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 6.3% in February, impacted by a few earnings misses and guidance downgrades and in a tough market environment for smaller companies with the ASX Small Ordinaries Index down 2.6%, and technology names in particular down more significantly as fears around AI impacted investor sentiment.

We took advantage of price strength in spots to trim a few winners, including AIC Mines, Metro Mining, and we further reduced Peninsula. We also trimmed Austin Engineering ahead of its poor half-year result, helping to mitigate of the damage from that name. Proceeds were put to work as we continued to build our position in Fiducian Group into its continued price weakness, while a position in Bhagwan Marine was initiated via its recent capital raise.

With much of the portfolio having de-rated through the recent sell-off across swaths of the smaller companies market, we’re enthused about the value and increasing upside potential embedded across the portfolio.

Commentary

Key contributors included Verbrec which rose 24% on the back of a strong result and positive guidance for the period ahead. Verbrec’s integration of recently acquired Alliance Automation is underway, and the merged company is gaining attention as an interesting engineering services company with exposures to electrification, and renewable energy, underpinned by multi-year maintenance contracts. The company’s balance sheet is strong, with a significant net-cash position, positioning it well to fund organic growth as well as any strategic bolt-on acquisitions. Valuation remains undemanding at a single digit expected P/E for the year ahead. Viva Leisure was our other material contributor, rising 17% on the back of a strong financial result. Having expanded rapidly in the past through acquisition, Viva has pivoted over the past couple of years toward focusing on optimising its vast gym network, developing adjacent revenue streams, and profitability & cash generation. We’re pleased to see this focus translating into an improving bottom-line and momentum that looks set to continue into the periods ahead. We view the sub-10 times forward earnings multiple applied to this cash generative double-digit grower as being far too low. Viva has considerable upside potential in the years ahead from both earnings growth and multiple expansion as its story becomes more widely understood among smaller companies investors.

While the portfolio benefited from Verbrec and Viva, this wasn’t enough to offset damage from our key detractors. These include Austin Engineering which reported poorly and seeing its shares decline 22%, while Readytech fell 50%, initially in sympathy with the market sell-off of technology names, with the decline accelerating in the wake of a result below expectations, and with lowered guidance. Austin & Readytech are discussed in greater detail, below. EML Payments fell 21%, as it delivered results in-line with our expectations, and we view the market’s response as something of an overreaction. Having previously performed strongly, Peninsula handed back some of those gains, declining 18%. The company is progressing to plan with its Wyoming uranium production ramp-up. In a portfolio context, we seek to capitalise on the extreme volatility we experience from time to time, and having significantly reduced Peninsula into its recent price spike, we’ve more recently been adding back at a ~40%+ discount to where sales were made. Trading around positions in this way helps both control risk while enhancing returns.

Tyro and SDI each fell 8% despite results that were OK, but pleasingly, SDI announced after the close for the month its agreement to be acquired by a Chinese industry peer. The takeover price represents a 60% premium, with most of that reflected in SDI’s share price in March.

We also note that some results were actually quite strong and bode well for the future, but these companies experienced muted share price reactions. Count, for example, was flat for the month despite an excellent set of results with underlying NPATA growing strongly (up 33%), and encouraging results across various important business metrics. Momentum is strong, and the company trades for less than 10 times current year expected NPATA.

31st December Results Review

• Our largest position, EDU Holdings, reported strong student enrollment numbers, and financial performance for the half-year – all in-line with our expectations. The company continues to diversify its higher education course offering, with strong growth in new courses. Having paid its maiden dividend of 1cps following the June half-year, we were pleased to see this expanded to 3cps for the December half. The company faces some regulatory uncertainty, with announced changes to the ability to pay agent commissions resulting in some tweaking to its sales model in the months ahead. In the medium term, the sudden shift in sentiment toward immigration poses additional regulatory risk should student numbers be curtailed in the future. These have been weighing on EDU, with its shares falling 4% in February and further as we move into March. Pleasingly though, with its shares back in the 60c-range, the company is back buying shares. Between current cash backing plus ‘baked-in’ expected earnings over the next few years from existing/enrolled students, the vast majority of EDU’s current market value is covered with very little goodwill implied for any sustainable and enduring business into the future.
• Another key holding, Shriro Holdings, reported strong profitability with sales rising 8% for the half, and NPAT up 10%. As we’ve highlighted previously, we’re pleased with Fiona Brown having purchased a 20% stake in the company and having joined the Board. Ms. Brown has an excellent long-term track record of business growth and value creation via fellow ASX-listed distributor, Dicker Data. Shriro has made very clear its intentions with this latest results announcement. Having been cash-cowed at the behest of former substantial shareholders, the company is now very clearly in growth mode. Key to that growth will be making a suitable acquisition, and having stripped out surplus cash historically via dividends, capital returns, and buybacks, the company intends to de-prioritise dividends and retain earnings to fund growth. That said, they are pushing ahead with the previously-approved buy-back of up to $15m of shares at 81cps – an amount that reflects over a quarter of the company. For those not wishing to move forward in a growth-oriented business with no or low dividends, the buy-back is being framed as an opportunity to adjust one’s position. There’s uncertainty as to what dividends will ultimately be in the future (either a reduced level, or none at all). Our preference is to implement a moderated dividend policy, perhaps around 50% of earnings, but either way, we think the set-up here over the next few years is really interesting. The shares trade for less than seven times earnings with ~20% of its market value in cash. We expect any shares retired at these prices will be highly value accretive to remaining shareholders, and together with the potential for carefully considered growth opportunities, the upside potential from here is very significant.
• Austin Engineering disappointed with an earnings result that was materially below expectations which themselves had been downgraded just three months earlier, in November. Missing guidance by such a margin with only weeks remaining in the half-year period is itself quite concerning, not only to us, but also to the ASX which has queried it with the company. Management are navigating a tricky period with operational issues across its various units. In particular, a substantial OEM supply contract in Chile is uneconomic, and causing significant losses. Despite its challenges, the company trades around book value, and has a fairly comfortable balance sheet. We expect they will be able to manage through their current issues, and that profitability will be restored to more normal levels. If and as they achieve this, we see significant upside potential to the shares from here which presently trade at 4-6 times what we consider normal earnings.
• Readytech reported revenue below expectations, reduced its FY2026 guidance, and withdrew its FY2027 guidance. The company’s consistency with failing to meet its own guidance over the past few years is probably good reason to discontinue the practice. Readytech is among the most unloved of technology-related stocks at this point. Its cost base is too high for the revenues and considering the growth being generated. Something’s got to give at this point, and we believe there will be forces working in the background to right the ship here. The company is cutting costs with modest workforce reductions, and is reviewing non-core business lines with a view to potential divestment. We think these are both sensible, but we don’t think they’re going far enough. With 70%+ of revenue going in employee costs, for a SaaS business of this nature with a highly valuable base of users, we think there’s material upside potential to earnings and valuation from here if they can cut those costs. Management have said they could effectively slash costs, but that would come at the expense of growth. But growth is anemic and isn’t worth what the company’s spending, at this point. We expect Readytech’s dominant private equity shareholder won’t be happy with the status quo, and that ultimately there’ll be a more meaningful reset with this business, or potentially a sale to a third party who could achieve significant value uplift through cost-out.

New Stock: Bhagwan Marine

Bhagwan is a marine solutions provider operating across Australia and serving the oil & gas, resources, construction and marine logistics industries. The company has a core fleet of around 100 vessels in addition to many other marine assets used to provide services across industries and geographies. Founder-led, Bhagwan is a long-established business but is relatively new to the ASX, having listed via an IPO in 2024. Bhagwan had been on our radar for some time, and we ultimately invested recently via a well-supported placement to make a very interesting acquisition of fellow industry operator, Riverside. Like Bhagwan, Riverside is a long-established multi-generation family business. Riverside is a good fit for Bhagwan as it provides complementary services, fills some geographic gaps, and – importantly – is, in our estimation a fundamentally better business with a less capital intensive model (Riverside has emphasised the operation and management of others vessels, which comprise the majority of its fleet), and include the sole commercial ferry service to Magnetic Island. Riverside generates approximately double the EBITDA margins of Bhagwan, and is underpinned by many multi-year management agreements. The deal terms and structure were also very pleasing. Riverside vendors have taken some equity in Bhagwan as part consideration, in addition to having an earn-out component to the purchase consideration. Bhagwan’s founder has tipped in additional cash via its capital raise, and a comfortable level of debt is being utilised taking debt/EBITDA from around zero to around one times. We view this as an optimisation of Bhagwan’s balance sheet which previously had a lot of excess capacity. At the same time, the diversification lowers business risk, and Riverside improves the overall quality of the combined group. The deal is highly EPS accretive, but that’s mostly due to the financial re-engineering of the balance sheet, taking on some debt.

At our entry point, Bhagwan trades around 10 times current earnings with double-digit growth expected over the next few years. Its balance sheet is now fully utilised, but with strong and growing cashflows, we expect it won’t be long before the company will be able to make sensible tuck-in acquisitions in addition to organically expanding its fleet, and ultimately consider capital management initiatives including potentially buybacks.

Summary

While it was a tough month with a few negative surprises, these have been well priced into these companies. In some cases, such as EML and Tyro, results were in-range from our perspective, but the market was underwhelmed and punished them anyway. Where our expectations were comfortably exceeded – such as with Count – prices were flat. As hopefully is evident from the above commentary, across a range of interesting, clearly neglected, and idiosyncratic opportunities, we’re seeing strong growth and very low – often sub-10 times – multiples of current earnings. We believe our portfolios are well positioned across a diverse range of highly prospective businesses, and that despite the short term market and performance oscillations, the upside potential for long-term oriented investors is significant.

Thank you for your interest, trust and support.