The ASX 200 was up approximately 1.0% for the month of December, and we report Luke's Fund achieved a return of -7.9% over the same period, bringing the Fund’s current returns for FY2021 to 56.3%. We have experienced some choppy waters this month, with a number of downgrades, and capital raisings weighing on the share prices of key holdings. The top two detractors to the performance over the month being:
AVA Risk Group, which contributed -25.6% of the returns for the month. There was no news over the month we are aware of that contributed to the fall.
Talga Group, which contributed -16.5 % of the returns of the month. Talga Group announced a $25 M capital raise to develop and commission an anode pilot production plant. The capital raise was heavily discounted by approximately 20% of the share price at announcement. The pilot plant will be capable of producing 200 Tonnes of anode product per annum and will be commissioned in Q1 2022. This capacity is apparently sufficient to prove production capability at scale. However, this was not the case with Novonix, who’s customers are insisting on receiving samples from its full scale production facility before accepting the Novonix product into the supply chain. The next key milestones will be the formalisation of partnerships and financing to construction the graphite mine and the anode production facility. This will need to occur by Q2 2021 in order for the project program to be maintained.
Our gold hedge portfolio returned -6% for the month (vs a gold price change of 2%). As at the end of November, the precious metals portfolio is 15.1% of the fund portfolio.
Notable changes to the portfolio included:
We closed our position in Appen this month. Appen reported a downgrade during the month. However, we decided to sell primarily due to our loss in faith of management. We dislike management’s tendency of fudging their results, their tardiness in reporting the downgrade (which they flagged they were aware of in September), and failure of the COVID-19 tailwind they flagged during the half years results presentation to materialise. With revenue growth falling into to mid to low twenty percent range, we consider there are better places for our capital.
We closed our K2Fly position. The most recent acquisition of an IT service provider did not make any sense to us (it will also be a drag on gross margins in the short term, already low for a “software business”). Given the high valuation, and lack of recent SAAS deal flow, the downside risks appeared to outweigh any upside.
We established a position in Dusk Group. Recently IPO’d, Dusk Group is a vertically integrated fragrance specialty retailer. What attracted us to Dusk Group was the acceleration in revenue and profit reported in early November, together with high gross margins of +60%, healthy same store sales growth, and a very undemanding valuation. Dusk Group has plans to expand their store footprint to +160 stores over the next few years. The CEO, Peter King, appears to be a capable capital allocator, and we expect the growth in the store footprint, along with an expanding offering can drive future revenue / profits, as well as same store sales growth.
We are very pleased with our year to date performance, and we continue to find good investing ideas in this market, which we will share in due course. We wish all our readers a relaxing Summer break, and a prosperous 2021.
If you have any opinions on the companies we hold, or what like to know more, we would love to hear your feedback.