The Company returned 4.8% (after fees) during the month of March, performing in line with the S&P-ASX Small Ordinaries Accumulation Index.
Overall Commentary
Company Facts
| Name | value |
|---|---|
| Investment Manager | Spheria Asset Mangement Pty Limited |
| ASX Code | SEC |
| Share Price | $2.240 |
| Inception Date | 30 November 2017 |
| Listing Date | 5 December 2017 |
| Benchmark | S&P / ASX Small Ordinaries Accumulation Index |
| Dividends Paid | Quarterly |
| Management Fee | 1.00% (plus GST) per annum1 |
| Performance Fee | 20% (plus GST) of the Portfolio's outperformance2 |
| Market Capitalisation | $133.9m |
1 Calculated daily and paid at the end of each month in arrears.
2 Against the Benchmark over each 6-month period subject to a high-water mark mechanism.
Performance
1 Calculated as the Company’s investment portfolio performance after fees excluding tax on realised and unrealised gains/losses and other earnings, and after company expenses.
2 Benchmark is the S&P/ASX Small Ordinaries Accumulation Index.
3 Inception date is 30th November 2017. Past performance is not a reliable indicator of future performance. All p.a. returns are annualised.
Markets
The “everything” rally continued in March with the small and microcap indices outperforming the larger cap indices for the first time in a long time. Generally, these markets do not suit us as valuation discipline is far outweighed by fever-pitched speculation. However, this time was different, and the fund managed to keep pace with the benchmark in March. This is a great result considering the two best performers for the benchmark in the month were Mesoblast (MSB) and Life360 (360) which rallied 88% and 60%, respectively – two companies which we are unlikely to ever own given the former is a serial cash burner and the latter has a significant market capitalisation (nearly $3bn) despite it never being profitable. Also, the gold sector was strong as gold prices continued to surge to new highs. We have no direct gold exposure, so this was another headwind for performance. Interestingly, there were no real stand-out moves in our portfolio with the portfolio gain due to a broad-based rally across our holdings and not having anything blow-up.
Major Contributors to Performance
Over the month the largest contributors to performance were from overweight positions Vista Group International (VGL.ASX, +20%), Healius (HLS.ASX, +19%) and Universal Store Holdings (UNI.ASX, +16%).
Vista Group International (VGL.ASX) share price rose 20% in March post the company announcing their full year result at the end of February. Recurring revenue and SaaS revenue grew 10% and 20%, respectively, whilst EBITDA grew 25% although the company continues to capitalise an elevated level of R&D in respect of its cloud transformation. The cloud rollout continues to gather momentum with its first multi-territory client live and several new signings representing ~350 sites out of the group’s approximate 7,800 sites. The business also reaffirmed medium term aspirations of Annualised Recurring Revenue (ARR) of $175m and an EBITDA margin of 15%+ by the end of CY25, and to be free cash flow positive in Q424. We have been a long-term shareholder of Vista attracted to its strong market share (>50% ex-China) and transition from on-premise to cloud revenue which will increase their share of wallet and therefore drive significant growth in revenue and earnings.
Net Tangible Assets (NTA)1
Pre-Tax NTA2
$2.434
Post-Tax NTA3
$2.364
1 NTA calculations exclude Deferred Tax Assets relating to capitalised issue cost related balances and income tax losses.
2 Pre-tax NTA includes tax on realised gains/losses and other earnings, but excludes any provisions for tax on unrealised gains/losses.
3 Post-tax NTA includes tax on realised and unrealised gains/losses and other earnings.
Top 10 Holdings
Source: Spheria Asset Management
Market Cap Bands
Source: Spheria Asset Management
Major Detractors from Performance
The largest detractors from performance included not owning Life360 (360.ASX, +60%) and overweight positions in Bega Cheese (BGA.ASX, -1%) and Smartgroup Corporation (SIQ.ASX, -12%).
Bega Cheese (BGA.ASX) share price was broadly flat over the month which underperformed a market that rose strongly. The company delivered their 1H24 results in February with branded revenue growth offset by some weakness in bulk due to relatively weak commodity prices. However, there was some improvement in the milk supply late in the period which enabled the company to deliver results ahead of market expectations. The decline in Australian milk supply over recent years has forced processors to chase market share at the expense of returns in the industry. Management believes there are signs the decline in milk supply is potentially bottoming out and competition abating. This could be a major inflection point for the industry particularly if recent improvements in export prices are sustained. Whilst the company has re-rated in the last six months, earnings have also improved, and we continue to believe the business offers value underpinned by a strong branded portfolio.
Outlook & Strategy Going Forward
Investor confidence is high, and equity is cheap whilst debt is relatively expensive but available and the outlook for interest rate settings is down. We think this sets the market up for further M&A as organic growth is increasingly difficult to come by. Historically, we have been a disproportionate beneficiary of such activity as our companies are highly cash generative, have strong market positions and are generally cheaper given our valuation discipline, thus making them targets for bigger listed players, foreign companies and private equity.
Fund Ratings
Further Information
For more information, please contact Pinnacle Investment Management Limited
on 1300 010 311 or email distribution@pinnacleinvestment.com
Disclaimer
Spheria Asset Management Pty Ltd (‘Spheria’) (ABN 42 611 081 326), a Corporate Authorised Representative (No. 1240979) of Pinnacle Investment Management Limited (‘Pinnacle’) (ABN 66 109 659 109, AFSL 322140), is the investment manager of Spheria Emerging Companies Limited (‘SEC’ or the ‘Company’) (ABN 84 621 402 588). While SEC and Spheria believe the information contained in this communication is based on reliable information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Spheria and SEC disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. Any opinions and forecasts reflect the judgment and assumptions of Spheria and its representatives on the basis of information at the date of publication and may later change without notice. Disclosure contained in this communication is for general information only and was prepared for multiple distribution. The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. The information in this communication has been prepared without taking account of any person’s objectives, financial situation or needs. Persons considering action on the basis of information in this communication are to contact their financial adviser for individual advice in the light of their particular circumstances. Past performance is not a reliable indicator of future performance. Unless otherwise specified, all amounts are in Australian Dollars (AUD). Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from SEC and Spheria.
Zenith Disclaimer: The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned February 2024) referred to in this piece is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual, including target markets of financial products, where applicable, and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at Fund Research Regulatory Guidelines.
Lonsec Disclaimer: The rating issued (Spheria Emerging Companies Limited rating issued September 2023) is published by Lonsec Research Pty Ltd (‘Lonsec’) (ABN 11 151 658 561, AFSL 421 445). Ratings are general advice only, and have been prepared without taking account of your objectives, financial situation or needs. Consider your personal circumstances, read the product disclosure statement and seek independent financial advice before investing. The rating is not a recommendation to purchase, sell or hold any product. Past performance information is not indicative of future performance. Ratings are subject to change without notice and Lonsec assumes no obligation to update. Lonsec uses objective criteria and receives a fee from the Fund Manager. Visit lonsec.com.au for ratings information and to access the full report. © 2022 Lonsec. All rights reserved.
