September, 2023
The Fund returned -4.3% (after fees) for the month of September, underperforming the S&P-ASX Small Ordinaries Accumulation Index by 0.2%.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update-9.pdfAugust, 2023
The Spheria Australian Smaller Companies Fund returned -3.2% (after fees) during the month of August, underperforming the S&P/ASX Small Ordinaries Accumulation Index by 1.9%.
The portfolio performance was influenced by the domestic FY23 reporting season, global equities abroad experienced a decline due to uncertainty regarding additional rate hikes in the US, despite signs of easing inflation and a weakening economic environment.
Positive contributors for the month were positions in Bravura Solutions (BVS.ASX), Johns Lyng Group (JLG.ASX) and Regis Healthcare (REG.ASX) drove the relative outperformance. Whilst positions in IRESS (IRE.ASX), Vista Group (VGL.ASX) and Appen (APX.ASX) were notable detractors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update-1-1.pdfJuly, 2023
The Spheria Australian Smaller Companies Fund returned 4.0% (after fees) during the month of July, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.5%.
Markets rallied in July as fears of further rate rises abated, supported by better-than-expected inflation data. Bega Cheese (BGA.ASX), Universal Store Holdings (UNI.ASX) and Monadelphous (MND.ASX) drove the relative outperformance. Whilst Link Holdings (LNK.ASX), Supply Network (SNL.ASX) and Appen (APX.ASX) were notable detractors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update-8.pdfJune, 2023
The Spheria Australian Smaller Companies Fund returned 0% (after fees) for the month of June, underperforming the S&PASX Small Ordinaries Accumulation Index by 0.1%.
Over the month the largest contributors to performance were from overweight positions in VGL.ASX (82bps), ABC.ASX (34bps), SNL.ASX (25bps), and SIQ.ASX (23bps) as well as underweight positions in CTD.ASX (16bps) and LKE.ASX (14bps).
The largest detractors from performance included overweight positions in BGA.ASX (-87bps), APX.ASX (-70bps), LNK.ASX (-41bps) and JLG.ASX (-20bps) as well as underweight positions in PDN.ASX (-22bps) and AUB.ASX (-16bps).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update-7.pdfMay, 2023
The Spheria Australian Smaller Companies Fund returned -1.4% (after fees) during the month of May, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 1.8%.
Concerns over the US debt ceiling and fears of further economic slowdown drove the overall market lower.
Adbri (ABC.ASX), Appen (APX.ASX) and InvoCare (IVC.ASX) were key contributors to outperformance. Whilst consumer names came under pressure due to a slowdown in spending, with Universal Store Holdings (UNI.ASX), City Chic Collective (CCX) and A2B Australia (A2B.ASX) being notable detractors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update-6.pdfMarch, 2023
The Spheria Australian Smaller Companies Fund returned 2.2% (after fees) during the month of April, underperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.5%.
Corporate activity continued in April with Blackmores (BKL) receiving a takeover offer from Japanese beverage company Kirin. It was the fund’s best performer with Bravura (BVS) and Helloworld (HLO) the next top contributors to performance. Vista Group International (VGL) was the most notable detractor.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update-5.pdfFebruary, 2023
Again, the smaller end of the market fell more than the larger end with the S&P/ASX 100 index down only 2.4% in February. This trend began at the beginning of last year with the relative underperformance now having extended to greater than 20%.
The reporting season was particularly “bizarre” with share prices hammered on any glint of negativity in a result. To us it feels like the market is becoming even more short-term in nature, which presents opportunities for those with a long-term investment horizon.
Major Contributors to Performance
Over the month the largest contributors to performance were A2B Australia (A2B.ASX, +20%), Helloworld Travel (HLO.ASX, +25%) and Smartgroup Corporation (SIQ.ASX, +13%).
A2B Australia (A2B.ASX) – share price rose 20% post the release of their first half 2023 result. The business returned to positive operating performance across all metrics versus pcp after being heavily impacted by COVID travel restrictions. Revenue rose 21% and the company reported a $3.7m profit after several years of losses. Fleet numbers and total fares increased substantially, with fares processed returning to 90% of pre-COVID levels for the six months. In the month of December alone fares returned to 99.8% of pre-COVID levels. Revenue is highly correlated to fares processed and fleet growth. Given the right-sized cost base it is possible that A2B’s earnings will revert to levels above that of pre-COVID levels in the next 6 to 12 months. The business also has significant property assets valued at over $100m, pre the sale of one asset which was sold in December for $19m. Post settlement the company will have a net cash balance sheet in excess of $12m. The business is trading on about ~4x normalised EV/EBIT, excluding the value of the remaining surplus property.
Major Detractors from Performance
The largest detractors were InvoCare (IVC.ASX, -18%), City Chic Collective (CCX.ASX, -28%) and Blackmores (BKL.ASX, -9%).
Invocare (IVC.ASX) – share price fell around 18% during February with most of the decline being post the release of their CY22 financial result. As we had been anticipating, the business delivered strong top line growth (+12%), benefiting from unusually high excess deaths in key markets, a trend that has been in place for the last 18 months or so. However, the business was unable to convert this into operating leverage with costs rising 13% and capex remaining very elevated. The result was disappointing given the amount of capital that has been invested into the business over the last few years to refurbish funeral homes and upgrade technology to deliver greater efficiency. Whilst some of the cost increases were justifiable given labour market tightness, the inability to recover cost increases via higher prices was more technology and management related, in our opinion. Continued elevated capex (~$70m in CY23) and discussion of “overseas acquisitive” growth rightly spooked the market and exacerbated the share price decline. Despite this we view IVC as a high-quality asset with a difficult to replicate geographic footprint, that has infrastructure like dynamics in a growing market which is duopolistic across many facets of its business and regions. After month end IVC was subject to a sharemarket raid from a private equity group at $12.65 (+40% premium to the last traded price) which acquired a 19.9% holding and put forward a non-binding indicative proposal to acquire all remaining shares at that same price. We believe it is in the shareholders’ best interests to pursue this approach and extract the highest price possible.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update-4.pdfJanuary, 2023
The Small Ordinaries and the Mid-Small indices rose coincidentally 6.3% over January recouping some of the losses felt in calendar year 2022. Whilst smaller companies were most sold off last year (falling almost 18% over 2022 vs. the ASX 100 which was actually up 2.3%), the bounce in markets has so far been uniformly felt across both large and small company indices.
Last year saw a confluence of negative events – the re-emergence of inflation, rapid interest rate increases and a war in Ukraine/Russia which caused uneven spikes in commodities and energy. We can only hope that calendar year 2023 is a brighter year for markets and the world in general. We are often asked by our clients to take out and polish our crystal balls and to prognosticate on the outlook for 2023 and beyond. I only wish our vision was that clear, but if it were we might be making an alternative living dressed in gypsy clothes! The one thing we feel more certain about however is that even if we had perfect macro foresight – and we certainly do not – that would not correlate highly with investment success! The reason is simple. The stockmarket is a forecasting machine itself. It consistently updates share prices based on the average investor’s perception of a company’s particular future and so much of what people think will happen (at least in next 12-18 months) is sort of baked into the current price. Our job is to assess whether we think the ‘baked in’ view is more or less likely than the average market participant and to invest accordingly. In other words, if we could predict the macro environment perfectly, we would not be focusing necessarily on the right things as much of the macro may already be factored into share prices. Our fear of a certain thing happening could be well and truly discounted into those share prices already.
The Spheria team spends most of our time looking at business fundamentals and assessing what has been put into share prices and whether we can opportunistically take a different view from the market. Inefficiencies are a small cap investors bread and butter. The other way we “stress test” our portfolio to reduce risks is to start from a conservative base. Our process is built around looking for businesses with cash flow conversion, strong balance sheets (50% of our top 10 holdings are typically net cash balance sheets – meaning they have no debt) and a supportive valuation. We believe this approach is likely to give our investors the best long-term advantage in outperforming the market whilst taking on less risk.
Over the month the largest contributors to performance were Blackmores (BKL.ASX, +21.4%), Breville Group (BRG.ASX, +23.2%) and City Chic Collective (CCX.ASX, +35.8%).
The largest detractors over the month were Nitro Software (NTO.ASX, -3.6%), Michael Hill International (MHJ.ASX, -4.5%) and Vista Group International (VGL.ASX, -1.5%)
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update-3.pdfDecember, 2022
Major Contributors to Performance Positive performance contributions from companies owned included:
Bega Cheese (BGA.ASX) – rose almost 11% outperforming the broader market on no news. We have recently discussed some of the headwinds that have been facing Bega including higher farmgate milk prices, elevated competition amongst dairy processors and higher costs arising from weather and COVID-19 absenteeism. In November it was revealed that one of Bega’s largest competitors, Saputo would be closing their Australian plants taking approximately 15-20% of capacity out of the market. We view this as good news as there has been too much processing capacity compared to milk supply resulting in companies like Bega having to bid aggressively to secure milk. Despite the recent firming of the share price, we believe the company remains undervalued given the market is capitalising the challenged (bottom of the cycle) environment that Bega currently finds itself. As raw material cost pressures eventually abate, we expect a substantial recovery in the earnings base.
Nitro Software (NTO.ASX) – gained 5% outperforming the broader market as the bidding war between Alludo and Potentia carried over to December. We have discussed NTO in several commentaries after the company received proposals at $1.58 and later $1.80 from Potentia, followed by a $2 Board recommended offer from Alludo (a software company owned by KKR) in November. In December, Potentia matched the $2 bid, however, this was quickly countered by Alludo with an increase to $2.15. Post month end, both parties have lodged applications to the Takeover Panel alleging shortcomings in the opposite camp’s takeover offers . The share price is trading at a slight premium to the highest bid from Alludo on the expectation that Potentia raises its offer to $2.15 or higher thus escalating the battle for control.
Major Detractors from Performance
City Chic Collective (CCX.ASX) – continued to fall in December after the company provided another weak trading update with global YTD revenue (as at 18 December 2022) down 7% vs the prior period due to weaker than expected Black Friday/Cyber Monday sales. The weaker retail environment and excess inventory position has forced increased promotional activity which has resulted in further gross margin compression. The company is now expecting a small loss in 1H23. We do not expect this equation to improve in the short to medium term as the company works through elevated inventory. Of greater importance at this point is liquidity and transitioning the balance sheet from a net debt to net cash position which unfortunately is at the expense of g roup profitability. We are taking a longer-term view on this company and will support the business in the event of a capital call.
Ainsworth Gaming (AGI.ASX) – fell almost 18% in December on no news. As discussed in last month’s commentary AGI was one of the top contributors with the share price rallying 58% after the company revealed they expected 1H23 PBT to be approximately $18m compared to the $10m earned in 1H22, a significant increase from losses experienced in 2021. The company generated $45m of free cash flow (before tax) in FY22 and now sits on +$50m of cash (no debt) and has valuable property in Las Vegas (+$50m) and Florida (+$10m). The business is trading on about 6-7x EV/EBIT and is returning to growth under a new management team.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update-2.pdfNovember, 2022
November was a strong month for share markets globally with both the Small Ordinaries and the Mid-Small Index rallying almost 5% each. Other markets were also up sharply with notable performances from the Eurostoxx up 9.1% and the Hang Seng leading the charge with a 21.5% rebound in A$ terms. The rebound appears to be largely driven by 10-year bond yields falling on the back of generally reducing pressures on inflation. We have been suggesting that there were many forces likely to drive inflation down including falling commodity prices, an unwind of the extreme pressure on goods trade (driven by the Covid surge followed by massive overstocking in the retail system globally) which in turn was driving down shipping and production costs in Asia. This has started to manifest in reported numbers which has got people thinking about when the current rates cycle may peak – possibly sooner and at a lower peak than previously thought.
Our sense is that the real economy will continue to slow in reaction to rate rises and some decisions around energy supply which are now causing system wide price increases. Pressures are being felt along the value chain with companies warning about margin pressures and deferrals in top line spending. In some cases, this is causing outsized reactions in share prices which is offering us opportunities in the small cap space. Whereas we were in a market where people would pay any price to OWN certain stocks, we have shifted to a market in which some people will ACCEPT any price NOT to own certain stocks. This flip in view can create opportunities for longer term and more fundamentally based investors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update-1.pdfOctober, 2022
The Spheria Australian Smaller Companies Fund returned 6.1% (after fees) during the month of October, slightly underperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.4%.
Positive performance contributions from companies owned included:
Nitro Software (NTO.ASX) – jumped almost 30% in October and is now up over 80% from its August lows after the business received two takeover proposals during the month. The first from Potentia Capital who increased their initial indicative offer from $1.58 announced in August to $1.80 via a formal takeover offer. The second from Alludo (a software company owned by KKR) at $2 a share. The Nitro board has unanimously supported the Alludo proposal, however, with two genuine buyers there is potential that the battle for control escalates. We continue to remain supportive of the business and despite the increased price, it still may be somewhat opportunistic given the recurring nature of the business’s revenue, growth potential, and its well-funded balance sheet.
Flight Centre (FLT.ASX) – after falling last month FLT rallied 17% in October on no company specific news. Many travel related companies including Qantas, Auckland Airport and Air Canada - to name a few - reported stronger than expected results during October with demand for travel continuing its rebound. This is supportive for FLT and echoes the company’s recent result with the Leisure division transaction values returning to 70% of pre-COVID levels and the Corporate division now above pre-COVID levels. The business has emerged from COVID with a leaner cost structure particularly in its Leisure division and is trading on only ~10x recovered EV/EBIT. Share price recoveries out of previous sharp downturns including World Trade Center (2001) and the GFC (2008) were pronounced and multi-year in nature, we suspect history will repeat despite a potentially weaker macro-economic backdrop.
Iress (IRE.ASX) – rallied almost 14% in October recovering from a significant share price fall after reducing profit expectations in September. As discussed in last month’s commentary the company was affected an elongated sales cycle particularly in the super administration space where the company has invested ahead of the curve for a large pipeline of expected tends in the industry fund sector. It has also been affected on the cost side due to higher technology costs particularly salaries. Feedback from the industry is that inflation is slowing with technology start-ups under pressure and global technology companies reducing headcounts. We feel IRE is well placed on the revenue front and cost front to ride out these challenging conditions.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Spheria-Australian-Smaller-Companies-Fund-Monthly-Update.pdfSeptember, 2022
The Spheria Australian Smaller Companies Fund returned -9.4% (after fees) during the month of September, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 1.8%.
Positive performance contributions from companies owned included:
Michael Hill International (MHJ.ASX) - rose 7.5% in September, in contrast to the broader market which fell during the month. MHJ announced their annual results at the end of August and as has been the trend for the last two years, continue to drive earnings growth ahead of revenue, seeing margins expand. Despite a significant number of store days being lost due to COVID-19 lockdowns at the start of the financial year, group revenue grew 7% and EBIT grew 11.1%. This was driven by continued store productivity, growth in digital, and a 76% growth in loyalty members. The balance sheet finished the financial year with -$96m of net cash and as such the company announced a share buy-back of up to 5% of the company's issued capital to deliver further earnings accretion to long term shareholders. Despite the impressive results and strong balance sheet, the company is trading on -4x EV/EBIT and yielding over 7%.
Monadelphous (MND.ASX) - share price increased 1.1% in September, continuing to trend higher after a solid return in August after the company announced their FY22 results. As discussed in the last commentary, the Maintenance and Industrial Services division grew revenues by 19% and now represents over 60% of group revenue. We view this transformation favourably as it is less risky than construction related revenue and more recurring in nature. We consider Monadelphous as one of the highest quality mining services businesses in Australia and is a second order beneficiary of the capex mining cycle. The stock has $180m of net cash and trading on an EV/EBIT multiple of around 10x.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/192060834.pdfAugust, 2022
The Fund performed well in August with results generally better than expected and takeover activity in the beaten-up technology sector aiding performance with a private equity group, Potentia Capital, conducting an off-market raid on Nitro Software (NTO), one of our key holdings at a significant premium to its last traded share price. The lithium sector continues to expand which has detracted from relative performance, but we note most of these miners are not producing, and the lithium price feels like it has gotten well ahead of fundamentals - this happened in 2019 as well. On the economic front, the combination of higher mortgage rates, higher fuel prices and rampant inflation has yet to significantly impact consumer spend with countervailing forces of full employment, strong wages growth and solid household balance sheets providing a buffer for now, and household credit still flowing. For what it's worth most of the companies we talk to are trading relatively well and balance sheets afford a solid buffer to ride out the highly anticipated economic downturn.
Positive performance contributions from companies owned included:
Monadelphous (MND.ASX) - share price increased 27% after reporting a solid FY22 financial result in August. The balance sheet is sound with over $180m of net cash and the outlook for the business remains strong due to relatively high commodity prices. The Maintenance and Industrial services division grew revenues by 19% and now represents over 60% of group revenue. We view this transformation favourably as it is less risky than construction related revenue and more recurring in nature. MND is trading on an EV/EBIT multiple of about 10x.
Nitro Software (NTO.ASX) - jumped 37% after an off-market raid by a private equity firm, Potentia Capital, at $1.58 which was a significant premium to the undisturbed price. We partially sold into the raid for liquidity reasons but remain supporters of the company as we believe the product (PDF software) is excellent and the pivot in strategy to bring forward profitability (over growth) as sensible. This change in strategy clearly did not mesh well with some investors who sold the company down aggressively which has facilitated the opportunistic takeover approach. We feel Potentia Capital will need to substantially increase its offer to gain control of the company. At worst, if they decide not to, the offer highlights value in the asset and its broader strategic appeal.
Ht&E (HTLASX) - share price rallied 17% from a low base after reporting a solid 1H22 financial result. The radio industry continues to be a resilient advertising medium globally due to stable audiences with a growth angle into podcasting and digital platforms (e.g. HT1 owns the I Heart Radio licence in Australia). HT1's balance sheet is sound with less than $80m of net debt after extinguishing large tax liabilities during the period and acquiring the regional radio assets of Grant Broadcasting. Post balance date, HT1 will receive about $8.8m from the divestment of its final balance of Luxury Escape shares and has again put its 25% stake in Soprano up for sale, which could be worth upward of $75m. HT1 is trading on an EV/EBIT multiple of about 5x.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/191059666.pdfJuly, 2022
The Spheria Australian Smaller Companies Fund returned 6.6% (after fees) during the month of July, underperforming the ASX Small Ordinaries Accumulation Index by 4.8%.
Due to the strong appreciation in the index the most significant attributions came from stocks not owned by the Fund that either declined in absolute terms or didn't rise as significantly as the index. Contributors here included Champion Iron (CIA.ASX) down 11%, NIB Holdings (NHF.ASX) off 2% and Elders (ELD.ASX) down 10.5% over the month. Positive contributions from stocks owned included:
Universal Stores (UNI.ASX) - rose 19% over the month, recouping some of its losses over the past few months. With a backdrop of rising interest rates and high energy prices it's been easy to sell consumer discretionary stocks. Shooting first and asking questions later, however, can sometimes be a poor strategy. UNI remains one of the few genuine growth stories in retailing in Australia. Having opened 13 stores since their IPO they now have 78 stores and have officially launched their second brand - Perfect Stranger. Perfect Stranger began life as an own brand offered within the Universal Store and has proven successful enough to warrant its own roll out. The remaining roll out of Universal and the potential for Perfect Stranger means UNI could almost double its current footprint of stores without having to go offshore - an option that remains on the table. Trading on a forecast 9x EV/EBIT with a net cash balance sheet, we don't think the shares are on a demanding valuation for the opportunity ahead of this brand and management team.
Seven West Media (SWM.ASX) - rallied 16% over July in sympathy with the market recovery. There was limited news flow out on SWM outside of their attempt to cancel their TV deal with Cricket Australia. The market has sold media names down aggressively over the past several months on the premise that a tough consumer environment would translate into much tougher media spending. Media names tend to be cyclical, and any downturn sees spending cuts. On the other hand, SWM has generated substantial cash since the last media spending downturn and goes into any potential cycle with a much-improved balance sheet. Valuation at SWM remains extremely compelling trading on an EV/EBIT multiple under 4x.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/190037885.pdfJune, 2022
Major Contributors for the Month:
IRESS (IRE.ASX) - rose 10% over the month retracing some of its losses in recent months.IRE is a high-quality software company with significant pricing power in its key verticals. This will allow it to weather cost pressures which are prevailing in the technology sector. It also has strong user loyalty in both the asset management and adviser channels in Australia and the UK, with customer churn rates at just 1.4% p.a. The company has implemented a share buyback ($100m) and is relatively inexpensive at 20x EV/EBIT with low debt levels and strong cash flow generation.
Vista Group International (VGL.ASX) - rallied 10% in June after being heavily sold down on the back of potential weakness in its customer base (being cinemas) and then more broadly with the technology sector sell-oft The company announced at the end of May it had entered into a 10-year agreement to transition an existing major enterprise client in Latin America to its Cloud platform. The deal will involve annual subscription fees for which the company sees a material uplift to revenue and then to earnings as the product scales with new client wins and existing client transitions. VGL is the largest ERP software provider to cinema chains globally with over 50% market share by screen count.
Michael Hill International (MHJ.ASX) - rose slightly over the month in a falling market. MHJ is a stock we have held in the portfolio for several years and continue to like, despite it rallying over 350% from distressed COVID induced lows. The management team is executing well driving further efficiencies in store and enhancing its online offering with the business experiencing eleven quarters of consecutive positive same store growth, despite significant interruptions over the last 2+ years. The company is actively looking for acquisition/s but in the absence of anything that meets its strict economic criteria, we believe a share buyback to be an efficient means of creating shareholder value given the current low trading multiple.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/189001785.pdfOctober, 2021
The Spheria Australian Smaller Companies Fund returned -0.8% (after fees) during the month of September, outperforming the ASX Small Ordinaries Accumulation Index by 1.3%. Over the past year to the end of September the Smaller Companies fund has returned 45.0% net of fees beating the benchmark by 14.6%.
As has probably become apparent from the commentary above we see a number of significant economic pivot points approaching. The first is a consumer spending swing back to services and away from goods. The second pivot point is the possibility of higher medium term interest rates and more persistent inflation than our Central Bankers would have us believe. Change leads to opportunity – the key is to be prepared and willing to make investment changes. We remain surprised, although we have been around long enough not to be so, by the overenthusiasm investors appear to have for money-losing disruptors in the small and mid-cap space. We are however more convinced by long-term investment history which suggests that unless new ideas make money in a reasonable timeframe, the fascination eventually wears thin, and investors will jump on board the next new thing leaving the old idea to wither in the market’s basement of forgotten dream
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/180074121-1.pdfSeptember, 2021
The Spheria Australian Smaller Companies Fund returned -0.8% (after fees) during the month of September, outperforming the ASX Small Ordinaries Accumulation Index by 1.3%. Over the past year to the end of September the Smaller Companies fund has returned 45.0% net of fees beating the benchmark by 14.6%
Flight Centre (FLT.ASX) was the most significant contributor to the Fund which took off over September returning 30%. FLT reported a depressed set of earnings in August as travel volumes cratered over the previous twelve months but indicated that they were starting to see a reasonable re-bound in both corporate and retail bookings towards the end of the fiscal year. FLT has continued to win significant business in FCM – their corporate side - whilst undergoing heavy restructuring on their retail side. This will mean earnings and margins could well re-bound to levels higher than they were prior to Covid 19 restrictions taking effect
Iress Ltd (IRE.ASX) declined 21% over the month as Swedish private equity firm EQT announced they were unable to agree a final bid price with the Iress Board. EQT had previously indicated an indicative price of $15.75 per share plus the interim 16c per share dividend. IRE remains a highly cash generative technology business with extremely entrenched customers. Whilst it is disappointing that no agreement could be reached from an investor’s point of view, we nonetheless believe the company remains a strong franchise with decent investment appeal. The company has commenced the share buyback announced at the time of their full year results and has bought back around $20m of the total of $100m announced
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/180074121.pdfJuly, 2021
The Spheria Australian Smaller Companies Fund returned -0.1% (after fees) during the month of July, underperforming ASX Small Ordinaries Accumulation Index by 0.8%
Major Contributors for the Month Piedmont Lithium (PLL.ASX – not owned) contributed to attribution as the stock declined 28% over July. Along with many other Lithium names, PLL had been performing strongly as investors size up the potential growth in Lithium demand driven by the likely strong uptake of battery demand for Autos and grid storage. PLL is in various stages of seeking approval for several mines in which it has a whole or part interest across the US, Canada and Ghana. In late July the company put out a release claiming they had not applied for a necessary mining permit variation in Gaston Country (North Carolina) which took the market by surprise. Several Class Action lawsuits have been filed in the US on account of the apparent lack of disclosure. PLL remains pre-revenue and in the resource de-lineation/ permitting phase – a time in a development cycle of mining shares we typically prefer to avoid.
Horizon Oil (HZN.ASX) rose 15% over the month. HZN strengthened on the back of the continued strength in the oil price and an increase in its share capital return from 1.4c to 3c per share of which we engaged with the board earlier in the month in order to help achieve such outcome (subject to shareholder approval at an upcoming EGM). HZN remains a reasonably low-cost oil producer – with cash costs hovering around US$20/bbl and has net cash of US$31m following strong cash generation and the receipt of some option conversions. Whilst oil shares tend to trade on low multiples on account of their limited resource span, HZN is trading on an EV to current years spot operating cashflow of 1.5x despite having around 5 years of operating life based on last reported 2P reserves (less FY21 production).
Major Detractors for the Month
Ainsworth Gaming (AGI.ASX) was the largest detractor as it retraced almost 19% over July on limited newsflow. AGI has been one of the strongest performing shares in the fund over the past year and seems to have fallen in sympathy with the increased Covid Delta variant outbreak in Australia and abroad.
Bega Cheese (BGA.ASX) detracted as the stock declined 12% on concerns that higher farmgate milk prices would potentially squeeze earnings. Whilst input pricing has risen this year, supply still appears to be relatively constrained as dairy farmers are still recovering from drought conditions last year. Herds and farmers take time to adjust to pricing signals before adding capacity. BGA still has substantial cost savings opportunities and synergies from their recent acquisition of Lion Dairy Drinks business. We feel the business is well positioned to perform over the medium term despite some short-term input pressures.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/176335572.pdfJune, 2021
The Spheria Australian Smaller Companies Fund returned 4.8% (after fees) in June, outperforming the benchmark by 1.7%. Over the quarter to the end of June, the Fund rose 8.4%, slightly underperforming the benchmark by 0.1%
Major Contributors for the Month
Ainsworth (AGI.ASX) was the largest contributor as the manufacturer of gaming machines rallied another 27% to end the financial year up 349% from the nadir it hit in mid-November. Whilst the pandemic has significantly negatively impact Ainsworth’s operations the firm has never been in danger of insolvency given property holdings in the U.S. that at one point exceeded its market capitalisation. The end market of casinos, pubs and clubs in its two major markets of Australia and the United States have recovered strongly and in many cases are now in a position to recommence expenditure on new machines. As a result, the group returned to profitability in the 2H of the financial year. New management in our view has made sensible changes to personnel to improve the product development cycle which we feel have been obscured by the pandemic. We still see potential for Ainsworth to leverage its valuable portfolio of intellectual property and regulatory approval to improve earnings well above the level it was generating prior to COVID-19.
IRESS (IRE.ASX) was the next largest contributor after rallying 21% on news that the firm had been the subject of a failed raid by an investment bank at a substantial premium to the last price on behalf of a financial investor. While the market has been frustrated by the lack of EPS growth in IRESS over the last several years we believe the investment in capability across their product suite has positioned them well strategically for future growth and hence are not surprised it has attracted corporate attention.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/174703959.pdfMay, 2021
The Spheria Australian Smaller Companies Fund was flat (after fees) in May, slightly underperforming it’s benchmark by 0.2%.
Major Contributors for the Month
Ainsworth Gaming Technology (AGI.ASX) rose almost 20% over the month as it reported improved trading for its second half. The US gaming market continues to recover from the Covid induced lock downs over the previous year and the company announced a gaming licence deal with US-listed GAN ltd worth up to US$30m over 5 years. EML Payments (EML.ASX – Not owned) declined 42% as they announced that the Central Bank of Ireland had raised significant regulatory concerns with respect to the two businesses EML had recently bought in the UK (Sentenial and Nuapay). Notwithstanding the recent share price pullback, we remain cautious on the stock given the frequent M&A undertaken by EML, the potential reputational and financial impact of the aforementioned regulatory issues and its still heady valuation (40x EV/EBIT in FY21). .
Class Ltd (CL1.ASX) rose 9% over May. CL1 continues to present as an outstanding investment opportunity as reasonably new management lead by Andrew Russell continue to execute against a growing TAM with an expanding product portfolio. Cash generation remains high, notwithstanding increased investment in longer term growth drivers like R&D and Sales and Marketing teams. Finally with rusted on consumers – over a 99% client retention rate – CL1 has significant latent pricing power should inflation become a market reality. Major Detractors for the Month
Monadelphous Group (MND.ASX) declined 22% over May on the markets continued concerns that the acute labour shortage in WA would crimp margins and stifle MND’s ability to bid for new projects. Whilst both concerns have some validity, we think they are shorter term in nature. The re-opening of Australia’s domestic travel borders followed by the eventual international border re-opening should alleviate labour cost pressures. Meanwhile record commodity prices which have spurred resource shares to their highs, will very likely lead to increased exploration, resource M&A and new capital projects. At less than 10x EV/EBIT we believe MND is attractive.
Seven West Media (SWM.ASX) declined 16% over the month on limited news flow. The announcement in late May that Nine Entertainment Co (NEC.ASX) had also reached an agreement with Facebook and Google for content sharing worth in the vicinity of $30-40m pa continues to give us confidence that earnings are likely to materially recover in FY21 and FY22 with a substantial improvement in the balance sheet. Longer term media consolidation in Australia remains the most likely scenario.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/173428381.pdfMarch, 2021
Spheria Australian Smaller Companies Fund returned 2.3% (after fees) in March, outperforming it’s benchmark by 1.5%. Over the quarter to the end of March the Fund increased 6.2%, outperforming the benchmark by 4.1%
Mortgage Choice (MOC.ASX) was the largest contributor to the Fund, rising 64% over the month. MOC has been in the Fund for some time on account of the strong valuation support provided by the trailing commissions as well as the recovery in the housing and housing finance markets. MOC has around 3.4% of the mortgage market which was subscale in terms of its ability to securitise its own mortgages. REA Group (REA.ASX) made a takeover offer towards the end of March at $1.95 per share (a 66% premium to the pre-bid price) via a scheme of arrangement. No doubt a big part of the rationale here will be to increase their own circa 1.5% market share (under the Smartline brand) and enable the scale benefits that come with size.
Zip Co. (Z1P.ASX – not owned) declined 29% over March as the market worried about the possible re-emergence of inflation and consequent rate increases. Z1P was also to some extent unwinding a very strong price appreciation from earlier in the year when the stock had almost doubled over January and February. Whilst Z1P demonstrates very strong topline growth (as do many financial or near financial companies), profitability and cash flow remain ever elusive. It's amazing how much financing these non-finance companies need to sustain themselves. Our caution on this stock and indeed the entire BNPL sector is due to the fact none have been tested in a bad debt environment and the low entry barriers mean that their topline success will (and indeed does) continue to attract an ever-increasing number of competitors. Increasing competition usually does not lend itself to higher margins and higher returns.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/170293767.pdfDecember, 2020
Spheria Australian Smaller Companies Fund returned 6.0% (after fees) in December, outperforming it’s benchmark by 3.3%.
Major contributors for the month:
City Chic Collective (CCX.ASX) was the largest contributor returning 46% over the month after it acquired the ECommerce and wholesale operations of UK plus sized fashion retailer Evans from bankrupt retailer Arcadia Group for A$41m in cash. While the deal is at a higher implicit multiple than the Catherine’s plus sized fashion acquisition that fell over in September, we believe it is a better strategic fit given it will help City Chic accelerate its organic rollout of the City Chic brand in the UK and Europe and won’t see City Chic acquire a brand that already crosses over with an existing portfolio holding.
Asaleo Care (AHY.ASX) contributed positively as it returned 35% upon the receipt of an unsolicited proposal from its 36% major owner Essity AB of Sweden to acquire all the shares in the company it does not own. We believe the offer of $1.26 is opportunistic and inadequate, given Essity will benefit from synergies with putting its 100% owned Australian healthcare distribution operations together with Asaleo’s B2B incontinence care operations.
Other holders appear to concur as the company closed the month at $1.35. At the current price the firm trades on 14x forward EBIT, which does not appear egregious for a business that has returned to solid top line growth following a period of significant re-investment in marketing and new product development.
Seven West Media (SWM.ASX) was the next largest contributor given the company’s 29% return over the month. This followed a strong November performance off the back of a better-than-expected AGM trading update and sees the company 100% higher than end October levels and 200% higher than end September levels. Despite this the company continues to screen cheaply. While the balance sheet remains somewhat stretched, we see scope for this to be rectified in the near term through asset sales at materially higher implied multiples than the group trades on.
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asset_class: Domestic Equity
asset_category: Australian Small Cap
peer_benchmark: Domestic Equity - Small Cap Index
broad_market_index: ASX Index Small Ordinaries Index
structure: Managed Fund
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fund_features:
Spheria Australian Smaller Companies aims to outperform the S&P/ASX Small Ordinaries Accumulation Index over the medium to long term. The fund generally invests predominantly in listed companies which are outside the top 100 ASX listed companies by market capitalization and companies listed on the New Zealand Stock Exchange with an equivalent market capitalization.