The ASX 200 was flat for the month of February, and we are pleased to report Luke's Fund achieved a return of 5.5% over the same period, bringing the Fund’s current returns for FY2021 to 59.3%. We were pleasantly surprised the portfolio remained in positive territory, after a volatile final two weeks in February.
The top contributor over the month was Pointerra, which contributed 40.1% of the returns. Pointerra announced a strong sales performance, with Annualised Contract Value growing 18% over the previous two months. Although Pointerra do not report ACV (Annualised Contract Value) per customer growth, it appears Pointerra’s clients rapidly increase their use of the platform over time, which we think shows Pointerra is saving its clients time, money, and resources. One concern is the lumpiness in revenue, with receipt well below what the ACV run rate. We note there is a pattern developing of Q2 receipts falling well behind ACV run rate, presumably due to clients deferring payment into the following calendar year.
The top two detractors to the performance over the month were:
Electro Optic Systems, which contributed -12.6% of the returns for the month. EOS reported its full year results at the end of the month, which was generally in line with expectations, however, they did not provide guidance for 2021, other than stating strong revenue growth is anticipated. It appears 2021 will continue to present challenges, with the sales cycle stretching out due to COVID-19 disruptions. Long term, we believe the prospects remain positive, particularly with the better than expected progress in their optical communications technology that will be ready for EOS link stage 1 (satellite communications business). This development will increase bandwidth by 2-3 times for the initial constellation, and likely delay the need for a second constellation.
A2 Milk, which contributed -6.2 % of the returns of the month. A2 Milk downgraded results yet again, and it is highly likely another down grade is in store for shareholders in the coming months, as management have flagged they are budgeting for a strong turnaround in the final quarter.
Our gold hedge portfolio returned -9.0% for the month (vs a gold price change of -7.8%). As at the end of February, the precious metals portfolio is 15.4% of the fund portfolio.
Notable changes to the portfolio included:
We closed our position in A2 Milk. We have decided the thesis is broken, with the Daigou channel in complete disrepair, and it being unknown to us how or when this sales channel will recover. Management reported they have strartegies in place to address this, but we are not convinced. Also, the US sales push is slowing, and appears to be losing traction.
We trimmed Pointerra significantly, as it rallied over the month. We think Pointerra has a tremendous future ahead of it, as companies continue to digitise their asset records, provided it can execute the very challenging task of growing a company rapidly whilst maintaining culture, team effectiveness, and cohesion. However, the valuation is rather stretched, and we were uncomfortable with its position size in the portfolio.
We continued trimming AVA Risk, which reported a very strong half year result. AVA Risk is overweight in our portfolio, and we are not comfortable with its current position size.
We sold our Jumbo Interactive holdings. Although the half year results were solid, the jackpot pipeline has been a little sub-par over recent months, and we believe there are better alternatives for our capital.
We added to our positions in Selfwealth, Dusk Group, Talga Group, Cleanspace Holdings. In particular, we are looking forward to a strong Q3 & Q4 for Selfwealth, and we anticipate the market will be taken by surprise, driven by rapid active user growth, traders per active user growth, and a substantial increase in gross margins, as the new contract with Openmarket kicks in (along with the higher Margin US market platform making increasing contributions).
Half year reporting has now come to an end, and we are pleased with the progress our companies have made. We see our investment theses remain intact in our small cap holdings, and we remain optimistic in their futures, and we expect our holdings to make their mark on that future.
We held 9.2% cash at the end of February. However, we have withdrawn 2.5% and transferred the cash to Luke’s Global Fund to take advantage of some international opportunities we have identified.
KEY LEARNINGS FROM THIS MONTH
Well, A2 Milk has taught a lesson or two about when to sell. The fact is, there were many signs the A2 Milk thesis was damaged, as early as the first half of 2020, when competitors reported their Daigou channel had faltered. At the time, A2 Milk reported their Daigou channel was not impacted. In hindsight, it was implausible for A2 Milk to not experience the difficulties other competitors were reporting.
We should have been more cautious of the difficulties competitors were reporting. It demonstrates how important it is to monitor competitors for any changes in the marketplace.
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