11 Jul 2023
Throughout June, the Australian market experienced a roller-coaster ride with initial bullishness tempered by concerns over inflation and weakening consumer confidence. However, towards the end of the month, the market found some buying support at the larger end bringing the market into mildly positive territory.
As we alluded to last month there was some tax-loss selling at the smaller end of the market which impacted a number of our less-liquid positions. The S&P/ASX All Ordinaries Accumulation Index rose 1.9% whilst the S&P/ASX Small Industrials Accumulation Index saw a modest 0.5% gain. Whilst the Cyan C3G Fund finished the month down 8.0%, which we will elaborate on below, it has rebounded in July, and in contrast to the weaker markets.
The RBA raised rates 0.25% to 4.1% in June but left them unchanged in early July stating:
“Interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so.”
There has been a tick-up in deals being done, almost all have been secondary placements and much of the volume can be attributed to the resources sector. However, we are seeing a marked increase in activity in the industrials sector and early indications are that FY24 will continue to be active along with signs that the IPO pipeline will reopen.
Other positive developments have included an increase in takeover activity including:
- Tesserent (TNT) bid for by Thales at 157% premium.
- Eroad (ERD) bid by Volaris at 69% premium.
- Limeade (LME) bid by WebMD at 325% premium.
- Costa Group (CGC) bid by Paine Schwartz Partners at a 30% premium.
We think this is an interesting indicator that industry can see real value in pockets of the listed market, most notably the small end, even though it has struggled of late to attract investment interest from non-industry and market participants.
Month in Review
There wasn’t much joy in respect to share price movements for the Fund even though there was nothing of note released by our companies in respect of bearish or negative news. We reiterate, and as mentioned in last month’s newsletter, that we believe many price movements can be attributed to tax-loss selling in a low liquidity environment:
- Raiz (RZI) -16%: The company’s update for May 2023 showed a slight 0.5% decrease in FUM to $1.1bn (which was commendable given the 3.5% slide in the All Ordinaries Index in May). There has been director buying and an increase in the holding of a substantial shareholder. The share-price weakness could well be on account of the lack of any announcement re the restructuring or exit of RZI’s Asian operations (which was previously stated to have been completed by May 2023). Post the most recent June update showing FUM +20% over FY23 the shares have enjoyed some buying support.
- Corum (COO) –18% (Healthcare Software): This has been a major contributor for the past couple of months but gapped down in price at the end of June. As we have noted previously, Corum has been awarded, and paid, a favourable judgement of $8.1m in a court battle with Fred IT Group. Fred IT Group subsequently appealed the decision in June which likely accounted for the selling pressure.
- Quickstep (QHL) -15% – In an earlier newsletter, we highlighted that a favourable outcome around the future of the QHL’s aftermarket (aircraft maintenance) business, with client commitments, would result in a material uplift in value. QHL has confirmed that it is committed to keeping and growing its aftermarket business but is yet to quantify revenue commitments by its “major Australian domestic airline customer”. Typically, such an announcement, coupled with directors purchasing over 300,000 shares, would be considered materially positive news. Hence, we found the decline in the share price in the month disappointing. We would expect further clarification and detail along with strong revenue growth in the half to provide impetus for a share price reversal.
- Mighty Craft (MCL) -26% – Last month the company announced a new non-executive Chairman (substantial shareholder Chris Malcolm) and the commencement of a strategic review which was followed-up this month with the ‘resignation’ of the Managing Director. Given the performance of the company over the past couple of years, this was likely not seen as a major negative despite the share-price action. There is likely some impatience over the progress of asset sales and a proposed capital raising (and uplift in valuation) for Better Beer of which MCL owns a 30% stake.
Click here for a PDF of this newsletter
Media
For all articles, videos and commentary featuring Cyan Investment Management please head to the Cyan Investment Management Linkedin page.
Outlook
We have been experiencing a prolonged period of underperformance in the domestic small-cap sector, and we have been eagerly (and impatiently) anticipating a recovery.
Certainly, our sense of impatience appears justified, as indicated by the chart below. The current small-cap underperformance, which has now lasted for 19 months, has surpassed the previous two significant downturns. The first followed the dot-com boom in 2000 and lasted 18 months, and the downturn after the Global Financial Crisis of 2007 lasted 15 months before reversing.
If the past is any guide, the elongated duration of this downturn may signal that a turning point for the sector is close. As Mark Twain wrote, “History never repeats itself, but it does often rhyme.”
The Fund has enjoyed an uplift in NAV to date this month (on no real company specific news and contrary to the weak market) which does gel with our theory of end of year tax-loss selling impacting June’s result.
The next cluster of news will be the Q4 cashflow statements, released in late July, from companies such as Alcidion, Birddog, Playside, Raiz, Readcloud and Zoom2U. Given the recent weakness in share prices and our contact with these companies, we strongly believe this will be a significant catalyst for the market to refocus on underlying fundamentals (and inherent value given the current market capitalizations of these companies).
As fellow unitholders we fully appreciate and accept that Fund performance over recent years has been below par. Much of this has been due to bearish market sentiment in the specific sectors that we concentrate in (namely smaller cap growth companies) but we also admit that in some cases we have made some poor investment decisions. In other cases, we’re confident that the strong underlying prospects and fundamentals of our investments will overcome present market conditions and significant value will be unlocked.
As always, we thank our investors for their ongoing support and are always available for contact directly.
Throughout June, the Australian market experienced a roller-coaster ride with initial bullishness tempered by concerns over inflation and weakening consumer confidence. However, towards the end of the month, the market found some buying support at the larger end bringing the market into mildly positive territory.
As we alluded to last month there was some tax-loss selling at the smaller end of the market which impacted a number of our less-liquid positions. The S&P/ASX All Ordinaries Accumulation Index rose 1.9% whilst the S&P/ASX Small Industrials Accumulation Index saw a modest 0.5% gain. Whilst the Cyan C3G Fund finished the month down 8.0%, which we will elaborate on below, it has rebounded in July, and in contrast to the weaker markets.
The RBA raised rates 0.25% to 4.1% in June but left them unchanged in early July stating:
“Interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so.”
There has been a tick-up in deals being done, almost all have been secondary placements and much of the volume can be attributed to the resources sector. However, we are seeing a marked increase in activity in the industrials sector and early indications are that FY24 will continue to be active along with signs that the IPO pipeline will reopen.
Other positive developments have included an increase in takeover activity including:
- Tesserent (TNT) bid for by Thales at 157% premium.
- Eroad (ERD) bid by Volaris at 69% premium.
- Limeade (LME) bid by WebMD at 325% premium.
- Costa Group (CGC) bid by Paine Schwartz Partners at a 30% premium.
We think this is an interesting indicator that industry can see real value in pockets of the listed market, most notably the small end, even though it has struggled of late to attract investment interest from non-industry and market participants.
Month in Review
There wasn’t much joy in respect to share price movements for the Fund even though there was nothing of note released by our companies in respect of bearish or negative news. We reiterate, and as mentioned in last month’s newsletter, that we believe many price movements can be attributed to tax-loss selling in a low liquidity environment:
- Raiz (RZI) -16%: The company’s update for May 2023 showed a slight 0.5% decrease in FUM to $1.1bn (which was commendable given the 3.5% slide in the All Ordinaries Index in May). There has been director buying and an increase in the holding of a substantial shareholder. The share-price weakness could well be on account of the lack of any announcement re the restructuring or exit of RZI’s Asian operations (which was previously stated to have been completed by May 2023). Post the most recent June update showing FUM +20% over FY23 the shares have enjoyed some buying support.
- Corum (COO) –18% (Healthcare Software): This has been a major contributor for the past couple of months but gapped down in price at the end of June. As we have noted previously, Corum has been awarded, and paid, a favourable judgement of $8.1m in a court battle with Fred IT Group. Fred IT Group subsequently appealed the decision in June which likely accounted for the selling pressure.
- Quickstep (QHL) -15% – In an earlier newsletter, we highlighted that a favourable outcome around the future of the QHL’s aftermarket (aircraft maintenance) business, with client commitments, would result in a material uplift in value. QHL has confirmed that it is committed to keeping and growing its aftermarket business but is yet to quantify revenue commitments by its “major Australian domestic airline customer”. Typically, such an announcement, coupled with directors purchasing over 300,000 shares, would be considered materially positive news. Hence, we found the decline in the share price in the month disappointing. We would expect further clarification and detail along with strong revenue growth in the half to provide impetus for a share price reversal.
- Mighty Craft (MCL) -26% – Last month the company announced a new non-executive Chairman (substantial shareholder Chris Malcolm) and the commencement of a strategic review which was followed-up this month with the ‘resignation’ of the Managing Director. Given the performance of the company over the past couple of years, this was likely not seen as a major negative despite the share-price action. There is likely some impatience over the progress of asset sales and a proposed capital raising (and uplift in valuation) for Better Beer of which MCL owns a 30% stake.
Click here for a PDF of this newsletter
Media
For all articles, videos and commentary featuring Cyan Investment Management please head to the Cyan Investment Management Linkedin page.
Outlook
We have been experiencing a prolonged period of underperformance in the domestic small-cap sector, and we have been eagerly (and impatiently) anticipating a recovery.
Certainly, our sense of impatience appears justified, as indicated by the chart below. The current small-cap underperformance, which has now lasted for 19 months, has surpassed the previous two significant downturns. The first followed the dot-com boom in 2000 and lasted 18 months, and the downturn after the Global Financial Crisis of 2007 lasted 15 months before reversing.
If the past is any guide, the elongated duration of this downturn may signal that a turning point for the sector is close. As Mark Twain wrote, “History never repeats itself, but it does often rhyme.”
The Fund has enjoyed an uplift in NAV to date this month (on no real company specific news and contrary to the weak market) which does gel with our theory of end of year tax-loss selling impacting June’s result.
The next cluster of news will be the Q4 cashflow statements, released in late July, from companies such as Alcidion, Birddog, Playside, Raiz, Readcloud and Zoom2U. Given the recent weakness in share prices and our contact with these companies, we strongly believe this will be a significant catalyst for the market to refocus on underlying fundamentals (and inherent value given the current market capitalizations of these companies).
As fellow unitholders we fully appreciate and accept that Fund performance over recent years has been below par. Much of this has been due to bearish market sentiment in the specific sectors that we concentrate in (namely smaller cap growth companies) but we also admit that in some cases we have made some poor investment decisions. In other cases, we’re confident that the strong underlying prospects and fundamentals of our investments will overcome present market conditions and significant value will be unlocked.
As always, we thank our investors for their ongoing support and are always available for contact directly.
Dean Fergie and Graeme Carson
Cyan Investment Management
AFSL No. 453209
An investment in the Cyan C3G Fund can be made by clicking here