12 Aug 2024
| Click here for a PDF of this newsletter After a benign start to the new financial year, the market enjoyed a late boost when softer than expected inflation figures resulted in revised expectations that the RBA will now keep rates on hold for the immediate future, as opposed to a previously expected 25bp rate rise in early August.
After a solid return in June of 4.5%, the Cyan C3G Fund kept up its recent momentum by returning 4.4% in July. Click here for a PDF of this newsletter Month in Review We’re pleased to report the Fund enjoyed another good month of performance driven by some promising company results and corresponding share price action. We have been invested in advanced manufacturing business Quickstep (QHL +127%) for some time, attracted to its carbon fibre manufacturing technology, blue-chip clients like Lockheed Martin and Northrup Grumman, almost $100m in revenue and modest market capitalisation ($30m). Recent share price action would suggest the broader market is now appreciating what we consider is an outstanding value proposition. This was no doubt assisted by a ‘Business Update’ released during the month which detailed revenue in excess of forecasts, cost savings initiatives and record revenues from their drone production division. Cyan detailed the attractive relative valuation of Quickstep in a Linkedin post with comparisons to companies like manufacturing company Titomic (ASX:TTT): $8m rev vs $187m mkt cap and DroneShield (ASX:DRO): $70m rev vs $1,200m mkt cap.
The long wait for healthcare software provider Alcidion (ALC +56%) to land a large UK contract was fulfilled in July with the announcement of their Preferred EPR (Electronic Patient Record) Supplier to North Cumbria UK, a 10 year, A$30-40m deal for the company. The was the second deal announced in the month, along with a 5 year, A$4m deal with Hume Rural Health in Victoria. The most attractive aspects of these new software contracts are their high margins and recurring long-term revenues. Indeed, ALC has noted that no additional staff will be needed to implement the North Cumbria contract, meaning a significant proportion of the revenues will flow through to the bottom line. Despite the decent percentage rise in the price this month (also helped by the strong +$5.6m in positive cashflow in the quarter), we anticipate more contract wins in the coming months (in light of the $200m+ tender pipeline) and expect the company has a significant runway for further price appreciation. Diversified building products company Big River (BRI +30%) was somewhat of a surprise performer given the extent of the price uplift and absence of any materially positive news. The company has been consistently acquiring bolt-on businesses which has seen it enjoy revenue growth of ~20% p.a. over the past 5 years. Supported by a solid yield of almost 5% and arguably a bottom-of-the-cycle PE ratio of just 12x, this is likely to be a company that will enjoy substantial success in any uplift in building activity, potentially complemented by its ongoing acquisition strategy. Stocks that held back the fund from even more upside in the month included Playside Studios (PLY -8%), Vinyl Group (VNL -10%) and traffic camera developer and operator Acusensus (ASC -7%). We continue to view their outlook favourably and believe each of these three companies are rich in positive catalysts over the next 12 months.
Media For all articles, videos and commentary featuring Cyan Investment Management please head to the Cyan Investment Management Linkedin page. Post the bullish end of month ‘rates-on-hold’ expectation, the market endured a significant 2-3 day sell-off on fears of a slowing US/global economy. In the short term this fear appears to have subsided with many stocks rebounding significantly from their weekly lows, however volatility may continue until markets get a clear direction from economic data points. One could argue fears of inflation and further rate rises are tempered by a slowing economy however the market, albeit briefly, chose to see this as a market threat. We continue to hold the view that over the medium-term interest rates are trending down, which is generally positive for company valuations and conducive to outperformance of growth companies in equities markets. Given the underperformance of smaller companies for a prolonged period of time, we see a high likelihood of a strong rebound in the periods ahead. As a material proportion of the Cyan C3G Fund is comprised by what we consider ‘deep value’ stocks that are back by strong cash holdings there is some buffer against significant downside compared to, say, the hyped AI sector that has huge growth expectations priced in. In respect to timely news for the Cyan C3G Fund, the upcoming reported season in mid-late August is likely to see further detail on the positive news we saw from a number of our stocks that reported July cashflow figures. As always, we are attentive to all risks and opportunities and welcome contact from our investors at any time. Dean Fergie and Graeme Carson
Cyan Investment Management AFSL No. 453209 An investment in the Cyan C3G Fund can be made by clicking here |
