October 2021 - Luke's Fund Performance Update
The ASX 200 Accumulated Index was up 1.4% for the month of October, and Luke's Fund achieved a return of 2.1% over the same period, bringing the Fund’s current returns for FY2022 to 14.5%, compared to the ASX 200 Accumulated Index return for the year to date of 3.8%.
The breakdown of our holding’s contribution to performance over the past month is outlined in Figure 1 below:
Figure 1 – Contribution Breakdown
The top contributor over the month were:
Camplify Holdings, which reported strong Q1 revenue growth, and the acquisition of two competitors in the New Zealand market, resulting in Camplify becoming the largest RV rental business in that market.
Novonix Limited, which continued its September rally, with no material news announced during the month.
The top detractors over the month were:
Damstra Holdings, which reported losing a key customer, and consequential downgrade in guidance.
Pointerra Ltd, which share price retreated in the lead up to its quarterly update released on October 29.
Our gold hedge portfolio returned 1.0% for the month (vs a gold price decline of -2.0%). As at the end of October, the precious metals portfolio is 8.3% of the fund portfolio.
We made the following portfolio changes over October:
We sold all our Gold bullion holdings, as we flagged our intention to do, and diverted all the cash from this transaction into our Crypto Fund, for the reasons outlined here.
We reduced our exposure to Electro Optic Systems, due to increased risks associated with the Spacelink business, and failure of management to deliver on their plans for funding the Spacelink business.
We trimmed our Novonix Holdings position over October to re-balance their weighting, and on what we consider to be a stretched valuation.
We trimmed our Camplify Holdings position, following strong share price appreciation over the month.
We reduced our exposure to Damstra Holdings, following a disappointing Q1 report, and the loss of Newmont as a client.
We held 4.1% cash at the end of October.
COMPANY NEWS & REPORTS
Notable news from our holdings included:
Camplify Holdings provided their Q1 2022 results, the key takeaways from the earnings conference were:
TV of $10.5 M, up 69% on PCP.
Revenue of $3.07 M, up 106% on PCP.
From earnings call - UK GTV of $2.2 M. UK GTV was $1.1 M for all of FY2021!
Take rate of 26.9%.
Premium membership was soft due to seasonality and lockdowns. RV owners tend to upgrade membership once 30 days rental passed, which lockdowns has hampered.
From earnings call: Spain GTV was $185 k, so very early stage.
Increase in costs due to seasonality, and Q4 payments to RV owners following strong Q4.
Customer success team ramping up, particularly in UK & Spain.
NZ RV rental market TAM is at least $125 M GTV.
Camplify assesses future markets according to RV ownership growth, RV owner age demographic (the younger, the better), and market synergies (UK market frequently holiday in Spain). This is the reason why Spain was identified as preferred market. Camplify is focusing on bedding down UK and Spain before further expansion.
Outlook: Increasing activity in recent weeks, but some hesitancy remains, particularly in relation to interstate travel.
On October 26, Camplify reported that they had agree to acquire Mighway, and SHAREaCAMPER businesses form Tourism Holdings Ltd. Tourism Holdings will retain a stake in Camplify, and will make Camplify the clear market leader in New Zealand, which has a surprisingly large RV rental market, as outlined above.
Damstra Holdings released their Q1 earnings update, reporting 20% revenue growth year on year, impacted by the loss of Newmont as a customer, following their decision to cease, and wind back their roll out of the Damstra platform. The loss of Newmont resulted in churn of 5.7% for the quarter, and a downgrade in guidance. Furthermore, management reported the sales cycle has lengthened, with deals they indicated would be closed a the end of Q1, remain open, and they also reported that Vault Intelligence management have left the company.
A part of our thesis for holding Damstra was based on our understanding that Damstra’s software platform was very sticky, as exemplified by their historically low customer churn rate. The loss of Newmont as a customer is challenging this thesis.
Going forward, we will need to see management demonstrate good sales execution in the near term, and evidence of the successful integration of their recent acquisition. If we don’t see evidence of this, we will sell our remaining holdings.
Electro Optic Systems
During the month, Electro Optic Systems (EOS) announced OHB was awarded the contract to construct the Spacelink satellites. Good news right? No. The deal was inferior to what management had guided for previously, namely:
· The contract will require progress payments on achievement of milestones. This is a different arrangement to what was originally flagged when the project was initiated. Originally, the CEO said he expected the manufacturing to be financed by vendor financing arrangements. Now, Spacelink will need to secure funding. More on that below.
· Initial payment tranche will be funded by OHB, who will take a $25 million stake in Spacelink. It is unclear how much ownership this $25 million convertible note stake will deliver to OHB.
Our thoughts are, the risks are somewhat higher than what we were led to believe. EOS will now need to raise capital to fund the manufacture of the satellites within the next 6 months (through IPO, or convertible notes). This, in turn will need them to sign up offtake agreements within the next 4-5 months. If they don't, shareholders will be left holding the bag.
Electro Optic Systems subsequently went in to a trading halt in late October. After an anxious wait, EOS reported a significant cash payment from phase 1 of the middle east contract, and a profit downgrade due to contract program delays, and accelerated investments in Spacelink.
On October 7, IntelliHR provided a sales update, outlining 95% growth in recurring revenue, and 121% subscriber growth, with no churn over the quarter.
Pointerra provided their Q1 Enterprise Sales, and Quarterly Activities report. Pointerra report 19% growth in ACV over the prior quarter, however they did not break out the Airovant, acquired ACV form the numbers. This lack of transparency is concerning, and prevents us from increasing what is now a rather modest position size.
Meanwhile, cashflow continues to be lumpy and uncorrelated to reported ACV. Pointerra’s current cash position is approximately $4 million, and with operating costs rising 40% over the past quarter, there is an increasing likelihood of a capital raise in the next 6 months.
During the month, Talga Group reported geophysical surveys has defined new exploration targets, which will be further investigated via diamond core drilling over the next few months, with results expected by the end of the year.
Furthermore, Talga Group provided their quarterly update on September 29, reporting that discussions regarding the financing and JV partnership negotiations for the Stage 1 anode refinery remain on track for resolution by the end of November, 2021. November may prove to be significant month for Talga Group, and mark the beginning of its transition to Europe's largest anode producer.
KEY LEARNINGS FROM THIS MONTH
During October, we had a number of disappointing outcomes, that resulted in significant falls in the share price of some of our holdings. It felt quite painful.
Stepping back, however, one can see we continued to beat the market, and achieved a respectable result for the month. We felt like losers, but we were actually winning on the scorecard, where it matters. It really shows what an emotional challenge successful investing can be, and how crucial it is that one must accept that losing is all a port of being a successful investor.
If you have any opinions on the companies we hold, or what like to know more, we would love to hear your feedback.