The Monash Investors Small Companies Fund (Fund) is an unlisted retail unit trust offering investors an Australian equity exposure with a strategy of outperforming the S&P ASX Small Ordinaries Total Return Index over the medium term (5yrs).

The Fund has been in operation since July 2012, and over this timeframe has generated strong returns to investors of approximately 10% per annum. Returns have outperformed the Index over time, and have been generated in a way that has often been significantly differentiated from other Australian share funds, helping clients to mitigate risk by blending with other assets within their broader portfolios.

This fund is appropriate for investors with “High” and “Very High” risk and return profiles. A suitable investor for this fund is prepared to accept high risk in the pursuit of capital growth with a medium to long investment timeframe. Investors should refer to the TMD for further information.

Dear Investor,

The Monash Investors Small Companies Fund declined 2.3% in May in a strong market for smaller companies with the ASX Small Ordinaries up 2.0%. Our relative underperformance over the past couple of years has certainly put a dent in our medium to long-term performance record. But to some degree this is – in our view – a function of declines to market prices that simply don’t reflect underlying fundamentals. Many of our holdings are priced increasingly attractively relative to our appraisal of value and offer meaningful upside potential.

Commentary

The portfolio again benefited from a strong gain in EDU Holdings which rose 22% on the back of positive AGM commentary, including a strong Q1 trading update, together with the resumption of its on-market buyback programme at these higher prices. EDU’s management have displayed strong commercial nous in buying in shares aggressively when they’re relatively lowly valued, and staying out of the market when pricing isn’t as attractive. So, we read their recent resumption of the buyback at these higher prices positively considering the current regulatory uncertainty clouding the industry and business.

Tyro Payments recovered 21% as market speculation again turned to potential corporate activity. Tyro’s shares had previously been under pressure with uncertainties surrounding the cessation of card surcharging weighing. We believe Tyro is well-placed for the changing landscape, and has an opportunity to win market share with merchants re-assessing options. Following the significant recent sell-off in software, technology, and payments companies, we believe these sectors are ripe for strategic or private equity operators to pick over. Previous holding, Smartpay, was acquired last year. Software company and portfolio holding, Readytech, has in early June received a takeover approach from a Constellation Software-backed acquirer. Tyro had previously courted potential suitors with no deal agreed, but prevailing market prices together with sound fundamentals may again attract interest in the company.

Detractors this month included Verbrec which declined 17% on no news. Austin Engineering fell 8%, also on no news, while Bhagwan Marine fell 20% on the back of a significant trading downgrade. Shriro fell 7% on low trading volumes in the wake of its significant buyback. Financials Count and Earlypay fell 9% and 17% respectively. Count for no particular news, and Earlypay as it provided a mixed trading update and announced a pause in its ongoing buyback programme as the company has reached its 10% in any 12-month period maximum.

The uncertainty of higher energy costs together with a weak demand in this uncertain economic environment, is impacting valuations across many industrial and consumer-facing companies. Undoubtedly, we’re in a challenging economic and investment environment. We look forward to hopefully reassuring commentary and FY27 guidance from companies over the next few months, and in the meantime, remain focused on the long-term fundamentals for our businesses. Good businesses that are well-managed, well-funded, and well-positioned in their respective industries will navigate these environments, capitalise on disruption, and emerge stronger and more valuable over time.

New stock: Comms Group

We took advantage of strong liquidity early in the month to initiate a position in Comms Group, a company that’s been held by the DMX funds for some time. Comms Group is an IT and communications group operating across three distinct verticals: Communications & Collaboration – full service telco provision to Australian businesses & government; Managed IT Solutions – managed IT & cloud services to corporates; and Global & Wholesale Unified Communications – enterprise & wholesale comms & voice services.

The company operates a highly cash generative and capital light model with a diverse client base, and significant recurring revenues underpinned by multi-year contracts. The company is growing both organically and through strategic acquisition, having last year purchased TasmaNet out of administration on highly favourable and significantly accretive terms.

At our purchase price of 6.8cps, Comms Group trades at a single digit earnings (NPATA) multiple, and is comfortably capitalised with balance sheet capacity to fund organic growth in addition to further strategic acquisitions. The company enjoys positive operating thematics, with, for example, the tailwind of cyber security underpinning corporate uptake of many of Comms Group’s services. Comms Group is a good example of idiosyncratic smaller companies we look for at DMX: a differentiated business, strong economic attributes, profitable, growing, and trading at relatively low valuations. As that growth continues and others come to the story, valuations may start to reflect fairer value and that re-rate together with growth along the way can help generate outsized returns from the investment.

Summary

While the market backdrop was more stable through May, the portfolio struggled with detractors taking the shine off some positive advances and developments with key holdings, including EDU Holdings. Where stocks continued to de-rate, we believe this is largely investors placing a greater risk premium on businesses whose short-term performance may be impacted by delayed decision-making by consumers and corporates, together with energy-related cost pressures. We continue to focus on the long-term fundamentals for our businesses, and are increasingly enthused about the latent upside potential across the portfolio.

Thank you for your interest, trust and support.