a revenue diversification perspective. Trading close to multi-year lows.
• Pure Profile (ASX:PPL – market cap: $24m) We expect PPL to deliver a strong improvement in reported NPAT in FY24. FY25 will benefit from ongoing organic growth and a material contribution from its recent i-Link acquisition.   Trading at multi-year lows.
• Kip McGrath (ASX:KME – market cap: $17m) – KME recently reported a return to profit, generating >$1m NPAT in the second half of FY24. With a re-focused board, we expect profit to grow strongly in FY25. Trading close to multi-year lows.
• PharmX (ASX:PHX – market cap: $23m) – Ongoing litigation has taken the focus off this high quality, under-the-radar, profitable pharmacy gateway business supporting $20bn in GTV spend in pharmacies. We expect the litigation to be resolved this calendar year, which will make PHX a much cleaner and more investable proposition. Trading close to multi-year lows.
• Austco Healthcare (ASX:AHC – market cap: $65m) With strong second half momentum, AHC will also benefit from its recent Amentco acquisition ($13m revenue and $3m EBITDA) and conversion of the record orderbook in FY25.

We are enthused about our portfolio of the unique, under-the-radar companies that we own, and our strategy of benefiting from the long-term potential upside from these positions as they grow and become more widely known. With very few funds looking over the companies that we are focussed on and drawing on DMXAM’s almost 10 years of specialist investing in the micro/nano-cap space, we believe we are well placed to continue to build a unique, interesting and prospective portfolio at an attractive point in the cycle of small cap stocks.

As noted last month, whilst sentiment towards micro and nano-caps generally still remains low, there are clear green shoots, with an increasingly level of capital raising activity and, after a prolonged challenging period in this part of the market, we are optimistic about the prospects for FY25.

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