14 Jan 2025
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December 2024
After a strong equities market rally in November, fuelled by the Republican victory, the US market retraced in December with the Dow Jones diving 5.3% and the S&P 500 down 2.5%.
The Australian market followed the offshore lead with the S&P/ASX All Ords, Small Ords and Small Industrials Accumulation Indices all falling by 3.1% over the month. Pleasingly, and despite the market headwinds, the Cyan C3G Fund continued its recovery with a strong result of +5.8% for December.
Post the US election result the focus appears to have shifted back to economic fundamentals, with recent data suggesting “sticky” inflation above the RBA target and strong labour markets potentially resulting in rates staying higher for longer, both in the US and domestically.
An increased focus on underlying stock fundamentals and value appears to be directing interest to the smaller end of the market, fuelled by takeover activity (as discussed in our November Monthly Report) and share price recovery in a number of smaller ASX listed companies that had previously been underperforming for some time. This would be well received after 3 consecutive years of small cap underperformance.
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Month in Review
Again this month, the largest contributor to performance was aerospace and defence company Quickstep Holdings (QHL +41%) which entered into a Scheme Implementation Deed (essentially a friendly takeover) at $0.575 with ADSAM, the holding company for Marand for which QHL does manufacturing work for Lockheed Martin and the C-130 Hercules program. The directors of Quickstep have approved the transaction subject to no “Superior Proposal”. Last month we wrote:
“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.”
Given the improved trading of Quickstep and potential for a new bidder to come into the mix, we continue to hold our shares.
Whilst the QHL outcome was incredibly pleasing, we were most enthused by the news that traffic camera operator Acusensus (ACE +20%) made in the month. The company announced two major contracts:
- a nationwide speed camera supplier agreement in New Zealand worth almost NZ$100m and;
- an expansion of its existing mobile phone and seatbelt contract in QLD worth A$27m.
In order to help fund these contracts the company raised A$10m in an Institutional Placement at $0.90 (to which the Cyan C3G Fund subscribed) and an additional $2m in an SPP. Despite the healthy 20% rise in the month to $1.11, we feel investors have not embraced the milestones as vigorously as they could have in context of the company’s modest $150m market cap and net cash balance of ~$30m.
Acusensus: Total Contract Value (A$m)
The third major contributor in the month was consumer facing micro investing platform Raiz Invest (RZI +20%). The company has made significant financial progress in the past year, closing down loss-making international operations and adding a strategic investor in State Street. The timing of the stock’s run in the past month has been somewhat curious though given there has been no major update from the company since the AGM in late November. However, there has been significant interest in the sector however with strong runs in Netwealth (NWL) and Hub24 (HUB) along with takeover bids for Spaceship Investors, Selfwealth (SWF) and Insignia Financial (IFL). With Raiz’s 300,000+ customer base and over $1.5bn in FUM, there is no doubt the company is an attractive target for domestic or international financial institutions wishing to acquire an engaged suite of retail investors.
Despite the moderate falls in the broader indices in the month, the Fund experienced only a handful of declines with Alcidion (ALC -8%), Playside (PLY -8%) and Vinyl (VNL -5%) the main detractors.
Media
For all articles, videos and commentary featuring Cyan Investment Management please head to the Cyan Investment Management Linkedin page.
Outlook
As we look to 2025, we remain optimistic about the outlook for the Australian smaller companies sector.
At a macro level the key areas of focus will continue to be:
- Inflation and economic performance: In developed economies the narrative has been around soft economic landings and inflation trending back towards central bank target levels. Inflation and labour markets are proving more stubborn than previously forecast in certain regions, but nonetheless, general economic environments are more stable and predictable than recent times.
- The interest rate cycle: The general consensus is that rates have peaked and globally we are in a rate-cutting cycle. This has begun in many economies including Europe and the US, but the pace and magnitude remain an area of great debate. Nonetheless, this point in the cycle is conducive to equities markets, most notably in the growth sectors.
- Geopolitical issues: The US political situation appears conducive to stimulus and economic growth. The Middle Eastern and Russian/Ukrainian conflicts remain an ongoing risk.
At the market level we are seeing increased liquidity at the smaller end, which should be further improved as the macro issues play out. The clear relative value in small caps versus the larger end is increasingly coming under focus, and the first real signs of recovery were evident in the December quarter of 2024. We continue to believe that this will drive further corporate and M&A activity. Fundamentally from an earnings perspective, a large cohort of companies will be cycling against moderate performance in previous corresponding periods, resulting in earnings growth to complement price re-rating.
We look forward to the February (interim) reporting season as the next catalyst to stock-specific performance.
Outside of our monthly reports, to keep up to date intra-month with stock news, please keep an eye on our Linkedin profiles.
We thank our investors for their support and believe recent results are the beginnings of a sustained re-rating in the micro-small cap sector.
As always, we are attuned to market risks and opportunities, and we welcome contact from our investors at any time.
Dean Fergie and Graeme Carson
Cyan Investment Management
AFSL No. 453209
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