September, 2023
The Ellerston Australian Microcap Fund outperformed the S&P/ASX Small Ordinaries Accumulation Index by 1.69%, with the market finishing down 4.04%. The best performing sector in the Small Ordinaries was energy, up almost 16%, In contrast with real estate which fell by almost 8%. The market selloff was macro driven, with the September monthly CPI indicator showing we aren't out of the woods yet, with inflation reaccelerating to over 5% for the year. The spike in fuel prices, a stubbornly strong job market, and rebounding house prices have added to inflationary pressure, causing the market to push out rate cut expectations into late 2024. Meanwhile the surging US bond yields and consequential lower AUD are only exacerbating the situation.
Tuas (TUA AU) is an owner/operator of a national mobile network in Singapore. During September, the share price for TUA rose 11% on the back of their FY23 result. The FY23 result saw TUA beat on market estimates for subscriber net adds, revenue and EBITDA. The business increased revenues 50% yoy and more than doubled EBITDA, as it continues to win market share off the incumbent telcos. The business is expected to launch its fibre broadband product in 1H24, and given its attractive price point, should see TUA replicate its initial prepaid success in the broadband market. TUA remains one of our core positions for the fund.
Generation Development Group (GDG AU) is a specialist provider of investment bonds solutions, alongwith an investment-linked lifetime annuity product. During September the stock rallied by 11%, following a very strong FY23 result. While it's been a volatile period in financial markets, we were pleased with the rebound in sales throughout the quarter and we expect this momentum to continue in FY24. Additionally, Lonsec (which GDG owns 49% of) continues to thrive, with the Investment Solutions division continuing to outperform. The recently launched lifetime annuity product is small but gaining momentum, and we are optimistic about this opportunity which is supported by regulatory and demographic tailwinds. The stock remains one of our higher conviction positions.
Having wropped up our post result meetings with company management, we are now in preparation for AGM season, which is effectively a mini reporting season, and upcoming broker conferences. During this period, the market will be paying close attention to September quarter trading updates, along with any outlook commentary or guidance. This is a great opportunity for us to explore new names, while ensuring our existing portfolio companies are tracking in line with our expectations.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2309_MicroCap-Fund-Newsletter.pdfAugust, 2023
The Ellerston Australian Microcap Fund delivered 0.34%, outperforming the Small Ordinaries Accumulation Index which finished down 1.31%. We do note that at one point during the month the market was down over 3%, before recovering as it waited for Fed Chair Powell to comment at the annual Jackson Hole summit, and digested concerns around the Chinese economy.
Closer to home, August is reporting season and to a large extent, it played out as we had anticipated, with inflationary costs impacting margins and higher interest and lease costs drsagging on EPS. Overall, cyclicals and consumer facing companies outperformed expectations, while large caps and defensives had a more challenging August. As anticipated, not many companies provided guidance but those that did were generally rewarded. While reporting season can see volatility in share prices, we find it also creates numerous opportunities and allows us to reset our expectations with new information at hand, setting us up for the 2Q of the financial year.
During the month, several of our stocks outperformed. Duratec (DUR AU) saw its share price rise by over 18%, DUR is an Australian engineering and remediation contractor that specialises in upgrading and extending the life and use of infrastructure assets. Both revenue and EBITDA numbers that were reported were at the top end of the guidance range, with $491.8m of revenue vs $465m-$495m and $38.8m of EBITDA vs Having already upgraded its guidance range in April, we see this as a terrific result with strong exit run rates, particularly at the EBITDA line. We hold DUR as one of our core positions within our Microcap Fund.
Babybunting (BBN AU) also rallied strongly ending the month up 32%. The stock had been significantly sold off following a raft of negative trading updates, combined with a CEO The stock rallied following a release which showed the FY23 result was no worse than feared, combined with a better-than-expected trading update for July, as well as the announcement of a cost base reduction. Despite an uncertain macro outlook, we think BBN should be able to improve its financial performance through a recovering consumer, self-help initiatives and its store rollout potential as a category killer.
Helloworld (HLO AU) finished the month up 12%. HLO was one of very few companies tows provide the market with FY24 guidance and was rightfully rewarded. The group is guiding for EBITDA of $64-72m which implies 45-63% growth. Given we are only early in the year ate and with a number of acquisitions undertaken in the back end of FY23, we believe guidance may prove to be conservative.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2308_MicroCap-Fund-Newsletter.pdfJuly, 2023
The Ellerston Australian Microcap Fund delivered 1.73%, underperforming the Small Ordinaries Accumulation Index which finished up 3.54%. During the month, the RBA paused interest rates and announced the replacement of RBA Governor Phillip Lowe with Michelle Bullock. Bond yields rose slightly as the market changed its expectations that rates may remain at peak levels for longer. Looking more specifically at stock news, M&A remained elevated as Costa (CGC AU), best known for avocados and berries, received a bid at $3.50 per share while UMG Group (UMG AU) entered a scheme Implementation deed at $5.00 per share. We have also seen capital raises pick up at the smaller end of the market as companies look to bolt on growth to their current base.
In July, the market digested a lot of stock specific news flow with in full swing and companies pre releasing their full year results. This saw many of the travel names upgrade guidance or provide positive trading updates-Flight Centre (FLT AU) up 23% : Corporate Travel (CTD AU) up 17% and Siteminder (SDR AU) up 44%. While retailers like KMD Group (KMD AU) and Michael Hill (MHJ AU) cited softer trading is continuing. Resources updates were a mixed bag with the lithium names struggling.
RPM Global (RUL AU) was a strong performer, delivering 10%. This was on the back of the company providing an update on its FY23 software sales and guidance. RUL reported that it now has A$126m in pre-contracted, recurring, non-cancellable software revenue which was up 32% on the prior year. Total Annual Recurring Revenue now stands at A$55m. FY23 operating EBITDA, before once-off management incentives, is now expected to finish at A$15m, which compared to the company's guidance of A$13.8m. We continue to see RUL as a high-quality play, noting its blue-chip customer base, its profitability, and the share buybock it is currently undertaking. RUL remains a high conviction position for the fund.
One of our top performers for the month of July was MMA Offshore (MRM AU), which finished the month up 14%. This price move was on the back of a +15% upgrade to consensus when guidance for FY23 was issued that would see EBITDA between $66-68m. The trading update also implied that momentum is likely to continue. MRM's vessel utilisation over 2H23 was 79%. We believe this is very impressive given that three of their larger vessels were in dry dock for much of the third quarter of the year when compared to S their 71% utilisation from 2H22. This update was a strong indicator of the leverage that can come through with this business, and we believe this cycle is still some time from the peok ate with day rate and utilisation still ramping up rapidly. We hold this as a high conviction our portfolio and still see significant upside from here.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2307_MicroCap-Fund-Newsletter.pdfJune, 2023
The Ellerston Australian Microcap Fund delivered 2.11%, outperforming the Small Ordinaries Index whichfinished flat at 0.03%. This was the second month in a row where large cops outperformed small caps. In June we saw the RBA hike rates by 25bp, May monthly CPI beat expectations, both of which contributed to further consumer weakness. We saw a number of consumer discretionary names continue to drift on the back of negative sentiment and consensus estimate downgrades. M&A activity remained elevated with PointsBet receiving multiple bids for its US business, while Perenti bid for DDH1.
Qoria Limited (QOR AU), formally Family Zone, had a strong month finishing up 40% on the back of two positive announcements. QOR is one of the only global providers of digital safety and student wellbeing solutions. Its services look after over 13m students; 5m parents and 24k schools globally. QOR's share price was supported by its trading update which reported that its ARR was at +$95m before entering its seasonal strong quarter while its fixed costs remained stable, producing gross margins of +80%. The group also outlined the pathway to EBITDA profitability and 20% EBITDA margins over the next 24 months. QOR also announced a new debt facility which should help clean up the group's capital structure and remove the doubt of a further capital raise. We don't have many stocks in the portfolio which are loss making, however, when we see a business that has the ability to take market share globally and a line of sight to cashflow breakeven we are happy to invest.
We only recently wrote about Fleetwood (FWD AU},but once again it contributed strongly to this month's performance with the stock rallying 26% on the back of an additional contract with RIO which can generate a further $100-120m in revenue over a number of years. Our attraction to FWD has always been around the operating leverage that the Searipple village can deliver to earnings. This asset over the last 10 years has been heavily written off on FWD's balance sheet given the historic downturn in accommodation requirements around Karratha. However, over the last few years, even though occupancy had remained low compared to historical averages, it has been a solid cash producing asset. We believe that as more projects are launched around the Karratha region, this asset can once again start printing —$30m+ of EBIT which is more than the entire business is generating currently. We believe further contracts on top of its already announced contracts should see o continued re•rating to the FWD share price.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2306_MicroCap-Fund-Newsletter.pdfMay, 2023
The Ellerston Australian Micro Cap Fund outperformed the Small Ordinaries Index by 0.14% in the month of May. The market was weighed down by noise around the US debt ceiling and closer to home, fears around higher inflation and rising interest rates. In May we also saw weakness in Small Resources with the index down over 7% with coal, gold and copper names all being hit. On the flip side we saw a strong rally in tech names on the back of the frenzy in AI sparked by NVIDIA's 2Q trading update in the US.
May can be a mini reporting seasons with numerous conferences taking place which can require companies to provide trading updates. We entered May being very cautious around consumer facing names and anticipating a wave of downgrades. Early trading updates in May were a mixed bag with Media exposed names being hit heavily while large cap retailers such as Super Retail Group and JB Hi-Fi weathered the storm slightly better. However as the month progressed, a number of domestic retailers began providing negative trading updates, with consumer conditions markedly tougher post the Easter period.
File:April, 2023
The Ellerston Australian Micro Cap Fund outperformed the Small Ordinaries Index by 1.0% in the month of April. The market rallied in April partially based on the Reserve Bank of Australia (RBA) pausing interest rate rises (we note RBA moved rates by 0.25% in May),the anticipation of a softer landing and signs that global inflation was on a downward trajectory. We continued to see M&A appear with Kirin bidding for Blackmores and Wesfarmers/API bidding for Silk Lasers to name two.
More importantly, we saw at the smaller end of the market, fundamentals return. By this we mean catalysts and changes in earnings once again drove share price movements. The quarter was filled with news flow as companies got a handle on their 3Q results, and many cleansing the market before conference season kicked off. Turning to the portfolio, three stocks that had a strong April were Helloworld Travel (HLO AU); SmartPay (SMP AU) and Fleetwood Limited (FWD AU). We first bought into HLO in 2021 when it sold its corporate travel division to Corporate Travel Management (CTD AU) for $175m ($100m cash + $75m in CTD scrip).
While the transaction removed an earnings stream for HLO, it fundamentally changed the balance sheet of the business. HLO has benefited from the opening of borders and the recovery of leisure. This was clearly demonstrated in April when the Group provided a 3Q trading update, materially upgrading EBITDA guidance (+31-36%) to $38-42m (from $28-32m). This is the second upgrade that HLO has pushed through this year and there is further scope as guidance implies a weaker 4Q despite this usually being a seasonally stronger period. With Management being major shareholders and a balance sheet, which is ready to undertake M&A we believe HLO remains materially undervalued.
File:March, 2023
The Ellerston Australia nMicro Cap Fund outperformed the Small Ordinaries Index by 0.42% in the month of March.lt was a roller coaster ride for small caps with the index being down over 5% mid-month before recovering to close-0.72% on the back of a wave of takeover offers. From a macro point of view, March was one of the more interesting months that we have had in some time. We saw the failure of multiple US banks with Silicon Valley Bank (SVB) having some direct contagion into the Australian market. We also saw the rescuing of Credit Subse by UBS. Unlike previous periods of financial distress, regulators were on the front foot which appears to have stemmed any broader contagion.
March also saw a wave of M&A. In the Industrial space we saw all cash bids for United Malt from an industry player and Invocare, which was trading near COVID lows, be pounced on by private equity. In the healthcare space, Estia Health received o credible bid from Bain Capital while Australian Clinical Labs made on opportunistic scrip bid for Healius. The most dramatic impact to small cops in March was Albemarle's bid for Liontown - a lithium explorer. Liontown holds a reasonably large weight in the index and was also heavily shorted, which resulted in the stock rallying more than the bid price. It also had a chain reaction sending other lithium names soaring. Ultimately this dynamic resulted in the Small Resources Index finish up 6% on the doy and 5.57% for the month (vs Small Industrials which finished down 3.0194 We think M&A will remain a large thematic goingforward.
We remain cautious of broad-based EPS growth across the market. This, coupled with rising interest rates and the push and pull of inflation/rate expectations, leaves us of the belief that we are back in a stock-pickers market. We continue to look for companies that can grow revenue and navigate inflationary pressures through the current period.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/MicroCap-Fund-Newsletter-March-23.pdfFebruary, 2023
The Ellerston Australian Micro Cap Fund finished the month up 0.1% outperforming the Small Ordinaries Index which finished down 3.7%. The market gave back some of its gains from January weighed down by Resources, Healthcare and Energy. Statistically, reporting season disappointed the market with more companies missing consensus estimates which resulted in net downgrades across the board. However, what we would say is the drivers of the earnings downgrades were very much inline with our expectations and what we have been discussing in these newsletters over the last 6 months. We saw higher wages impacting costs bases; we saw rising interest rates impacting net interest costs; and we saw inventory levels that couldn’t be cleared or if they were cleared, with the use of discounting. The mixture of all these issues meant that cash balances have diminished (or debt has increased) and management discussions around price rises, “right sizing” and re-considering their capital allocation policy were front of mind.
This reporting season highlighted the markets grapple with what are the right multiples for businesses with an uncertain earnings trajectory. On one hand we had GUD Holdings which supplies aftermarket parts up 28% verse a Temple & Webster an online retailer down 38%. While there are many differences between these two names, most simply we have defensive retailer verse an expensive cash burning retailer. This dichotomy played out across the market with a rotation back towards defensives over the growth/ risk shift we saw in December and January. Two companies which reported a reasonable result in February whose valuations over the last 6 months have come back into more agreeable territories are DGL Group and Aussie Broadband. DGL group (DGL AU), a provider of diversified services within the chemical manufacturing, warehousing, distribution and environmental services, closed the month of February up 20%.
The share price ran throughout the month in anticipation of the H1 FY23 results, which was released on the 28th February. DGL demonstrated strong revenue growth of 52% on the prior period, driven both by acquisitive activity in the half as well as strong organic growth. Cash flow conversion, which had been an issue in previous results, came in very strong for H1 FY23 at 108%. The result was accompanied by an upgrade to the guided EBITDA range, from $70-$72m to $71.5-$73.5m for FY23, and was coupled with guidance to strong underlying cash flow conversion of 90-95%. We hold DGL as one of our core positions and look forward to a strong half in which DGL continues to leverage their specialised solutions in the chemical manufacturing and logistics space.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2302-MicroCap-Fund-Newsletter.pdfJanuary, 2023
January saw the equity markets rally strongly on the back of easing fears around interest rates with the perception that inflation may have peaked. This saw discretionary stocks take off with the likes of Super Retail Group up 18% and JB-Hi-Fi up 15% on the back of positive trading updates. Discretionary stocks with larger than usual short interest also outperformed, with Breville up 23% and ARB Limited up 24%. Other deeper value cyclicals also had positive momentum with Media and Telco stocks having a good run. Materials stocks weren't left out, however, it mattered very much which commodity you were in with lithium and rare earth stocks outperforming the coal names. The Ellerston Australian Micro Cap Fund finished the month up 2.95% verse the Small Ordinaries up 6.56%.
While January is usually a quiet month as the market comes back from the Christmas break and prepares for the February reporting season, it wasn't the case this year. We saw numerous M&A transactions and trading updates. Two of our companies that provided updates were Austin Engineering and OFX Group.
Austin Engineering (ANG AU) is a mining services company that specialises in the construction of light-weight buckets and trays for large mining plant and equipment. In January, ANG's share price rose by 23% on the back of a very solid trading update at the end of the month. In its trading update, the group confirmed that it had received confirmed orders and contracts for its budgeted $250m FY23 revenue. This means that any additional contracts signed to March have a high probability of being realised in FY23 and provide further upside. In this update, ANG confirmed a positive outlook for the mining equipment market for the next 18 months. We continue to be excited by the prospects of ANG going forward, as it continues to realise both cost and revenue synergies from its Mainetec acquisition, tapping into the huge potential of the US market.
OFX Group (OFX AU) was one of our weaker performers for the month, declining by 17% on the third quarter trading update. This reflected softer consumer revenue, as the mix of transactions shifted from larger property/wealth transfers towards travel. This normalisation is broadly in line with our expectations, and we were pleased to see the corporate segment, which is now the engine room, firing on all cylinders.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2301-Ellerston-Asia-Growth-Fund-Newsletter.pdfDecember, 2022
December saw a reversal of the exceptionally strong November period with the market finishing down 3.73%. The Ellerston Australian Microcap Fund outperformed the Small Ordinaries Accumulation Index by 1.18%. The market was weighed down by higher-thanexpected US Nonfarm payrolls which in turn meant that equity markets expected a delay in the US Federal Reserve (Fed)“pivot”.
Looking more broadly at CY22, it has been a particularly challenging year for Micro and Small Caps with the Small Ordinaries finishing down 18.38% compared to the ASX 100 which was broadly flat at +0.63. The smaller end of the market was disproportionality impacted by the withdrawal of liquidity due to tightening monetary policy. This led to significantly reduced volumes across financial markets (especially at the small end of town). We also saw the Small Industrial Index derate heavily as higher inflation rates accentuated existing cost pressures at an industry level. While at an asset allocation level, it drove a rotation out of Industrials into Resources which have historically benefited in inflationary environments.
Contributing to the Fund’s performance in December was MMA Offshore (MRM AU) and Acrow Formwork & Construction (ACF AU). During December, MMA Offshore (MRM AU) was one of our top performers with a share price increase of 27% for the month. MRM released a trading update in which they upgraded 1H23 to the range of $30-32m of EBITDA. This was on the back of a considerably high utilisation of their MPSV vessels - the largest and most expensive of their fleet. We anticipate the overall utilisation rate to continue to grow year on year, reflecting strong tailwinds from both the oil and gas and offshore wind sectors as they ramp up production. We hold MRM as a core position in our portfolio and believe that this is just the beginning of the operational leverage the business can generate at high fleet utilisation and increasing day rates for vessel hire.
Acrow Formwork and Construction Services (ACF AU) performed admirably in the month of December. It’s share price rose 9% in anticipation of their 1H FY23 results due in February. Going into December, there was much speculation over Clough Engineering and their involvement in the Snowy Hydro 2.0 project. However, fears were abated when ACF clarified that they had no debt exposure to Clough for this project. ACF has a strong track record of meeting/beating its guidance, and we believe the outlook for secured hire revenue and increased margins is positive. We hold ACF as a core position into the result and feel there is more of the story yet to play out.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2212-MicroCap-Fund-Newsletter.pdfNovember, 2022
November was a challenging month for the Ellerston Australian Microcap Fund which delivered -2.29%, compared to the Small Ordinaries Accumulation Index which put on 4.92%. Our lack of resource exposure hurt us with the Small Resources index rallying 12%, compared to a modest 3% increase in the Small Industrials. We also had a few “own goals” with the likes of Bravura Solutions and Helloworld Travel trading down significantly which we will discuss in detail below.
Looking more broadly at the market, the strong rally in November was a function of the softer than expected US CPI print, and dovish commentary from the Fed. Accordingly, the markets have peeled back their terminal rate expectations and the Australian 10-year bond yield declined by 20bps. In November we saw significant news flow with many of our portfolio companies - and the general market - providing trading updates at their AGMs and broker conferences. The updates were mixed with the consumer holding up surprisingly well although the headwinds are building, with cost pressures still present (albeit moderating) and funding costs continuing to rise. The markets remain extremely volatile which is creating opportunities and we think well-funded companies will look at resuming M&A activity to capitalise on current conditions. Turning to stocks, and where our performance went wrong in November. Firstly, it was a tough month for Bravura Solutions (BVS AU) a provider of middle and back-office technology solutions for the funds administration and wealth management sectors.
The stock fell materially after revealing initial take outs from their strategic review which has been ongoing since the full year result. As a result of this review, BVS significantly downgraded their revenue, EBITDA and NPAT guidance on the back of delays in signing new contracts as well as an increase in their cost base that exceeded our expectations. While we understood that BVS had a number of hairs on it, we were a fan of its sticky customer base and integrated technology. We were of the view that the elevated cost base could be right-sized and the business could be more streamlined going forward. The announcement in November took us (and the market) by surprise when it was announced that further costs were going to be added into the business and some smaller clients’ contracts were winding down. Given the material change in the earnings outlook and the lack of clarity on near term earnings and increasing costs, we exited the position.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2211-MicroCap-Fund-Newsletter.pdfOctober, 2022
The Ellerston Australian Microcap Fund delivered 4.3% in October while the Small Ordinaries Accumulation Index rallied strongly up 6.5%, rebounding from September’s weakness. The month was full of central bank news with the RBA and BOC being more dovish than the market had anticipated with smaller hikes announced. The market saw glimmers of hope that inflationary pressure might have been easing with shipping costs retreating and US rents starting to roll. While we are not macro investors, we are watching inflation closely and believe it will be weighing on our portfolio companies for a while to come. Looking to Asia, China had a rough month with the Hang Seng finishing down 14.7% on the back of concerns around Chinese property and CCP Congress which saw weaker iron ore prices and the AUD/USD sell off heavily early in the month before finishing roughly flat. We continue to see M&A being a key theme in the market with a number of additional bids occurring predominately focused on the tech space with Nitro, ReadyTech and Pushpay all getting bids.
October was also full of news flow for our portfolio companies and the general market with both AGMs ramping up and wave of broker conferences. Trading updates were mixed but general themes came as no surprise with cost inflation and consumer demand being discussed ferociously. Turning to the portfolio, several our stocks had solid trading updates which helped support October’s performance.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2210-MicroCap-Fund-Newsletter.pdfSeptember, 2022
The Ellerston Australian Micro Cap Fund outperformed the Small Ordinaries Accumulation Index by 4.40% during September. It was a rough month for the benchmark which finished down over 11%, mainly on the back of the ongoing inflationary pressure in the US and the consequential higher interest rate expectations. Small Resources fell by almost 14%, trailing the Small Industrials by almost 3%. The worst performing sectors were Financials and Information Technology, both off by around 12%, while Energy and Industrials were the best performing, only giving away 3% and 6% respectively. The currency markets were also volatile, as the AUD/USD slid by 6% to 0.64.
Equity Trustees (EQT-AU) one of our higher conviction positions held its ground extremely well in what was a tough month for equities. The company provides trustee and related services to both corporate and personal clients. The business is extremely resilient, long duration earnings and a prudent management team. We think the market has digested the acquisition announced late in August. We think this acquisition makes perfect sense, the two businesses are highly complementary, brings additional scale and highly sought-after staff, and material cost synergies which should deliver double digit accretion. The business continues benefiting from structural tailwinds, and still has plenty of firepower to undertake further acquisitions.
Peter Warren (PWR-AU) one of Australia's largest car dealerships was a solid performer during the month. Order books are at record levels and continuing to grow despite supply starting to improve over the last couple month. This shows how well demand is holding up despite the macro backdrop. Another noteworthy event was private equity firm Quadrant sold their remaining 9.4% position in PWR to Suttons Motor Group, one of the largest private dealers in NSW.
August, 2022
The Ellerston Australian Microcap Fund trailed the Small Ordinaries Accumulation Index by 1.17% during August. It was a rollercoaster month for the benchmark which rallied in the first two weeks, before giving it all back in the second half after Powell's hawkish comments. Looking behind the index, small resources surged higher finishing up almost 6%, while Information and Technology and REITs fell by around 5%. To a large extent reporting season played out as we had anticipated, with labour shortages and inflationary pressures being key features. What was also interesting, and while backwards looking, the consumer has held up surprisingly well despite the rising cost of living. Overall, outlook commentary was relatively conservative across the board, which is to be expected given the macro uncertainty, and we saw FY23 EPS forecasts cut by a much needed 5% on average.
Servcorp (SRV AU), one of our core positions was a standout performer during the month, putting on almost 20%. The company provides workspace solutions, with operations in Australia and New Zealand, Asia, Europe, the Middle East and the USA. Servcorp's product offering includes the provision of physical corporate offices, individual desks in a co-working environment, hot desks and a virtual office solution, where the customer can work remotely while using Servcorp's address and ancillary services. The company delivered a solid result, managing its costs tightly and generating free cash flow, while benefiting from higher occupancy and pricing post covid. With nearly a third of its market cap in unencumbered cash, guidance for strong growth in FY23 and generating free cash flow of at least $60m, we believe there is significant upside in this name.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2208-MicroCap-Fund-Newsletter.pdfJuly, 2022
The Ellerston Australian Micro Cap Fund trailed the Small Ordinaries Accumulation Index by 1.86% during July. It was an incredibly solid month for global equity markets, with the benchmark rallying by over 11% driven by lower bond yields, and moderating rate-hike expectations. Healthcare led the charge, rising by 23%, while many of the heavily sold off tech names ran hard, driving the IT sector up almost 18%. The only sector that went backwards was consumer staples, albeit by a modest 3%, while small industrials also outperformed small resources for the second straight month. Confession season is well and truly underway. We saw Nuix and EML Payments falling by around 30% on a weaker trading update and a sudden CEO departure respectively. It was also tough month for some of the agriculture names with Bega Cheese and Costa Group down by circa 20% on weaker trading updates, while several other names were heavily sold off on the back of noise around a possible Foot and Mouth disease outbreak in Australia.
Two stocks that did well for us in July were Fleetwood and Tuas. Fleetwood (FWD AU) was a solid performer with the stock up +32% for the month. The group is a diversified business which provides accommodation in remote locations; a modular manufacturer and sells spare parts and accessories for caravans. FWD over the last decade has gone from market darling to an under-loved micro-cap. Over the last four years, FWD has transformed the business by selling off underperforming assets, purchased further modular businesses, bringing in new management and bolstering the balance sheet. Late June and early July were a roller coaster ride for the FWD share price with the company announcing both a downgrade and a material contract within days of each other. FWD’s Building Solutions business continued to have issues impacted by cost increases from material and labour shortages, project delays and unfavourable weather conditions. These problems resulted in a full year EBITA loss of circa $3-4m relative to market expectations of a small EBITA gain. Management believe, issues in its Building Solutions business should be well contained to the FY22 and 1H23 result. On the flip side of this horrible news, a few days later FWD then announced a material contract for its Searipple Village in Karratha. This is a five-year contract with Rio Tinto to provide 250 rooms per night on an exclusive basis. The contract should generate between $52-70m of revenue over the life of the contract and has the potential to increase if RIO takes up additional options. Our attraction to FWD has always been around the operating leverage that the Searipple village can deliver to earnings. This asset over the last 10 years has been heavily written off on FWD’s balance sheet given the historic downturn in accommodation requirements around Karratha.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2207_MicroCapNewsletter.pdfJune, 2022
The Ellerston Australian Micro Cap Fund outperformed the Small Ordinaries Accumulation Index by 1.83%during June. Overall, it was a rocky month for markets with the benchmark down by 13%, and for the first time in a while the Small Industrials outperformed the Small Resources, which fell by 22%. Telecommunications was the strongest performer during the month down 5%, closely followed by healthcare and consumer staples, as investors shifted towards the more defensive side of the market. The sell-off mainly reflected macro uncertainty along with rapid inflation across fuel, housing and food.
Upon reflection, fiscal 2022 was a rollercoaster year to say the least, and really a tale of two halves. Markets were buoyant in the first half, with the Small Ordinaries finishing up 4% driven by record low interest rates, stimulus, and ongoing economic reopening. However, this came to a grinding halt in the second half with the global Omicron outbreak and Chinese lockdown, capped off by the war in the Ukraine. The main consequences being choked up supply chains, an energy crisis, and rapidly rising commodity prices – all of which helped inflation rear its ugly head in a big way. As if the cost-of-living pressures weren’t already putting households under enough pressure, the Reserve Bank of Australia (RBA) backflipped on its guidance that rates would not rise until 2024 and began hiking at a pace not seen in decades. All of which drove the Small Ordinaries down by 25% in the second half, to finish down 20% for the year.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2206_MicroCapNewsletter.pdfMay, 2022
May was a volatile month with the Small ordinaries falling 7.01%., as the market digested rate hikes, inflation, the federal election, and ongoing concerns around recessions, particularly in the US. Once again small resources outperformed small industrials driven by the coal names. We saw continued weakness in housing and consumer discretionary names as the markets tried to process the new rate environment and inflationary fears, both of which will ultimately flow through households. M%A remains elevated with several non-binding approaches made across numerous sectors. Against this backdrop the Ellerston Australian Micro CapFund underperformed the small ordinaries Accumulation index by 3.76%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2205_MicroCapNewsletter.pdfMarch, 2022
The Ellerston Australian Micro Cap Fund finished up to 1.75% for March, underperforming the small ordinaries Accumulation Index which is up by 5.25%. The strong rally into month-end was once again driven by the resource index finishing up over 12 %. Outperforming the small industrial about 10%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2203_MicroCapNewsletter.pdfApril, 2022
The Ellerston Australian Micro Cap Fund underperformed the Small Ordinaries Accumulation Index by 1.40% in April. April was another challenging month for the equities markets with ongoing concerns around inflation, interest rates, COVID lockdowns in China and continuing Ukraine / Russia tension impacting sentiment. Closer to home we also had the starters gun go off on the upcoming Federal Election (called for the 21 May) with both parties releasing a range of new potential policies. While Australian markets were down for the month, they held up relatively better than US equities where we saw the S&P 500 down 8.7% and the NASDAQ down 13.2%. Against this macro backdrop as expected more defensive sectors outperformed while Information Technology sector was worst hit. Once again Small Resources (+0.3%) outperformed Small Industrials (-2.1%) pushed higher by the coal names.
During these volatile markets we continue to stick to our process of looking for stocks which provide a 3 to 1 risk return. While the market has been pushed higher by an exceptionally strong resource sector, it has meant that small industrials have been marked down aggressively. Small industrials are our bread and butter and this market sell off is creating opportunities to increase our weights in names we already hold and open new positions at highly attractive prices.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2204_MicroCapNewsletter.pdfJanuary, 2022
The Small Ordinaries Accumulation Index had a bumpy start to 2022, falling more than 12% at its peak to finish down 9% for the month. Once again the Small Industrials Index underperformed the Small Resources Index, and value stocks outperformed growth stocks. Looking more broadly, the All Ordinaries were down 6.6% in January which is the fourth worst start to the year since 1960. The global sell off was driven by rising real yields, as the Federal Reserve signalled that it would look to raise rates. With rising bond yields weighing on valuations, the All-Industrials PE de-rated by about 10% to 20x. Against this backdrop, the Ellerston Australian Micro Cap Fund outperformed the Small Ordinaries Accumulation Index by 0.90%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2201_MicroCapNewsletter.pdfDecember, 2021
The Ellerston Australian Micro Cap Fund had a weak December delivering -1.04% versus the Small Ordinaries Accumulation Index of 1.41%. Pleasingly for calendar year 2021 the Fund returned 21.61% taking the since inception annualized return to 24.59%.
Looking more closely at December, it was a volatile month with the Small Ordinaries Index down circa 4.5% at its lows, with fears around the Omicron variant weighing on sentiment. The usual Christmas rally arrived late in December but wasn’t sufficient for the Small Ordinaries Index to keep pace with the ASX100. The Small Ordinaries Index was strongly supported by Small Resources Index which was up 3.5% for the month, materially outperforming Small Industrials Index (+0.8%). Resources benefited from iron ore rebounding and oil rallying, with the Fund having no exposure to either thematic. M&A continued in the space, with the Virtus Health receiving a non-binding approach from BGH Capital and Link entering into a scheme with Dye & Durham. We expect M&A to remain a strong theme for CY22.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2112_MicroCapNewsletter.pdfNovember, 2021
The Ellerston Australian Micro Cap Fund delivered -2.37% in November underperforming the Small Ordinaries Accumulation Index which was down -0.31%. The market volatility increased towards the end of the month as the US Fed Chair provided more hawkish comments around the tapering timeline as well as the emergence of the Omicron COVID variant. Bonds rallied sharply on renewed COVIDconcerns, and we also witnessed the AUD slide aggressively down to 0.71 against the USD. Once again the Small Resources Index materially outperformed the Small Industrials Index with a circa 5% delta between the two indices. While some of our underperformance can be attributed to our lack of resource exposure, we did wear some pain from transitional flow along with some weaker stock announcements.
One detractor in November was Atomos (AMS AU), which declined 20% for the month. Despite providing strong FY22 guidance at its AGM (revenue growth of 20% and EBITDA margins in line with consensus), the stock was impacted by concerns over chip shortages and selling pressure in technology stocks. We continue to like AMS as one of the few companies to provide strong FY22 guidance and is now at the cheapest valuation it has ever been (~13x FY22 consensus EBITDA). We believe new product releases and M&A activity will continue to expand AMS’ addressable market and bolster its earnings and free cash flow growth in coming periods.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2111_MicroCapNewsletter.pdfOctober, 2021
The Ellerston Australian Micro Cap Fund delivered 0.14% in October, underperforming the Small Ordinaries Accumulation Index which was up 0.92%. Notably, what kept the market on its toes in October was the rise in bond yields. We saw the Australia’s 10-year bond yield rise 59bps to 2.08% (after 33bps rise in September). In October we also saw the Small Resources Index (+6.5%) again materially outperform the Small Industrials Index (-0.6%) driven by Gold and Lithium names. M&A was the clear theme of the month with a flurry of takeover offers. We saw HUB24 bid for Class; DDH1 bid for Swick; Cardno and Intega Group both receive offers from offshore players; Senex continue dialogue with its suitor; and the REIT space continue to consolidate, to name just a few.
As we previewed last month, October kicks off AGM season. So far, most of the commentary has revolved around post-lockdown trading, and generally speaking this has been positive with signs of life seen across most sectors. Another theme is the state of the supply chains, labour supply and cost inflation –all of which we continue to monitor closely. Turning to the portfolio there was a lot of news flow in three of our names:Aussie Broadband (ABB AU), Aroa Biosurgery (ARX AU) and Envirosuite (EVS AU).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2110_MicroCapNewsletter-1.pdfJune, 2021
The Ellerston Micro Cap Fund delivered 42.33% in FY21, substantially outperforming the index. We would like to thank all of our unit holders for their support during this unique year. In FY22 we will continue to search for high-quality companies that give us a 3-to-1 risk reward or 50% upside over a three-year period.
Looking at FY21, we think the year can be loosely broken down into two camps: 1) ongoing COVID-19 challenges; and 2) the ever-changing economic landscape. We saw unprecedented levels of government stimulus which supported businesses into the recovery. This saw the Small Ordinaries Accumulation index finish up 33.23% supportedby the Consumer Discretionary Sector which rallied +58% in FY21. Other notable sectors for the year were Financials +52%, Communication Services + 45% and Materials + 39%. This was the strongest return for the index since 2007.
June is always a busy month for the team as we continue to hit the ‘pavement’ to assess our holdings before companies go into blackout. June is always about preparation for the upcoming reporting season in August and ensuring we continue to reassess our investment thesis and portfolio weightings, as well as stress test our assumptions into this catalyst rich period.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2106_MicroCapNewsletter_June.pdfMay, 2021
The Ellerston Australian Micro Cap Fund returned -0.25% in May versus the S&P/ASX Small Ordinaries Accumulation Index return of 0.27%. The market was impacted by continued concerns around inflation with the US inflation print coming in at +3% which was much higher than market expectations. These concerns, coupled with continued rotation from tech and high multiple names saw the Small Ords reach an intra month low of 4%.
Dragging the market higher from this intra month low were onceagain the Resource names with seven of the top ten being the largest Index contributors. On the flip side despite the continued commodity strength, mining services names can’t seem to catch a break with ongoing wage inflation impacting margins and a number of downgrades seen across the space. Another big data point for the market in May was the Federal Budget which announced A$96bn of stimulus.
As we discussed briefly last month, stimulus benefited some of our holdings including the likes of Japara Healthcare as more funding was allocated to the Aged Care space. We also had a number of our companies report their1H21 or FY20 results. Overall, the four stocks that we own that reported in May all had pleasing results. These companies varied from financials to technology plays. We also had a number of our positions provide trading updates which will continue as we approach the end of the financial year as management teams have to reassess guidance and/or consensus estimates
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Contact-Insights-May-2021-1.pdfApril, 2021
The Ellerston Micro Cap Fund returned 4.7% in April versus the S7P/ ASX Small Ordinaries Accumulation index return of 4.98%., supported by a strong rally in resources. highlighting this point was the fact that the small resources sector index was up 9.5% for the month, on the back of a broad-based rally with iron are surging a further c15 to $190/t. We also saw base metals like cooper reach fresh decade highs and the battery raw material space strengthened, supporte by the merger of Galaxy resources and Orocobre Limited to create a $4bn merger of equals, and a top 5 global lithium chemical companies.
Also in April, investors attention focused on the performances of the economy with the end of Job Keeper in March. We will continue to keep a close eye on this over the coming months to ensure our investments that are exposed to more onsumer sentiment trends remain robust. We remain reasonably confident on the consumer given that we saw in April that unemployment recipients dropped bt 46K for the fortnight to 16TH of April and job ads remain ner record highs wich all bode well for Australia's unemployement role to trend lower
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2104_MicroCapNewsletter_April-1.pdfMarch, 2021
The Ellerston Australian Micro Cap Fund returned -0.09% in March verses the S&P/ASX Small Ordinaries Accumulation Index return of 0.79%. The trend of heightened volatility continued into March, with investors focused on the timing of an economic recovery and the potential for acceleration in inflation. We also saw Australian bond yields decline modestly in March, after the spike in February which supported yield sensitive sectors including Utilities, Discretionary and Real Estate. At the larger end of the market we saw merger and acquisition (M&A) activity come roaring back, with, Computershare acquiring Wells Fargo’s Corporate Trust business; REA Group acquiring Mortgage Choice and Bank of Queensland acquiring ME Bank, to name a few. Given the current low interest rate environment we believe M&A will be an ongoing theme as corporates use cheap debt/high multiples to make accretive acquisitions.
Moving to the S&P/ASX Small Ordinaries Index for March, we saw the pro-cyclical rotation continue with Consumer Staples up, strongly driven by Agricultural exposures like Select Harvest and Graincorp. Retailers were mixed (Premier and Harvey Norman did well) and BNPL players saw a reversal of the strength witnessed in February. Travel and Leisure stocks continued to perform strongly as the market gained confidence on the vaccine rollout, and increasing likelihood that borders will start opening up.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2103_MicroCapNewsletter_March.pdfDecember, 2020
The Ellerston Australian Micro Cap Fund increased by 2.04% during the month of December, marginally trailing the S&P/ASX Small Ordinaries Accumulation Index which rose by 2.76%. December wraps up what was a tumultuous, but overall, incredibly positive year for the Fund. The Fund closed the calendar year up 31.68% (net of fees), 22.47% ahead of the Index, an extremely pleasing result. Resources were the strongest performer during December, with Materials and Energy up 8%, and 7% respectively.
Telecommunications and Technology, on the other hand, were the weakest sectors; both slightly in the red. During the month the reopening rally (i.e. travel, leisure, and tourism) lost momentum following the COVID-19 outbreak in the Northern Beaches of NSW, and the discovery of highly contagious strains triggered a resumption of localised lockdowns and a resumption of interstate travel restrictions. Kelly Partners (KPG) was a solid contributor during December, increasing by 31% and up around 100% for the calendar year to date.
The company provides accounting and taxation services to private small and medium enterprises (SMEs) and high net worth individuals. The business is high quality; boasting industry leading EBITDA margins with an extensive pipeline of opportunities (both organic and M&A), and we are attracted to the recurring revenue base. In more recent news, the company announced a partnership with AUB Group, one of Australia’s largest insurance broking networks. Under the partnership, KPG will be able to offer accounting and tax services to AUB clients and members, while general and life insurance broking services will be offered to KPG clients. We think the deal will deliver a meaningful earnings uplift from FY22, as it opens a vast network of client opportunities for KPG, while adding value through the broking service offering. Universal Store (UNI) performed well, growing by 18% during the month, and up over 35% from its recent IPO.
The company is an omni-channel clothing retailer, specialising in streetwear, denim, skate clothing and surf wear. Universal is a young, but formidable player in its niche. Its brand awareness is increasing and quickly gaining momentum relative to larger and more mature players like Glue Store and General Pants Co. The growth pipeline is attractive and supported by ongoing store rollouts (we see capacity for the network to almost double in size from here), increasing private label penetration which will support gross margins.
Additionally, we see a large opportunity for growth in its online channel, which is still in its infancy, but a high priority given the impact of COVID-19. Kicking off 2021, our initial priority will be preparation for the 1H21 reporting season. With COVID-19 vaccinations around the corner we think a more normalised trading environment can be expected in the near-to-medium term future. However, the rapid emergence of the Northern Beaches cluster has shown us that we cannot afford to be complacent, and as such we continue to closely monitor any stocks which are susceptible to further restrictions. We are comfortable that our portfolio exposure is balanced heading into the reporting season, and we will also be on the lookout for evidence of sustained improvements in companies that have benefited from the events of the last 12 months. On the deal side, we think the corporate activity of late 2020 is likely to continue for the time being. In keeping with our process, we will heavily scrutinise every proposal that comes across our desk and continue to be wary of opportunistically timed deals. As always, our preference is to find high quality businesses benefiting from long-term structural tailwinds, with solid balance sheets and stronger teams.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/2012-Ellerston-Australian-MicroCap-Fund-Newsletter.pdfticker: ECL0984AU
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Fund Newsletter
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Ellerston Australian MicroCap Fund is made up of a portfolio of between 30 – 60 smaller and micro cap companies. The Fund adopts a unique investment process that aims to produce consistent returns over time, regardless of market conditions.
- The Fund employs an active, research-driven investment approach which seeks to identify a portfolio of smaller and micro cap companies with the aim of delivering superior returns to the benchmark over time.
- The Fund will invest in companies that are believed to have the potential to deliver significant upside over the medium term and where there is a reasonable margin of safety to mitigate downside risk.
- Investments will generally be made in companies that have sound business franchises with attractive earnings profiles that operate in growth industries and trade at a discount to valuation.