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Monthly Report Australian Fund October 2021

31/10/2021

Australian Fund October Monthly Report

The Forager Australian Shares Fund returned 1.57% in October and outperformed the index, which rose 0.15%. Over the month, a handful of the Fund’s investments reported quarterly results and some provided Annual General Meeting (AGM) updates. Increasing interest rates also put a dampener on the more growth-oriented investments in the portfolio.

The Fund’s investment in insurance software company Fineos (FCL) and sports tech provider Catapult (CAT) share some similarities. Both are growing businesses. Both have highly sticky revenue yet currently lose money. And both, alongside a few other growth-oriented investments, were small detractors to performance last month. With growing but currently cash-burning businesses, higher interest rates mean more of a discount to their more distant cash flows. 

And, with interest rates on Australian 10-year government bonds rising by more than 0.60% over the past few months, investors have cast a more cautious eye over businesses like these. However, we are more concerned about their underlying business performance. 

In that department, Fineos announced a quarterly result largely in line with expectations, with continued growth and improved cash collections. And Catapult saw contracted revenue grow 30% organically from the prior year, while revenue churn dropped to only 4.1%. Both are good indications that the investment theses are playing out as expected despite the macro headwind.

Positives outweighed the negatives over the month. 

Mining services company Perenti (PRN) held an AGM where it confirmed its financial guidance for the current year. Despite the 27% run up during the month, Perenti remains cheap on nine times current year’s after-tax earnings. But it is not really about this year. Staff inflation cost concerns seem to finally be abating as borders reopen. And in the 2023 financial year, the benefits of recent contract wins in Australia, Botswana and Canada will be fully contributing to earnings. At that point, Perenti will look cheaper still at only seven times after-tax earnings. With other parts of the market growing more expensive, headwinds abating and more contract wins to come, investors may once again become excited about mining services.

Enero (EGG) took another step in the right direction at the company’s AGM. Revenue for the first quarter continued to grow quickly, with particular strength at its ad-tech American affiliate OB Media. The contribution from OB, the highest margin business unit, drove profit margins higher still. Later in the year, more travel and entertainment spend will weigh on margins, while staff will likely demand higher wages in a tight labour market. But Enero remains intent on organic growth, driven mostly by OB. And the purchases of new businesses, funded by its $31m war chest, appear imminent. 

Seven West Media (SWM), the traditional media business, has been busy over the last few weeks. Once overleveraged, the Seven West management team has worked hard on bringing debt down to a more reasonable level of $240m. With a lower level of debt, the company’s bankers have provided a new debt facility at half the prior funding cost, with more flexible terms and a maturity extended to 2024.

And Seven West didn’t waste any time making use of this new facility. Just three days later, the company agreed to the acquisition of its regional affiliate Prime Media (PRT). By spending $72m to fully own Prime, Seven has paid just under three times earnings before interest, tax, depreciation and amortisation. And even after the recent 30% rise, Seven West shares are trading at only six times this year’s net profits. With dividend payments resuming and the balance sheet in good shape, things are starting to get better for the company.

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