10 Dec 2024
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The Republican victory in the US spurred markets globally with the US S&P 500 reporting its strongest monthly performance of the year, rising nearly 6% to an all-time high of just over 6,000.
The Australian market pushed higher, although not as vigorously, with the S&P/ASX All Ords Accumulation Index gaining 3.7%. This rise was largely through the strength in the financials, technology and healthcare sectors with the seemingly unstoppable performance of the index’s largest company, Commonwealth Bank (CBA +11% in November), and the now A$26bn healthcare software company Promedicus (PME +30%). The valuation of PME is nothing short of astonishing – in FY24 its reported revenue and NPAT were $162m and $83m respectively, placing the stock on a P/E ratio of over 300x and an EV/Sales multiple of 150x.
At the smaller end there was quite some dispersion with S&P/ASX Small Industrials Index rising 3.9% whilst the S&P/ASX Emerging Companies Index fell 0.9%.
The Cyan C3G Fund gained 3.4% for the month with some significant differences at individual stock level.
The RBA kept cash rates unchanged at 4.35%, the 13th consecutive month. Australia is now an outlier with rates having recently been cut in the US (25bp), Euro (25bp) and NZ (50bp).
As noted last month takeover activity remain a key feature with seven offers made for ASX listed stocks in the month of November alone as outlined below with the associated offer premiums.
IPO activity was also quite strong although the listing outcomes were not as favourable as investors might have hoped. In the industrials space we saw Cuscal (CCL 0%), Symal (SYL -2%), ReNerve (RNV -10%) and Vitrafy (VFY +4%) floated on the ASX through November.
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Month in Review
The Fund’s holding in aerospace and defense company Quickstep Holdings (QHL +84%) received a takeover offer from ASDAM at $0.40, a 105% premium to last sale price. ADSAM is the holding company for Marand for which QHL does manufacturing work for Lockheed Martin and the C-130 Hercules program. Quickstep has made significant progress in restructuring its operations including closing down previously unprofitable business lines and we expect its profitability to improve significantly in FY25. Despite the bid being at a large premium, the stock was trading at this level only a few months ago and hence we continue to hold in expectation of an increased bid or counteroffer. The company is currently working through a business valuation and we expect this release to unlock further stock value.
A couple of days after the QHL bid, logistics services provider Silk Logistics Holdings (SLH +60%) received a takeover offer from DP World Australia at $2.14. The acquisition is to be executed through a Scheme of Arrangement, is supported by the Board and is expected to be complete in the first half of 2025. As the stock was trading near the takeover price and we considered it unlikely there will be a counter bid, we elected to sell our shares on market to pursue other market opportunities.
One of these opportunities was a placement in large-scale metal 3D printing company AML 3D (AL3). The company raised $30m to further expand into the US primarily driven by contracts for the US Navy. We expect further news-flow as the contract is expanded and the company rolls out its bank of ARCEMY systems into the large US market.
Alcidion (ALC +20%) was strengthened by the announcement of two new contracts during the month: a $4.5m contract with Northern Adelaide Local Health Network; and a $3.7m contract with Peninsula Health in Victoria. We expected the stock would have pushed even higher over the month given the positive news flow but it’s undoubtedly promising that the company continues to win new deals and build out its recurring revenue which now sits at $30m p.a. Given its modest relative market cap of ~$80m (EV/Sales 2.5x) we think there is huge potential upside in light of the interest in the medical software sector.
On the downside a number of companies in the Fund pulled back on no specific company news. Falls included ReadCloud (RCL -19%), Birddog (BDT -18%) and music business Vinyl (VNL -19%) but all three have since rebounded in December.
ReadCloud’s price movement was somewhat confusing given the full year result released in November (RCL has a September financial year end), detailed strong results across the board for the technology-backed education business.
Media
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Outlook
There continues to be some volatility at the smaller end due to pockets of low liquidity but at the same time there is some real enthusiasm in the sector as placements are snapped up and ongoing takeover bids are announced.
We’ve seen some additional upside this month with a large contract win and associated placement for Fund holding Acusensus along with the aforementioned bounce in some of our smaller positions.
Whilst there is some thought that the markets can be particularly quiet over the December/January period, we expect the market to be busy with corporate news up until Christmas. And whilst many market participants take breaks in January, the month is historically one of the better ones with an average return of over 1% which can also be amplified at the smaller end.
Outside of our monthly reports, to keep up to date intra-month with stock news, please keep an eye on our Linkedin profiles.
As always, we are attentive to all risks and opportunities and welcome contact from our investors at any time.
Dean Fergie and Graeme Carson
Cyan Investment Management
AFSL No. 453209
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