Cyan Newsletter – 31 March 2025

Global markets endured a turbulent March with all indices sustaining significant falls.  The US bore the brunt of the market’s wrath with ongoing trade tensions and broader political instability worrying market players. The NASDAQ saw a painful 8.1% fall whilst the broader S&P 500 index pulled back 5.8%.

Back home, and despite a welcome rate cut in February, investors sought to sell stocks across the board with the S&P/ASX All Ords dropping 4.2% (having fallen 4.0% in February) whilst the S&P/ASX Small Ordinaries and S&P/ASX Small Industrials Accumulation Indices retraced 3.5% and 6.7% respectively.

After holding up well last month with a small 0.4% gain, the Cyan C3G Fund succumbed to the market weakness and retreated 6.3%. Despite this fall, the Fund has gained 12.1% in the year to 31 March 2025 versus a 2.2% rise in the S&P/ASX Small Ordinaries and a 3.8% decline in the S&P/ASX Small Industrials Accumulation Index.

At stock level there was some serious pain felt by the broader market. The lowlight being the unsuccessful Phase 3 drug trial from eye therapeutics company Opthea (OPT -37% suspended) – not held by the Fund – which appears likely to wipe out almost all of their A$700m market capitalisation. This shock result reverberated across the market with investors seeking to reduce their exposure to other drug development companies including Clarity (CU6 -40%), Mesoblast (MSB -22%) and Anteris Technologies (AVR -42%). Large OPT shareholder Regal (RGL -29%) was caught up in the trainwreck and was marked down accordingly having announced it was writing off its reported $220m investment in the company.

It has long been a philosophy of the Cyan C3G Fund to avoid the often binomial outcomes from investing in drug development companies. Whilst there will be times when other investors do well in the sector, we appreciate that we don’t hold the specific technical knowledge base needed in order to fully understand the science and hence confidently and prudently invest. Recent market outcomes ensure this will continue.

The overall market weakness also impacted larger fund managers including Pinnacle (PNI -23%) and HMC Capital (HMC -32%) whilst some of the recent ‘hero stocks’ including Cettire (CTT -21%), Life 360 (360 -12%), Pro Medicus (PME -21%), Wisetech (WTC -10%) and Zip Money (ZIP -35%) also saw some major profit taking.

It wasn’t all negative news, both Smartpay (SMP +50%) and The Reject Shop (TRS +97%) enjoyed takeover bids (taking the total number of industrials takeovers announced in FY25 to 19) whilst defence stocks such as Droneshield (DRO +18%), Electro Optic System (EOS +19%) and AML3D (AL3 +18%) were beneficiaries of ongoing geopolitical tensions.

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Month in Review

The Cyan C3G Fund was moderately active during the month of February.

We added an initial position in lending business Beforepay (B4P -2%) which we have been following since its (unsuccessful) listing three years ago. The company has grown significantly with steady customer growth (over 250,000 active customers), declining loss rates (1.1%) and better margins producing profitability for the past three financial halves. Whilst the current Beforepay business looks attractive in isolation given its sub $50m market cap and $18m in cash, the company is expanding into outsourced credit risk scoring through its subsidiary Carrington Labs. This business uses data generated from its lending business to produce sophisticated credit risk scores for lenders. The company has landed initial customers in the US and is expected to win more clients at what will be very high margins for the company and could be a catalyst for a significant rerating.

We also took a small placement in Bioxyne (BXN +20%), an Australian life sciences and health products company that develops and commercialises consumer health products in the rapidly growing medical cannabis space. Whilst we have largely steered clear of this sector in the past, the financial results BXN has been posting recently have been outstanding and appear to have been flying well under local investors’ radars. We feel the market has overlooked the value this company has created after their subsidiary, Breath Life Sciences, was the first to be licenced by the TGA in Australia to manufacture booming consumer CBD and THC products. In support of our thesis, early in April BXN announced a $7m manufacturing and supply agreement with NectarTek for all their consumer products.

As expected in a soft market we saw a number of stocks decline in value over the month including Alcidion (ALC -9%), Raiz Invest (RZI -12%), Acusensus (ACE -7%) and Credit Clear (CCR -18%).  The gainers were less numerous but included defence stocks AML3d (AL3 +18%) and Quickstep (QHL +1%), which is subject to a takeover.

Media

For all articles, videos and commentary featuring Cyan Investment Management please head to the Cyan Investment Management Linkedin page.
Outlook

At the time of writing, recent events with respect to Trump’s US trade tariffs have shocked the market with global repercussions. The uncertainty and volatility is at levels not seen since the World Health Organization (WHO) declared the COVID-19 outbreak a global pandemic on 11 March 2020. There has already been a trove of commentary, analysis, bewilderment and criticism of the tariffs published.

From our desks and with respect to the composition of the Cyan C3G Fund we would make the following observations:

1. All the companies in the Fund operate domestically, providing services, software or materials to consumers, governments and industries largely in Australia, NZ and the UK including non-cyclical sectors like healthcare, education and road safety;
2. The two companies potentially impacted by these tariffs are subject to corporate activity including aerospace defence manufacturer Quickstep (takeover) and camera manufacturer Birddog (which has just announced a selective buyback at cash backing);
3. The Fund has no exposure to the ‘hero stocks’ that have been trading at sky-high multiples and hence vulnerable and sensitive to changes in market sentiment;
4. The Fund’s companies are backed by strong balance sheets and are expected to post strong cash-flow reports at the end of April.

Whilst the inflationary and global growth implications remain of both uncertainty and of concern, having Australia sitting on the lowest global tariff of 10% will give the country a strong competitive advantage over time. This is not to suggest a bullish current view, but with swirling conjecture and angst, it is important to step back with some perspective on where Australia stands in the current trade landscape.

As we’re coming to understand, there can be significant changes in the US’s narrative and policy and the flow-on effects to our local market will remain a moving feast. With such volatility on a daily basis, it’s important to focus on the underlying fundamentals of the companies we have invested and take comfort that their growth paths remain intact despite short-term gyrations.

Please stay in touch with our intra-month commentary via Linkedin or feel free to contact us at any time.

Dean Fergie and Graeme Carson

Cyan Investment Management

AFSL No. 453209

An investment in the Cyan C3G Fund can be made by clicking here