Ellerston Australian MicroCap Fund (ECL0984AU) Report & Performance

What is the Ellerston Australian MicroCap Fund fund?

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.

Growth of $1000 Investment Over Time

Performance Report

Peer Comparison Report

Peer Comparison Report

Latest News & Updates For Ellerston Australian MicroCap Fund

Ellerston Australian MicroCap Fund Fund Commentary September 30, 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.

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Product Snapshot

  • Product Overview
  • Performance Review
  • Peer Comparison
  • Product Details

Product Overview

Fund Name APIR Code
? A Product Code is unique a identifier code issued by a group or governing body, to reference products in a large group. For an example, APIR codes are commonly used for Funds and Ticker codes are commonly used for Securities such as ETFs and Stocks.
Structure
?
Asset Class
? An Asset Class breakdown provides the percentages of core asset classes found within a mutual fund, exchange-traded fund, or another portfolio. Asset classes (in microeconomics and beyond) generally refer to broad categories such as equities, fixed income, and commodities.
Asset Category
? An Asset Category is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset categories (or a sub-asset class) are made up of instruments which often behave similarly to one another in the marketplace, looking down to the Asset Category level is important if looking to build a diversified portfolio.
Peer Benchmark Name
? A Peer Index (benchmark) refers to a peer group of investment managers who have the same investment style or category. It is used to compare the performance of one manager to their peer group, which makes it simpler for investors to choose between the vast number of investment managers.
Broad Market Index
? A Market Index (benchmark) refers to a hypothetical portfolio of investments that represents a segment, asset or category of an investable market. Market Indices are used to benchmark managers performance, to assist their style reliability and ability to provide excess returns.
FUM
? Funds/Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.
Management Fee
? A management fee is a charge levied by an investment manager for managing an investment fund. The management fee is intended to compensate the managers for their time and expertise for selecting finanical products and managing the portfolio.
Performance Fee
? A performance fee is a payment made to an investment manager for generating positive returns. This is as opposed to a management fee, which is charged without regard to returns. A performance fee can be calculated many ways. Most common is as a percentage of investment profits, often both realized and unrealized. It is largely a feature of the hedge fund industry, where performance fees have made many hedge fund managers among the wealthiest people in the world.
Spread
? A spread can have several meanings in finance. Basically, however, they all refer to the difference between two prices, rates or yields. In one of the most common definitions, the spread is the gap between the bid and the ask prices of a security or asset, like a stock, bond or commodity. This is known as a bid-ask spread.
Ellerston Australian MicroCap FundECL0984AUManaged FundsDomestic EquityAustralian Mid CapDomestic Equity - Mid Cap IndexASX Index MidCap 50 Index123.37 M1.2%6.00%0.5%

Performance Review

Fund Name Last Month
? Returns after fees in the most recent (last) month).
3 Months Return
? Returns after fees in the most recent 3 months.
1 Year Return
? Trailing 12 month returns.
3 Years Average Return
? Average Annual returns from the last 3 years.
Since Inc. Average Return
? Average (annualised) returns since inception
1 Year Std. Dev. (Annual)
? The standard deviation (or annual volatility) of the last 12 months.
3 Years Std. Dev. (Annual)
? The average standard deviation (or annual volatility) from the last 3 years.
Since Inc. Std. Dev. (Annual)
? The average standard deviation (or annual volatility) since the fund inception.
1 Year Max Drawdown
? The maximum drawdown in the last 12 months - a drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund.
3 Year Max Drawdown
? The maximum drawdown in the last 36 months - a drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund.
Since Inc. Max Drawdown
? The maximum drawdown since inception - a drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund.
Ellerston Australian MicroCap Fund4.79%10.2%34.71%-1.31%14.52%14.59%16.76%20%-8.1%-34.52%-34.52%

Peer Comparison

Fund Name Peer Index Name
? A group of individuals who share similar characteristics and interests are called peer groups. Peer group analysis is an essential part of assessing a price for a particular stock in investment research. The emphasis here is on making a comparison, meaning that the peer group constituents should be more or less identical to the company being examined, especially in terms of their main business and market capitalization areas.
12 Months Excess Return
? Excess returns are an important metric that helps an investor to gauge performance in comparison to other investment alternatives. In general, all investors hope for positive excess return because it provides an investor with more money than they could have achieved by investing elsewhere.
Excess Return Annualised Since Inception
? Excess returns are an important metric that helps an investor to gauge performance in comparison to other investment alternatives. In general, all investors hope for positive excess return because it provides an investor with more money than they could have achieved by investing elsewhere.
12 Months Alpha
? Alpha is used in finance as a measure of performance, indicating when a strategy, trader, or portfolio manager has managed to beat the market return over 12 months. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark that is considered to represent the market’s movement as a whole.
Alpha Annualised Since Inception
? Alpha is used in finance as a measure of performance, indicating when a strategy, trader, or portfolio manager has managed to beat the market annualized since inception. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark that is considered to represent the market’s movement as a whole.
12 Months Beta
? Rolling 12Month Beta is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks).
Beta Annualised Since Inception
? Beta is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks).
12 Months Tracking Error
? 12Month Tracking error is the difference in actual performance between a position (usually an entire portfolio) and its corresponding benchmark over the last 12 months. The tracking error can be viewed as an indicator of how actively a fund is managed and its corresponding risk level. Evaluating a past tracking error of a portfolio manager may provide insight into the level of benchmark risk control the manager may demonstrate in the future.
Tracking Error Since Inception
? Since Inception tracking error is the difference in actual performance between a position (usually an entire portfolio) and its corresponding benchmark since inception. The tracking error can be viewed as an indicator of how actively a fund is managed and its corresponding risk level. Evaluating a past tracking error of a portfolio manager may provide insight into the level of benchmark risk control the manager may demonstrate in the future.
12 Months Correlation
? Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management, computed as the correlation coefficient, which has a value that must fall between -1.0 and +1.0.
Correlation Since Inception
? Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management, computed as the correlation coefficient, which has a value that must fall between -1.0 and +1.0.
Ellerston Australian MicroCap FundDomestic Equity - Mid Cap Index8.7%3.77%NA%NA%NA%1.245.27%7.23%0.960.93

Product Details

Fund Name Verifed by SMSF Mates Manager Address Phone Website Email
Ellerston Australian MicroCap FundYes-https://ellerstoncapital.com/-

Product Due Diligence

What is Ellerston Australian MicroCap Fund

Ellerston Australian MicroCap Fund is an Managed Funds investment product that is benchmarked against ASX Index MidCap 50 Index and sits inside the Domestic Equity - Mid Cap Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Ellerston Australian MicroCap Fund has Assets Under Management of 123.37 M with a management fee of 1.2%, a performance fee of 6.00% and a buy/sell spread fee of 0.5%.

How has the investment product performed recently?

The recent investment performance of the investment product shows that the Ellerston Australian MicroCap Fund has returned 4.79% in the last month. The previous three years have returned -1.31% annualised and 20% each year since inception, which is when the Ellerston Australian MicroCap Fund first started.

How is risk measured in this investment product?

There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Ellerston Australian MicroCap Fund first started, the Sharpe ratio is NA with an annualised volatility of 20%. The maximum drawdown of the investment product in the last 12 months is -8.1% and -34.52% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.

What is the relative performance of the investment product?

Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Ellerston Australian MicroCap Fund has a 12-month excess return when compared to the Domestic Equity - Mid Cap Index of 8.7% and 3.77% since inception.

Does the investment product produce Alpha over its Peers?

Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Ellerston Australian MicroCap Fund has produced Alpha over the Domestic Equity - Mid Cap Index of NA% in the last 12 months and NA% since inception.

What are similar investment products?

For a full list of investment products in the Domestic Equity - Mid Cap Index category, you can click here for the Peer Investment Report.

What level of diversification will Ellerston Australian MicroCap Fund provide?

Ellerston Australian MicroCap Fund has a correlation coefficient of 0.93 and a beta of 1.24 when compared to the Domestic Equity - Mid Cap Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.

How do I compare the investment product with its peers?

For a full quantitative report on Ellerston Australian MicroCap Fund and its peer investments, you can click here for the Peer Investment Report.

How do I compare the Ellerston Australian MicroCap Fund with the ASX Index MidCap 50 Index?

For a full quantitative report on Ellerston Australian MicroCap Fund compared to the ASX Index MidCap 50 Index, you can click here.

Can I sort and compare the Ellerston Australian MicroCap Fund to do my own analysis?

To sort and compare the Ellerston Australian MicroCap Fund financial metrics, please refer to the table above.

Has the Ellerston Australian MicroCap Fund been independently verified by SMSF Mate?

This investment product is in the process of being independently verified by SMSF Mate. Once we have verified the investment product, you will be able to find more information here.

How can I invest in Ellerston Australian MicroCap Fund?

If you or your self managed super fund would like to invest in the Ellerston Australian MicroCap Fund please contact via phone or via email .

How do I get in contact with the Ellerston Australian MicroCap Fund?

If you would like to get in contact with the Ellerston Australian MicroCap Fund manager, please call .

Comments from SMSF Mates

SMSF Mate does not receive commissions or kickbacks from the Ellerston Australian MicroCap Fund. All data and commentary for this fund is provided free of charge for our readers general information.

Historical Performance Commentary

Performance Commentary - August 31, 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.

Performance Commentary - July 31, 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.

Performance Commentary - June 30, 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.

Performance Commentary - May 31, 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.

Performance Commentary - April 30, 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.

Performance Commentary - March 31, 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.

Performance Commentary - February 28, 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.

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