Dear Shareholder,

 DMXCP’s NAV increased 0.8% (after all accrued management fees and expenses) for May 2024. The NAV as at 31 May 2024 was $2.4320, compared to $2.4134 as at 30 April 2024.

Australian equity markets were mixed during May – the All Ordinaries was up 0.5% while the Small Ordinaries decreased 0.1%. The Emerging Companies Index continued its recent rise finishing up 0.6%.  

Material contributors for the month included Medadvisor (ASX:MDR) which rose 47% after guiding to a maiden profit result for the year, while Verbrec (ASX:VBC) increased 43% with some renewed interest in the stock following a market update. Key detractors included Joyce Corporation (ASX:JYC) which gave up last month’s gains, falling 16% on no news and AFL Legal (ASX:AFL) which fell 15% during the month following a weaker than expected third quarter result.

Portfolio news

May is typically a quiet month for company news; however, we saw a number of holdings report trading updates, including many of our larger positions. We set out our top 10 holdings below, and comment on some of the recent news relating to these positions.

In relation to these positions (that comprise ~45% of the portfolio) and the recent updates, we make the following observations:

• Growth – we want to own growing companies that have the potential to grow from small, under the radar companies into more widely known larger companies. As noted in the updates above, we continue to see portfolio companies report strong double-digit revenue growth, which drives strong earnings growth.
• Scale – while the market caps may be on the small side, we own some substantial businesses with six of the positions noted above having annual revenues in excess of $100m (SEQ, VBC, SMP, JYC, CUP, MDR). With these large revenue bases, small improvements in profit margins can lead to meaningful increases in profit.
• Profit – with MDR reporting its maiden NPAT result, all the above positions are now EPS positive. We expect strong EPS growth from these holdings from here.
• Value – we continue to see exceptional value in the smaller end of the market, with many positions (VBC, CUP, SEQ, EVO, JYC) trading on single digit NPAT multiples with little expectations of growth reflected in their market pricing.

We provide additional commentary on some of these positions below:

Verbrec (ASX:VBC)

Last month we discussed our thesis for VBC, – an engineering and design firm, with a focus on electrification & energy storage projects and gas market transition. These are  growth areas supported by strong tailwinds. In May, the Australian Government released a medium and long-term strategy that emphasises the important role gas will play in the transition to net zero by 2050. Gas supplies 27 per cent of Australia’s energy needs and represents 14 per cent of Australia’s export income, with the government committed to promoting continued exploration, investment and development in the gas sector and to avoid a shortfall in gas supplies. As a key service provider to the gas sector, this is particularly positive for VBC. VBC services the entire project asset lifecycle from initial concepts, design, construction, staff training, asset management, to de-commissioning. VBC is the largest provider of asset maintenance services to the Santos gas pipeline network.

VBC also continues to service demand in emerging battery and energy storage technologies and is currently engaged in the trial of two different long-duration battery storage technologies, both of which are being trialled for the first time in Australia. With improving margins, pipeline and outlook, supported by some compelling structural tailwinds, VBC is well placed for strong growth, leveraging its capabilities to service the increased demand for new energy projects.

Stockbroker Veritas Securities released a note during the month highlighting the opportunity here: VBC at 13c was trading on a FY25 PE of 4x, with forecast EPS growth over the next two years of ~40%. It is the most attractively valued (lowest multiple) and has highest forecast earnings growth amongst similar engineering, construction and maintenance ASX-listed companies, sitting firmly by itself in the lower right quadrant (low valuation/high growth) in the chart below.

Findi (ASX:FND)

During May we were pleased to have spent some time in India (Delhi, Pune & Mumbai) as part of an investor road show which was hosted by the FND board and management and which included other FND existing investors, interested potential investors and broking analysts. The visit was helpful in providing additional insight and understanding of the FND opportunity. Please see our article where we discuss the trip in detail: Findi – A research trip to India – DMXAM

Medadvisor (ASX:MDR)

We have been long term holders of MDR, attracted to its tremendous market opportunity in the US, capitalising on large pharmaceutical companies looking to transition their significant spending on medication adherence to the innovative and smarter digital adherence solutions that MDR offers. While revenue growth over recent years has been strong, MDR has, to date, struggled to convert its substantial revenues into profit. Further, there have been market concerns that some of MDR’s recent growth had been driven by one-off COVID vaccine campaigns. However, FY24 has seen MDR dispel these concerns, delivering 20%+ revenue growth and its maiden NPAT result. The next stage of the MDR journey is to further restructure its cost base. Although not cheap based on current earnings, with near term revenue broker expectations of $150m+ and EBITDA margins of 20-30% following its cost restructuring, MDR is now making encouraging progress towards becoming a highly profitable business.

Whilst sentiment towards illiquid micro-caps generally still remains low, there are clear green shoots, with an increasingly level of capital raising activity and a number of small companies enjoying strong share price momentum. While June inevitably sees some tax-loss selling, the underlying fundamentals of the portfolio are improving. As we head towards year end, and 30 June reporting, as highlighted above, most of our larger positions have recently reported and/or provided guidance, reducing the risk of negative surprises during reporting season.  Our top 10 positions, and across the portfolio more broadly, are for the most part delivering strong revenue growth, improving margins and have clear pathways to stronger future profit growth. 

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