The Company returned 2.6% (after fees) during the month of September, underperforming the S&P-ASX Small Ordinaries Accumulation Index by 2.5%.
Overall Commentary
Company Facts
| Name | value |
|---|---|
| Investment Manager | Spheria Asset Mangement Pty Limited |
| ASX Code | SEC |
| Share Price | $2.280 |
| 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 | $136.3m |
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.
Net Tangible Assets (NTA)1
Pre-Tax NTA2
$2.407
Post-Tax NTA3
$2.354
1 NTA calculations exclude Deferred Tax Assets relating to capitalised issue cost related balances and income tax losses. These figures are subject to audit.
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
The Company returned 2.6% (after fees) during the month of September, underperforming the S&P-ASX Small Ordinaries Accumulation Index by 2.5%.
Markets
The sharemarket’s momentum continued through September with the weight of money pushing “growth” type stocks to valuations that appear sublimely ridiculous. Resource stocks also rallied strongly after a very challenging quarter. These two macro factors weighed on performance as we are underweight high multiple stocks and have an underweight position to small cap resources due to a lack of substance (i.e. low costs of production and long duration) outside of the top 100.
Major Contributors to Performance
Over the month the largest contributors to performance were from not owning Light & Wonder (LNW.ASX, -18%) and overweight positions in both NZME (NZM.ASX, +13%) and Sims (SGM.ASX, +15%).
NZME (NZM.ASX) share price rose 13% during the month as the market became more enthused with the outlook for NZ companies post the RBNZ’s surprise interest rate cut. NZM continues to deliver on its digital transformation strategy with digital audio revenue and digital subscription (news) revenue growing 33% and 13%, respectively in 1HCY24. The standout was the 63% growth in OneRoof’s digital listing revenue and a +70% increase in OneRoof listing upgrades, driving positive earnings for the property portal in what is generally a weaker half for listings. The audience gap between OneRoof and the #1 property platform has reduced to just 10%, with OneRoof continuing to gain share. We believe the market continues to undervalue NZME as an out of favour traditional media company, despite its clear transformation from print to digital (now ~30% of revenue) and the value in owning the outright #2 property portal in NZ which as a market has been slow to transition to digital. NZME trades on only ~4x FY25 EV/EBITA with the outlook for earnings likely to improve from here as the economy recovers and as OneRoof structurally grows.
Major Detractors from Performance
The largest detractors from performance included overweight positions in Star Entertainment Group (SGR.ASX, -34%), Coast Entertainment Holdings (CEH.ASX, -15%) and Fletcher Building (FBU.ASX, -3.6%).
Star Entertainment Group (SGR.ASX) share price fell 34% in September post the company resuming trading post the release of their delayed FY24 results. There are a significant number of moving parts in respect of SGR’s earnings outlook including a weak economy, management’s ability to execute on cost-out, introduction of carded gaming and the duration of increased remediation costs. Current earnings are heavily depressed due in large part to elevated remediation and compliance costs such that the group is losing money on an EBITDA basis. There does, however, remain significant value in the group’s property assets. On our calculations these could be worth anywhere from $700m (24cps) based on value of hotel rooms in isolation up to $2.7bn (94cps) on a replacement cost basis (both after deducting debt and other liabilities). If earnings recover post elevated remediation costs and on a through the cycle basis there is an argument the group could be worth $1bn (or 35cps) or more. Regardless of the potential valuation upside, we have decided to reduce the position size as there remains a high risk of default given expected cash outflows in the short term and uncertainties that surround debt tranche 2 ($100m) which is contingent on $150m of subordinated debt being raised before the end of December 2024, which best case will be highly dilutive at current share price levels. Unfortunately, the investment has been a poor performer, as we significantly underestimated the extent of regulatory risk and the magnitude of early losses at the QWB project.
Outlook & Strategy Going Forward
The market divergence between “have” and “have not” company valuations has continued to stretch. If something does give in the high multiple space, there could be a very healthy rotation to companies that are more attractive from a valuation perspective. The rate cutting cycle which has begun in earnest offshore could be a catalyst for a shift in fortunes for the domestic market which has been driven by the outperformance/valuations of major banks, large caps and perceived high growth stocks.
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.
