Dear Shareholder,

 DMXCP’s NAV increased 4.1% (after all accrued management fees and expenses) for November 2023.  On 30 November 2023, DMXCP went ‘ex’ a dividend of 7.5c plus 3.2c in franking credits. The dividend will be paid on 12 December 2023. The NAV as at 30 November 2022 was $2.3846 (cum-dividend) and $2.2774 (ex-dividend), compared to $2.2917 as at 30 October 2023.

After a weak October, markets staged a recovery in November – the All Ordinaries was up 4.7% while the Small Ordinaries increased 6.9% and the Emerging Companies Index was up 3.7%.

Key contributors for the month included Findi (ASX:FND) and Diverger (ASX:DVR) – we comment on both of these below. Detractors included Field Solution Group (ASX:FSG) and Soco Corporation (ASX:SOC) which declined on no specific news.

Diverger Update

During the month, we were pleased to see a revised offer for DVR from Count (ASX:CUP) at $1.365. In addition, CUP has permitted DVR to pay a special dividend, with potential value in the franking credits of up to $0.043. Since the announcement of the first CUP offer, CUP’s share price has increased, so a component of the increase in consideration reflects the CUP share price uplift. Nevertheless, the headline offer price is a pleasing 20% increase on CUP’s initial offer price of $1.14 per share (and excluding any value of the franking credits).

As previously noted, we did not believe that CUP’s initial offer (which had been recommended by the DVR directors) appropriately reflected the fair value of the DVR business. We viewed the 25%+ accretion to CUP’s earnings as a result of acquiring DVR as excessive, and which we felt DVR shareholders were not being appropriately compensated for. When the initial low-ball offer was announced, we advised that we were conscious of doing the right thing by our investors by voicing our feedback and engaging with the various parties to try and achieve a better outcome for our investors and DVR shareholders, that more appropriately valued the DVR business.

Over the following weeks we had various meetings/discussions with DVR and other stakeholders, where we outlined our views and our intention to reject the CUP offer. We were also contacted by a number of other DVR shareholders who were similarly underwhelmed by the CUP offer price. While it was never put to a vote, we were confident that there were sufficient DVR shareholders (>25% of the register) aligned with us to reject the initial CUP offer, notwithstanding that:

• DVR’s major shareholder HUB (34% shareholding) intended to accept the offer;
• all of the DVR directors intended to accept the offer, and
• the DVR board had unanimously recommended that all DVR shareholders vote in favour of the offer.

DVR also held its AGM during the month where it noted it was “well on the way to achieving our earnings targets with FY24 looking to come in at the higher end of the forecast range”. This would see DVR generate EPS of 13c+. We feel any bidder that secures DVR for less than $1.40 is getting a very good deal. Having said that, we consider the revised CUP offer to represent a fairer outcome, particularly for those who wish to continue as shareholders in the merged entity. We continue our due diligence in relation to this.  

The DVR journey has been an interesting one, and, for us, ultimately successful. We were attracted to DVR’s market leading assets and cash flow generation, which has continued over the years since we acquired our initial position in 2017. The entry of HUB24 (ASX:HUB) onto the register as DVR’s largest shareholder in 2021, in our view, (negatively) changed the dynamics at the board level, but DVR continued to make encouraging operational progress.  If DVR had achieved its FY25 EPS target of ~20c EPS, we would have expected a meaningful share price re-rate. However, we acknowledge that there was work required to get that target, and given the other opportunities we are seeing in this current market, the improved CUP offer does provide an opportune liquidity event for us, at a not unreasonable price.

Findi

We acquired our shares and options in FND, an Indian ATM operator and banking services provider, after participating in the underwriting of a capital raise in December 2021. Since then, FND has surprised on the upside in relation to its execution and earnings growth with recent news highlighting that progress:  

• In late October, FND’s Indian subsidiary secured a 10-year ATM contract with the State Bank of India (SBI). This extended deal is expected to generate $250-280 million over 10 years at an IRR of 35%. Along with the previously announced deal with the Central Bank of India (CBI), it provides earnings certainty for the medium term.
• During November, FND reported a strong set of half year numbers. Operating cash of $20m was recorded for the half, with FY24 EBITDA guidance of $24m re-affirmed.  FND’s closest peer, CMS Info Systems, trades on 9x FY24 EBITDA, while FND is priced at 2.5x FY24 EBITDA before any uplift from the SBI contract.

Our DCF for FND is ~ $3.00, with our forecast cash flows based primarily on already contracted earnings with major Indian banks, and excludes the potential contribution from a number of upside initiatives. 

Notwithstanding FND’s strong share price rise over the last couple of months, we think a significant de-risking of the Findi business has occurred, and we can be more confident of its future prospects. With the 90-cent options acquired through the capital raise now in the money, we have the opportunity to increase our investment in FND. Given our view of the current low valuation, multiple growth options, and emerging track record, we are likely to exercise these options in January 2024. 

Chris Steptoe discusses our FND thesis in more detail here.

AGM updates

November saw the majority of our portfolio companies hold their AGM’s, which usually also included a year-to-date trading update. Across the portfolio there was limited surprises. Holdings that had previously provided guidance at their full year results, all re-confirmed their guidance at their AGM updates. Several holdings including Smartpay (ASX:SMP) and Joyce Corp (ASX:JYC), not unexpectedly, reported some challenges due to the weaker economic environment However, the majority of holdings have guided for good levels of growth, with costs being relatively contained.

Amongst our smaller market-cap holdings, it was pleasing to see Knosys (ASX:KNO) deliver a positive EBITDA result for the quarter of $0.2m – a significant improvement due to expense reductions from a restructure in Q4 FY23. KNO is targeting 10% organic revenue growth in FY24.  Careteq (ASX:CTQ) confirmed it is “on track” to meet its key near term financial milestones including growing its medication management JV to $1.5m EBITDA in FY24, and approaching group profit. Achievement of those milestones should drive a re-rate.  As mentioned last month, with EVs of $2 to $3m, these opportunities are essentially being priced for failure/bankruptcy, or at least as if they are shells with no value attributable to the IP or the business assets. Even modestly successful execution from here should see a good outcome, with significant potential upside from these very low bases.

Christmas wishes and concluding comments for 2023

2023 has certainly been another challenging year. The bear market experienced by smaller companies has been ongoing for 18 – 24 months now. While we don’t know when, markets conditions will improve, and we remain positive and believe we are well positioned in generally difficult to replicate positions, for when we come out the other side:

• The departure of investors from the smallest companies, and lack of interest in these companies, has given us the opportunity to acquire and add to positions at bottom of the cycle prices. An example is CTQ where we recently lead its re-capitalisation at 2.5c, with the company having IPO’d early last year at 20c (which we passed on at the time);
• A number of companies that were causing us headaches 12 months ago have now worked through their issues (such as SEQ, AFL and EPY) and are now well positioned for strong profit growth; and
• More broadly, expectations are low, and valuations are generally very attractive, with multiple portfolio names trading on less than 10x earnings yet have attractive growth profiles. We would expect over time good outcomes from such situations.

As this is the last newsletter before Christmas, we would like to take this opportunity to wish you and your family a safe and merry Christmas and an enjoyable new year.

We thank all our investors for their support, patience, and for the confidence you have shown in us and our strategy. We are privileged to have such a loyal and supportive group of long-term investors.