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Monthly Report Australian Fund April 2022


Australian Fund April Monthly Report

After a brief period of respite in March, the market trends of 2022 resumed in April. The threat of higher inflation and rising interest rates pummelled small-cap stocks, especially those with higher growth prospects. The Forager Australian Shares Fund fell 7.3% by month’s end and is now down 17.3% over the last six months.

We have been carefully monitoring operating results and, where the operating performance continues to justify our valuations, gradually increasing portfolio investments in the most heavily punished holdings. While the share prices would suggest otherwise, the operational updates shared during April were good.

The Fund’s three most significant enterprise software investments, Whispir (WSP), Nitro (NTO) and Bigtincan (BTH) all released quarterly cashflow statements over the month. Trends in revenue growth for all three remain at least in line with expectations, ranging from 24% at Whispir (using the recurring component of its revenue only) to more than 40% at Nitro.

Perhaps more importantly, strong progress has been shown on the cost side of the equation. Nitro reduced its estimate of current year losses and expects to be generating cashflow in the 2024 financial year. Bigtincan was already cash-generative in the March quarter and should improve from there.

Investors clearly don’t believe these companies will generate the profits we expect them to, but we see no reason to change our theses. The current period losses are very modest in contrast with the long-term revenue annuities being built. How valuable those annuities ultimately become is still to be proven, but as we get more evidence and if share prices continue falling, you should expect higher portfolio weightings. While the prospect of rising rates might affect investors’ valuations of these software businesses, the impact on their operations is minimal.

The same can’t be said for those in the lending business, where rising rates can affect customers’ ability to repay their loans as well as the cost of funding used to make the loans in the first place. Fear of growing problems in this sector has sent share prices plummeting. The Fund has small investments in both Wisr (WZR) and Plenti (PLT), whose respective share prices have fallen 42% and 35% this calendar year alone.

Operational progress for both has exceeded expectations. This industry, as explained in the January Monthly Report, is a scale business.

The expectation is for a small number of healthily profitable players to emerge over time and Wisr and Plenti look like two of them. March quarter reports showed Plenti’s loan book is already north of $1 billion and Wisr isn’t far away. They will both hit $2 billion over the next few years without dramatically increasing the rate of progress and that should enable them to be nicely profitable.

Investor concern is not about the rate of growth, though. It is that the profitability will be decimated by a dramatic increase in the percentage of loans that aren’t repaid.

Healthy scepticism is warranted. We have assumed much higher default rates than the artificially low levels of the past few years. And these are rapidly growing, young businesses—they need to prove themselves through the economic cycle. Hence the relatively low portfolio weights.

But the fear is overdone. Both these businesses are specifically targeting safer borrowers with a proven capacity to repay their loans. The March quarterly reports still showed default rates well below our long-run expectations. The whole market will need to deal with higher interest rates and both companies have already indicated they are increasing pricing for the end customers. In any case, savings rates in Australia remain high and jobs plentiful.

Economic conditions are absolutely going to deteriorate. But, while the portfolio weightings need to remain modest, we expect both businesses to successfully navigate and prove that their current share prices are far too low.