Cyan Newsletter – 28 February 2017

14 Mar 2017

The Cyan C3G Fund managed to eek out a small gain in February taking the Fund’s one year return to 22.4%, ahead of the All Ords’ 21.3% and well in excess of the Small Industrials’ 11.4% return.

Full Report: Cyan Monthly Feb 17

Despite the slightly positive results reflected in the market indices over February, the situation on the ground appeared a lot tougher up close, with downgrades aplenty. A number of retailers had a particularly rough time with Godfreys (GFY), Grays Online (GEG), Shaver Shop (SSG), Redbubble (RBL), Retail Food Group (RFG), RCG Corporation (RCG) and The Reject Shop (TRS) all posting disappointing results, to which investors pulled out the red Texta and aggressively marked down their prices.

Some other former ‘high flyers’ shot down during reporting season included Ardent Leisure (AAD), CSG Group (CSV), Eureka Group (EGH), iSentia (ISD), and Hills Industries (HIL) all of which have endured declines of 25% or more.

Some of the better results came from the likes of McMillan Shakespeare (MMS), Blue Sky Alternative Investments (BLA), NextDC Ltd (NXT), Costa Group (CGC) and Monadelphous Group (MND).

February Review

The outcome for the C3G Fund of a basically flat result in February was disappointing in light of the generally strong results our core holdings posted.

Blue Sky (BLA) announced a 130% increase in 1H17 NPAT to $10.1m and a 59% growth in assets under management over the pcp to $2.7bn. In light of this outstanding performance, the shares pushed almost 20% higher in February.

Afterpay (AFY) a provider of interest-free payment solutions for retail customers, produced some truly astonishing trading metrics: underlying sales of $145m (+370%); revenue of $6m (+417%) and an inaugural operating EBITDA profit of $0.6m. Post their result, AFY announced a proposed merger with 26% shareholder, Touchcorp (TCH) Partially due to a flagged founder sell-down in AFY (which was effected on 1 March), the stock ended the month down 15% however we remain extremely upbeat about the outlook for the combined businesses.

One of our more recent investments, equipment financier Axsesstoday (AXL) posted an inaugural result ahead of market expectations. In the 6 months to December 16, NPAT was $1.6m, up 186% on the pcp. In addition, AXL upgraded its FY17 NPAT prospectus guidance from $3.3m to $3.6m.

Domestic credit provider Money3 (MNY) posted a solid 1H17 NPAT of $13.7m, well ahead of market expectations. All business metrics looked outstanding: bad debts have fallen from 3.5% to 2.5%; EBITDA margins are over 45%; and a further 2.5c dividend has been declared and full year guidance upgraded to $27.5m NPAT. MNY ended February down 5%.

Whilst Cyan avoided all the significant downgrades (of which there were many) the only slight disappointment was financial services software provider Praemium (PPS) which reported a 39% increase in underlying 1H17 EBITDA of A$2.6m, (against A$1.8m in the pcp) which was impacted slightly by sales and marketing investment. The stock fell 20% in the month, no doubt impacted by the sudden departure of the Managing Director, Michael Ohanessian. We have spoken with the PPS board and are comfortable the company is well progressed in their search for a replacement.

Since the run-up to the US election last year, the Cyan C3G Fund has been conservatively positioned with the cash weighting occasionally touching 50%. The weightings of our core positions in the Fund are always being tweaked with respect to underlying company fundamentals, daily movement in share prices and changes in market sentiment.

Broadly, in the past month, our weightings have been increased as the Fund’s companies have performed ahead of expectations and prices have been relatively unchanged. The market has also experienced a significant rotation out of smaller companies, and whilst this appears yet to have ceased, we certainly believe it is losing momentum. Hence the risk/opportunity balance is beginning to swing back in favour of the small-cap sector.

We continue to focus on growth and note that 8 of our top 10 holdings generate what we believe to be maintainable return on equity above 20% and are reinvesting at least half of their earnings back into the business. In terms of size, approximately half of our holdings are in companies with a market capitalisation between $200m and $750m.

The longer-term track record of the Fund remains outstanding. Over the past two years the C3G Fund has exceeded comparable indices by 20%+ p.a. and has achieved this with lower volatility (i.e. risk).

We thank all our investors for their support and look forward to keeping you all updated with the Fund’s progress.

As always we are contactable in person if investors wish to discuss any aspect of their investment in the Cyan C3G Fund.


Dean Fergie & Graeme Carson

Cyan Investment Management

AFSL No. 453209