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Monthly Report Australian Fund May 2022


Australian Fund May Monthly Report

What was a tech-led sell-off broadened to a wider small-cap rout in May. The net asset value of the Forager Australian Shares Fund fell by 9.6% for the month and just six of 38 stocks in the portfolio saw share price rises.

Investors are rightly concerned about rampant inflation, rising interest rates, and the potential for a recession in the not-too-distant future. For many businesses, especially smaller ones, these concerns have led to large share price reactions.

Advertising-dependent businesses were sent into a spin as US social media company Snap (NYSE:SNAP) admitted that it has no chance of reaching the bottom end of revenue guidance provided just six weeks prior.

Meanwhile, in Australia, Seven West Media (ASX:SWM) upgraded its profitability guidance on the 4th of May. The owner of Channel 7 and The West Australian now expects to generate earnings before interest, tax, depreciation and amortisation (EBITDA) of between $335m and $340m. That will translate to approximately $180m of profit after tax for shareholders.

But investors are cautious of a quick about-face in advertising spending, and its share price fell 25% for the month. Seven West now has a market capitalisation of just $763m, or roughly four times its likely profit for the year. After several years of asset sales and cash generation, its balance sheet is now robust and this business should be more resilient than the market price currently suggests.

While Seven West has seen plenty of cycles throughout its long history, the next recession Australia suffers will be a first for Plenti (ASX:PLT). During May the fintech lender announced its results for the year ended 31 March.

New loan volumes rose 134% and Plenti finished the year with a loan book of $1.3bn. The company is now focused on reaching a $5bn loan book by 2025. Bad debts stayed low and the business was profitable in the second half of the financial year. And, while borrowing costs are rising for Plenti, they are being passed through to its customers with a lag.

The portfolio weighting here is small and we would have preferred both Plenti and Wisr (ASX:WZR) to have a few more years to reach scale before a recession hits. If it comes sooner rather than later, the test their lending algorithms will be put through will give us a solid guide to the long-term profit potential.

Other companies with an odd year-end include Gentrack (ASX:GTK) and Catapult (ASX:CAT).

Gentrack, a software provider to utilities and airports, grew revenue by 12% for the half to March and is well on track to grow above its prior expectations over the next few years. Having weathered the worst of the difficult UK energy market, Gentrack is now winning new work with better quality products. Investors have not given the new management team credit for some early wins, which make the longer-term prize more achievable.

Sports technology supplier Catapult delivered its annual results during the month. The company’s video products, an underperforming segment for a few years, had some success in the southern hemisphere summer but grew only 7%. And cash costs were up substantially with total cash outflow totalling US$18m.

But its world-leading wearables business continues to power on, increasing contracted revenue by 32%. Going into the big North American customers’ key buying period this half, Catapult will be armed with some new and interesting integrated products to showcase. With the projected growth in its valuable low-churn contracted revenue sitting at 20 to 25%, the company’s transition to profitability should accelerate over the next two years.

As explained in our distribution policy update in late 2021, the Fund now pays semi-annual ordinary distributions. In July, this ordinary distribution will be $0.04. An additional annual special distribution, where warranted, will also be paid in July. Realised gains in the first half of this financial year, mostly thanks to the substantial gain on Mainstream, should result in a special distribution this year in the vicinity of $0.05 to $0.08 per unit.