The ASX 200 Index was up 1.4% for the month of May, and Luke's Fund achieved a return of -0.9% over the same period, bringing the Fund’s current returns for FY2021 to 55.0%.
The top contributors over the month were:
1. Calidus Resources, which contributed 8.0% of the returns for May. Calidus Resources’ share price benefitted from a recovery in gold prices, as Calidus makes good progress in transitioning to a gold producer, with production on track for early in the new year.
2. Cettire, which contributed 7.5% of the returns for May. We opened a position in Cettire, following upgraded guidance for FY2021. Cettire are winning market share off luxury retailers, by undercutting the competitors, accepting lower margins, and running a very capital light, lean business. Cettire has very attractive customer acquisition costs, however, there are significant risks in the business model, which is reliant on their network of wholesalers ,and the luxury brands wiliness to accept discounting of their product and brands. Farfetch, the leading online brand, have come out and stated they will not compete with the likes of Cettire on price (perhaps they see the risk is too great). Cettire’s success is reliant on luxury brands allowing Cettire’s business model to damage their brand.
3. Yandal Resources, which contributed 7.0% of the returns. Yandal’s share price also benefitted from a recovery in gold prices, along with further promising, shallow, high grade drilling results at Gordons Dam.
The top detractors to the performance over the month were:
1. Electro Optic Systems, which contributed -11.5% of the returns for May. EOS announced an “acceleration of cash receipts” to the market, which turned out to be a delay in cash receipts from what was reported in February. At the recent AGM, the CEO re-assured investors the cash is coming, EOS has reached the necessary scale to manage its onerous compliance costs, and EOS is able to fund future growth from business cashflow, provided revenue growth remains below 70% per annum. There certainly is a question mark regarding EOS’s capital requirements, given the funding required for project inventories. However, the CEO alluded to EOS now being able to negotiate more favourable payment schedules in their contracts, which will reduce capital demands going forward. EOS have significant milestones ahead, with Spacelink financing (which will crystallise a market value for the business), and a $1 billion contract (in advanced stages of negotiation) to be announced by the end of the financial year. Further innovations were revealed during the AGM, including their Remotely Operated Combat Vehicle (ROCV), which we are told has unparalleled capability.
2. Pointerra, which contributed -12.6% of the returns for the month, following a slow down in revenue growth over Q3, with revenue and ACV growth slowing to an annualised rate of around 75% per annum, and the continuation of flight from high growth businesses into value / cyclical businesses.
Our gold hedge portfolio returned 11.9% for the month (vs a gold price increase of 7.7%). As at the end of May, the precious metals portfolio is 17.2% of the fund portfolio.
Notable changes to the portfolio included:
1. We sold out of Chalice Mining, based on valuation grounds. With a market capitalisation of approximately $3 billion, and still years away from production, we decided to exit on valuation grounds.
2. We sold out of Dragontail Systems for 23 cents per share on the announcement of a takeover bid that has been recommended to shareholders by the board.
3. We continued to trim AVA Risk over the month, as management reported an extension to the Aura IQ sales cycle into next financial year.
4. We added to our Cleanspace Holdings, and opened a position in Cettire.
We held 3.8% cash at the end of May.
KEY LEARNINGS FROM THIS MONTH
The most difficult, yet important decision an investor has to make, is when to sell. I am currently holding one or two “battleground” companies, and there are very smart investors on the short side of our positions.
The two companies in question are Electro Optic Systems, and Cleanspace Holdings. Firstly, EOS’s CEO addressed all my concerns regarding cashflow, and capital requirements. A question remains over the board makeup, but we have decided to give the CEO the benefit of the doubt. In relation to Cleanspace Holdings, we consider the recent slowdown in sales as a relatively short term issue, and the fact operating cashflow remains positive despite the sharp decline in sales, as a sign of resilience in the business model, with approximately 50% of revenue being high margin, recurring, consumables revenue.
I may end up being wrong on both counts, but I consider the risk - reward balance to be in our favour. We will know by the end of the year.
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