DMX Capital Partners August 2017 Shareholder Update An investment company managed by: DMX Asset Management ACN 169 381 908 AFSL 459 120 Level 4, 92 Pitt Street, Sydney, NSW 2000 PO Box 916, Milsons Point, NSW 1565 Opening NAV (1 Aug 2017) (1) $1.6785 Closing NAV (31 Aug 2017) (1) $1. 6987 Fund size ~$4m Performance Aug 2017 Performance last 3 months DMXCP GAV return (Aug) +1.437% DMXCP GAV return (3 m th) +2.334% (4) % cash held - month end (6) 29% Period end 30 day BBSW +0.136% (2) Average 30 day BBSW +0.395% (5) Gearing nil Out (under) performance +1.301% (3) Out (under) performance +1.939% No. of positions 18 All Ords return -0.051% All Ords return +0.168% Franking credits / Share (7) $0.015 DMXCP Share price = Closing NAV ($1.6987), being: Share portfolio value + cash fees payable tax payable + franking credits *On 30 September 2016 DMXCP s Share price was ex a 5c dividend and 2.14c franking credit which was paid on 16 October References to All Ords are for illustrative purposes only Monthly DMXCP Net asset value (share-price) returns (after fees) since inception (April 2015) (9) (%): Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD All Ords 2015 n/a n/a n/a +0.201 +9.448 +1.104 +6.524 +1.971 +9.711 +0.958 +3.568 +2.470 +41.62-8.83 2016-3.590 +1.323 +2.049 +2.045 +2.143 +0.020 +5.389 +7.056 +2.156 +1.058 +1.520 +0.321 +23.10 +7.01 2017 +0.885-0.816 +1.790-0.741-1.990 +0.210 +1.071 +1.208 +1.56 +0.95 Dear Shareholder, DMXCP returned +1.208% after all accrued fees and expenses during August 2017. DMXCP s NAV as at 31 August 2017 was $1.6987, up from $1.6785 at the end of July 2017. The All Ordinaries Index decreased marginally (- 0.05%) for the month. The fund has returned +77.02% after fees (including dividends) in the 29 months since inception (April 2015).. Portfolio Review During August all of our portfolio companies reported their financial results for the 12 months ending 30 June 2017. All of our core holdings (greater than 5% positions) reported results in line with, or exceeding, their guidance forecasts. Pleasingly, with the exception of Elanor Investors, all of our core holdings delivered earnings growth that exceeded our benchmark metric of double digit earnings per share growth Paragon Care (11% eps growth), Fiducian Group (23%), Konekt (15%), Joyce Corp (20%), Zenitas (36%) and Apollo Tourism (125%) (both Zenitas and Apollo on a pro-forma basis) and Pioneer Corporation (11%) (on a weighted average shares on issue basis). Further significant earnings growth into FY18 has been forecast across the portfolio - at this early stage in the financial year, strong earnings growth has already been publicly forecast by Pioneer (48% increase in NPAT), Konekt (20% pro-forma EPS growth) and Zenitas (89% EBITDA growth). Performance during the month was impacted by a fall in the share price of Konekt (down 14% for the month resulting in a cost to performance of 0.75%). During the month Konekt announced a significant acquisition (refer page 2) and capital raising at a discounted raising price of 48c. We were pleased to see Konekt s Directors commit to subscribe for/underwrite up to $4m of the $15.7m share issue, which is a strong vote of confidence in the future of Konekt, and we were pleased to also participate in the raising. We would expect the share price to move up once the capital raising has been completed in mid September.
A summary of notable FY17 results from a selection of our core positions is detailed below: Company FY17 result Comment highlights (*) normalised Konekt (ASX:KKT) Revenue +21% NPAT + 16% EPS +15% Dividend +50% KKT, a leading provider of workplace injury management and prevention services reported a very strong full year result. KKT benefited from its increased scale with underlying EBITDA margins increasing from 10% to 11% (and up from 8% in Fy16), resulting in significant earnings growth. KKT s increasing earnings EPS trend is shown below. During the year KKT secured over 30 new corporate customers, achieved a significant panel appointment in the Commonwealth Government sector and extended its Australian Defense Force contract. Source: Investor Presentation 17 August 2017 Paragon Care (ASX:PGC) Revenue +25% NPAT +35% EPS + 11% Dividend +36% During the month, KKT also announced a significant acquisition - Mission Providence, a leading provider of employment services. The acquisition is consistent with KKT s Returnto-Work focus with the purpose of maximising individual s workforce participation - the expansion into adjacent return to work and employment placement services markets diversifies and expands KKT s revenue streams. The merged business is projected to approximately double revenue and EBITDA and deliver EPS before amortisation accretion of c20% in FY18. At current prices, KKT is trading on about 8-9x forecast FY18 earnings. Paragon is a leading medical equipment, device and consumables supplier offering a onestop-shop service to most of the major hospitals and aged care facilities in Australia. Paragon s earnings are underpinned by long term contracts with hospitals for regularly purchased consumables, that comprise two-thirds of Paragon s revenue each year. Revenue for the year was up 25% to $117.2m with EBITDA margins improving from 13.0% to 14.6% due to cost synergies and operating leverage, resulting in EBITDA growth of 41% to $17.1m. PGC Results highlights FY14, FY15, FY16 & FY17 Source: Investor Presentation 8 August 2017 Paragon s growth is expected to continue as its product portfolio expands through new innovative products joining the platform and an expanded geographical footprint and sales penetration, with a focus on Queensland, South Australia and New Zealand. Paragon has a medium term target revenue of $250m, driven by a combination of strong double digit organic growth and acquisitions. At a 15% margin, this equates to $37m EBITDA or a 120% increase on FY17 s result suggesting a long runway of further earnings growth.
Fiducian Group (ASX:FID) Revenue +15% NPAT(*) +24% EPS + 23% Dividend +28% Integrated financial services company FID reported another strong increase in its underlying after tax profit in FY17 of 24%. Its total funds under management, administration and advice (FUMAA) increased 20% to $5.7b across the year. The FY17 result adds to FID s impressive track record of profit growth - FID has now recorded double-digit EPS growth in 14 out of 18 years since listing on the ASX. The operating leverage inherent in the business is coming to the fore now, with FID s Cost to Income ratio reducing significantly in recent years as the business scales up (2013: 70%, 2017: 60%). This ratio is expected to further decline into FY18, underpinning another year of strong earnings growth. FID s increasing revenue and EPS trend is illustrated below: Source: Results announcement 15 August 2017 Pioneer Credit (ASX:PNC) Revenue +18% NPAT +14% EPS +11% Dividend -3% With 44 offices throughout Australia, FID is now a substantial national financial services business, benefitting from increasing recurring revenue. FID is well placed to continue to build scale organically and through acquisitions, and to leverage its integrated service offerings to deliver consistent double digit earnings growth in coming years. Debt purchaser PNC reported strong headline numbers in FY17, achieving record cash collections ($71m) and investing a record $70m in new debt ledgers. PNC expects to generate a return of 4x on these investments. PNC s cash earnings (EBITDA) were up 12%. The strong result was achieved despite a significant (100% expensed) investment in the development of new products and in hiring 120 new employees. Due to PNC s commitment to staff training, it takes 5 months before new staff are profitable. This investment will underpin PNC s forecast strong FY18 results.
PNC NPAT history and forecast Source: Investor Presentation 24 August 2017 Zenitas Healthcare (ASX:ZNT) Revenue +1.4% NPAT +36% EPS +36% PNC has forecast FY18 NPAT of at least $16m (48% increase) with changing market dynamics expected to provide improved opportunities for PNC as a premium provider of differentiated financial services. Of PNC s expected $70m investment in new ledgers in FY18, $65m has already been contracted. Zenitas reported a very strong result - FY17 Pro-forma underlying EBITDA was ahead of forecast by 6% and EBITDA margin improved 25% over FY16. The improved margin was a result of focusing the ZNT Home Care business on higher margin business, the benefit of cross-referral capture, the provision of higher margin corporate health services, and cost synergies being realised. Over the course of the year, Zenitas has built a leading Australian healthcare business, now employing over 1600 staff, and operating from 55 locations. Its subsidiaries now includes Australia s largest physiotherapy practice, the largest aged care podiatry provider, and one of the leading national homecare businesses. Drawing on an experienced management team, the execution of this strategy has been pleasing and the market will take confidence from this strong result as highlighted below: Source: Results announcement 31 August 2017 Zenitas announced a very positive outlook, highlighting a long growth runway, with multiple growth drivers in place organic growth initiatives including furthering cross referrals between businesses and more sophisticated marketing capability to increase market share;
potential acquisitions in what remains a very fragmented market, and continued focus on internal operational improvements. Based on the initiatives and businesses currently in place, ZNT expect organic growth of between 7.5% and 10%, resulting in FY18 EBITDA of between $13m to $13.5m compared to $7m generated in FY17. With strong cash flows being generated, ZNT have indicated they will pay their first dividend this coming half. Joyce Corp (ASX:JYC) Revenue +43% NPAT +20% EPS + 20% Dividend + 5% Joyce Corporation, an investment company that owns the Bedshed Franchise, the fast growing Lloyds online auction business, and Australia s largest kitchen renovation company, reported a strong operating result relative to FY16. Total written sales across the Joyce group (including franchisee sales and gross auction sales) were $211m up +80% from FY16. Consolidated revenue was up +43% for the same period in 2016 to $81.1m. Auction gross sales from Lloyds increased to over $88m from $48m, with revenue increasing from $10m to $16.4m. Kitchen business KWB Group Pty Ltd delivered solid double- digit revenue growth of 16% with revenue increasing from $40m to $47m. Bedshed revenue increased 10% from $11.5m to $13m. Joyce is a diversified business that offers attractive counter cyclical features. Five years ago Joyce was solely dependent on its Bedshed business for growth. Today, as a result of prudent acquisitions and diversification, Bedshed comprises less 20% of Joyce s revenue. This diversification strategy has been implemented without Joyce having to raise equity since 2011. There are numerous growth drivers heading into FY18: The full year benefit of new Bedshed franchises and Kitchen stores opened during FY17. Additional new showrooms and the introduction of new product lines and benefits for Kitchens during FY18. The benefit of significant investment into development of the Lloyds online auction business (including national expansion) that was expensed during FY17 and is expected to lead to operational benefits in FY18. Full year benefit from owning its Corporate headquarters (cost savings and rental of excess capacity). Full year benefits (cost savings and rentals) from owning its Kitchen headquarters. Management have noted that the majority of the property is let on a long-term lease to a third-party kitchen cabinet manufacturer that will commence supplying product to Joyce. Considerable efficiencies and savings are expected to result from this arrangement in FY18 with the full benefit achieved in year ending FY19. Joyce is led by a proven, commercially astute, management team, has a solid balance sheet underpinned by significant real estate holdings, and is yielding 7.5% in fully franked dividends.
A SELECTION OF DMXCP S TOP POSITIONS AS AT 31 AUGUST 2017 (IN NO PARTICULAR ORDER): ASX:ZNT ASX: PNC ASX:JYC ASX:KKT ASX:PGC Zenitas Pioneer Credit JoyceCorp Konekt Paragon Care m/c: $56m m/c: $148m m/c: $46m m/c: $52m m/c: $153m EBITDA of between $13m to $13.5m (FY17:$7.0m) 48% increase in earnings expected group is poised for further growth double revenue and EBITDA (on proforma basis) continue to grow earnings and dividends OTHER NEWS New team members We are pleased to welcome Chris Steptoe to the DMXAM team. Chris has more than 15 years experience trading ASX small caps. He enjoys hunting for new ideas that have yet to be discovered by institutions and likens his approach to Jim Slater's GARP investing style. Chris will add depth to the team and assist in idea generation. Experienced investor and a substantial holder in DMXCP, Dean Morel, has accepted an invitation to join the board of DMXCP as a non-executive director. Dean has 30 years investing and business experience and holds a Master of Applied Finance from Melbourne University. Dean replaces Scott Riedel who has been an independent director since 2015. We welcome Dean, and we thank and offer our appreciation to Scott for his service over the last two years. Please feel free to follow us on twitter to keep up to date with our articles and commentary: https://twitter.com/dmxasset The following chart illustrates the return from investing $100,000 in the fund (including dividends and attached franking credits) since inception (April 2015). DMXCP is an absolute return fund, focused on generating positive (absolute) returns over the medium to long term. The fund is benchmark unaware, however for illustrative purposes, also presented below is 1) the corresponding indexed returns of the ASX All Ordinaries Index and 2) the S&P/ASX 200 Franking Credit Adjusted Annual Total Return (TR) Index (that adjusts for dividends and the tax effect of franking credits).
$180,000 $170,000 $160,000 $150,000 $140,000 $130,000 $120,000 $110,000 $100,000 $90,000 $80,000 $100,000 invested in DMXCP on 1 April 2015 vs All Ords & Franking credit adjusted ASX200 TR Closing NAV ($) (Adj'd for divs) All Ords Indexed ASX200(FC adj) TR We look forward to updating DMXCP Shareholders in early October with further portfolio developments. Kind regards Roger Collison Steven McCarthy Simon Turner Chairman and Chief Investment Officer Portfolio Manager Head of Client Services Note 1: Net asset value (NAV) is after all tax accruals but includes an estimate of franking credits available. Refer note 8 Note 2: 30 day BBSW rate at 31 Aug 2017 (mid-rate) was 1.60% per annum, which is calculated as 0.132% on a monthly basis Note 3: Out (under) performance is with reference to the 30 day BBSW rate and calculated as: DMXCP GAV monthly return less 30 day BBSW (monthly basis) Note 4: Unaudited result Note 5: 30 day BBSW rate chain linked for 3 months to 31 Aug 2017 (mid-rate) was 0.395% Note 6: Includes cash received during the month for the application of new DMXCP shares to be issued Note 7: Franking credits per share are franking credits arising from dividends received and for tax paid or payable on realised portfolio gains Note 8: All DMXCP disclosed returns include the payment of dividends and franking credits This document is issued by DMX Asset Management (DMXAM - AFSL 459 120) in relation to DMX Capital Partners (DMXCP). The information provided in this document is general information only and does not constitute investment or other advice. The content of this document does not constitute an offer or solicitation to subscribe for shares in DMXCP. DMXAM accepts no liability for any inaccurate incomplete or omitted information of any kind, or any losses caused by this information. Any investment decision in connection with DMXCP should only be made based on the information contained in the relevant disclosure document.