• Sean Rapley

August 2021 - Luke's Fund Performance Update

The ASX 200 Accumulated Index was up 2.5% for the month of August, and Luke's Fund achieved a return of 4.4% over the same period, bringing the Fund’s current returns for FY2022 to 2.8%, compared to the ASX 200 Accumulated Index return for year to date of 3.6%.


The breakdown of our holding’s contribution to performance over the August is outlined in Chart 1 below:

Chart 1 - Contribution Analysis Bar Chart


The top contributor over the month were:


1. Novonix Limited, which announced that Phillips 66 were making a strategic investment in Novonix. Phillips 66 is the largest supplier of needle coke, the feedstock for the production of synthetic anode. This strategic stake aligns the interests of Phillips 66 with that of Novonix, addressing the supply chain risk in a world with rapidly expanding demand for needle coke.


The top two detractors over the month were:


1. Dusk Group, which experienced concerns regarding the impact of ongoing lockdowns in NSW and Victoria .

2. Electro Optic Systems, with the release of their half yearly results and guidance as outlined below.


Our gold hedge portfolio returned 2.8% for the month (vs a gold price decline of -0.5%). As at the end of August, the precious metals portfolio is 14.3% of the fund portfolio.


TRADING ACTIVITY


It was a busy month of portfolio changes over August as outlined below:

  1. As we mentioned in our July update, we opened a new position. This position was Camplify Holdings, and we added to the position following the release of its annual results. Our summary of the results are outlined below.

  2. We are in the process of reducing our precious metals hedge portfolio size to 7%, as we outlined in Luke’s Crypto Fund introduction. As we identified, our crypto portfolio has similar characteristics to precious metals in relation to its low correlation to equities markets, and a hedge against a negative real interest rate environment. As part of this transition, we sold out of De Grey Mining, and Genesis Minerals during the month of August.

  3. We sold half our position in Pointerra, following their Fourth Quarter update. At face value, growth in Annualised Contract Value (ACV) looked good, however, management did not clarify if ACV included revenue from their recent acquisition, Airvant. We suspect it did, and backing this out (with some guesswork), growth appeared to slow markedly. We sought to contact management for clarification on this and a few other matters, and we are still awaiting a response. If they do not provide a satisfactory response, we’ll sell the remainder in September.

  4. We continued selling Selfwealth over August, and it is now a relatively small position. We note trading volumes have improved markedly over August, however, we have been stung by the poorly timed capital raise, and will cap the position size until we see good execution and capital allocation.

  5. After adding to our position in Novonix in July, we have trimmed our position a number of times, due to valuation, and portfolio position size concerns, following strong share price appreciation over August.

  6. We added to our Damstra Holdings position, following strong FY2021 results and FY2022 guidance as outlined below.

  7. We added to our Sequoia Financial Group position, following strong results, and conservative guidance, as outlined below.

  8. We added to our Advance Nanotek holding, following strong guidance, which indicates the recovery in demand is well underway as outlined below.

We held 8.8% cash at the end of August.


COMPANY NEWS & REPORTS


Advance Nanotek Ltd


Advance Nanotek Ltd reported FY2021 results with the following key takeaways:

  • Revenue of $6.5 million, down 64% on prior year.

  • Profit before tax of $0.3 million, down 96% on prior year.

  • Guidance: Reported recovery in sales, with H1 2022 sales on track to be similar to H1 FY 2022 sales ($12 M).

The comical investor relations communications continued, with a clarification issued shortly after the annual reports release. They will need to resolve this before their planned NASDAQ listing, as management’s reluctance to spend capital may be going a little too far. The company is run on the smell of an oily rag, which is exemplified by the corporate costs for FY2021 which were $284 000.


Camplify Holdings


Camplify released their annual results, with the following key takeaways:

  • Camplify reported 193% growth in revenue.

  • Camplify increased their fleet by 1609 globally, approx. 35% year on year.

  • 110 000 members, with 21 % of hiring form repeat customers.

  • Adj. operating cashflow of approx. $1.9 million, up from -$0.4 million.

Camplify are building an increasingly effective network effect of growing RV fleet and customer base, generating the flywheel effect one wants to see. Australian RV owners on the platform are now generating income that is attracting more RV owners, and the growing RV fleet is improving the value of the platform to customers. The NZ, UK, and Spanish businesses are still in the start up phase. If is highly uncertain how successful these start-up businesses will be at this early stage, and we will continue to watch growth number closely, noting the NZ business is getting close to generating income that will be attractive to more RV owners.


Cettire Ltd


Cettire announced their annual results. They were outstanding, with the highlights as follows:

  • Sales revenue up 304% to $92.4 Million over prior year.

  • Active customers up 285% over prior year.

  • Advertising now 53% of gross profit, a $9.8 million increase in advertising expenditure compared to $15.5 million increase in gross profit.

  • Active customer lifetime value at $261, up 21% over the year.

  • Customer acquisition cost increased to $97 per customer, a $30 increase per customer over the year.

Customer LTV and gross revenue is growing faster than advertising expenditure, and we are pleased to see aggressive advertising spend continuing, provided the economics are justified.


Damstra Holdings


Damstra Holdings announced their FY2022, with the key takeaways form their earnings call as follows:

  • Revenue for FY2021 of $27.4 M (excludes about $1.7 M of Vault revenue under contractual dispute).

  • Gross margin improvement to 79%, up from 69%.

  • ARR now $34.5M (vs $21.2 M pcp)

  • Churn is less than 1%.

  • 70 of 200 employees are engaged in R & D, including the development of the EPP (Enterprise Protection Platform), and AI driven protection development. Increasing US team to 30 people in FY2022, and seeking to grow team to 250-260 people in FY 2022. Plenty of development, including the development of intelligent workflows, & digital forms (compliance streamlining).

  • 60% of revenue growth in FY2021 from new customers, 40% of revenue growth from existing customers.

  • EPP being sold as the equivalent to CRM and ERM platforms for workplace risk / safety, and this is getting broad acceptance in the US.

  • Pipeline: International miner (40 k employees) completed trials this month, with negotiations to commence in September, + 3 US gold miners, 1 diamond miner, 1 large healthcare co, and 1 large US construction co, initiating trials.

  • Targeting free cashflow breakeven in FY2022.

  • Management report they don't like raising capital & diluting shareholders, hence why they have the $10 M debt facility in order to minimise / avoid further capital raisings.

  • Key learnings from FY2021 Damstra management have learnt they need to improve the visibility / deepening of their sales pipeline, and this is a key focus for FY2022.

Dusk Limited

Dusk Ltd reported their annual results for FY 2021, with the key takeaways:

  • Revenue of $149 M up 47.4% on prior year.

  • Net profit after tax of $22 million, up 130% on prior year.

  • Like-for-like sales up 32.7% on prior year.

  • Rewards members up 31% over year, to 688k customers.

  • 10 new stores opened over FY2021.

  • Rewards members contribute 60% of sales.

  • Gross margins: 68%.

COVID-19 shutdowns in NSW and Victoria ae impacting sales in FY2022 in the year to date. However, management anticipate a strong recovery, should NSW and Victoria restrictions on Dusk stores be lifted in time for Christmas trading.


Electro Optic Systems


Electro Optic Systems released their half yearly report, including some notable announcements over the month. Key takeaways:


  • Revenue and profit guidance slightly downgraded.

  • Middle-east contract asset concerns are being resolved. Management advised the remaining contract asset is to be invoiced this month, following sign off from the defence minister (which was imminent apparently). Management guided that they expect the cash to land in the coffers by the end of October. Management also advised, the larger Phase 2 contract will not be subject to the cashflow issues of Phase 1 due to re-negotiated terms.

  • Contract pipeline slips again. Guiding for $1 Billion contract win announcement by Q1 2022 (that’s March 31 2022).

  • Spacelink. Management reported revenue pipeline ahead of target, and is now $200 Million per annum, and advise satellite construction contracts to be signed by the end of September. But, they have changed their tune on the funding of the Spacelink business. Management now say they will fund the start-up with debt initially, with the sale of a minority stake in the business to follow as MOUs are converted to contracts. The reason behind this change was they were finding it difficult to find investors to hand over cash when there are no customers contracts in place. This change in approach simultaneously increases the risks for EOS shareholders, and delays the monetisation of the satellite asset. They have guided for the first contracts to be signed by March 31, 2022.

EOS management have again kicked the can down the road in relation to delivery of promises and resolving ongoing concerns in the business. They are pushing out patience, and we will exit should the next promised deadlines be missed.


Novonix Ltd


As highlighted earlier, Novonix announced a strategic investment form Phillips 66, which significantly de-risks the Novonix supply chain, and provides sufficient funding to develop anode production capacity to 40 kTonnes per annum.


Sequoia Financial Group


Sequoia Financial group reported their annual results, with the following key takeaways:

  • Revenue of $116 M, up 37.8% on prior year.

  • Profit after tax of $5.5 million, up 187% on prior year.

  • Guiding to achieve increase in market share form current 3% to 8% by 2025.

CEO, Garry Crole has guided for revenue growth of 15% for FY2022, noting this is conservative guidance and is dependant on the progress of acquisitions. Garry stated $4 million in profit has been set aside for acquisitions this year, and acquisition multiples are 3-4x EBIT multiples. We are expecting revenue of $140-150 M for FY 2022, with NPAT of $6.5-$8 Million, which is somewhat above Gary's guidance. .


KEY LEARNINGS FROM THIS MONTH


Key learnings we take away from this month are:


1. August is a very busy month, & I need a break! That's all I've got this month.


If you have any opinions on the companies we hold, or what like to know more, we would love to hear your feedback.


Regards,



Sean




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