Spheria Emerging Companies Limited ASX : SEC ASA Listed Investment - - PowerPoint PPT Presentation

Spheria Emerging Companies Limited

ASX : SEC

ASA Listed Investment Company Showcase

1. SEC Company update 2. Smaller companies investing 3. Opportunities 4. Questions

Agenda

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Spheria Emerging Companies (SEC.ASX)

• SEC is a listed version of the Spheria Australian Smaller Companies Fund
• Designed to give investors exposure to:
• cash generative
• lowly geared smaller companies
• with supportive valuations.
• SEC will typically have 20-65 stocks (currently 35) with a max. weight of 5%
• Has consistently paid dividends every 6 months in line with prospectus

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The great re-rating

0% 100% 200% 300% 400%

Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19

PE re-rating by PE quintiles over last year

Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5

• Highest rated PE stocks one

year ago, have had a huge re-rating during the year

• Unjustified by growth in

earnings, likely driven by growth in quant/ passive funds.

Source: Spheria Asset Management

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Relative valuations – WAAAX* vs Spheria Basket

* WAAAX consists of Wistech, Afterpay, Altium, Appen and Xero Source: Spheria Asset Management

A select basket of five Spheria stocks is valued at

• nly 11% of the WAAAX

complex and yet has a similar level of profitability

$4bn

0x 20x 40x 60x 80x 100x 120x 140x 160x 150 200 250 300 350

Aggregate Profit (EBIT) Multiple Aggregate Profit (EBIT)

Aggregate Market Valuations (A$bn) WAAX vs Spheria Basket

WAAAX* $35bn

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Microcaps – closing the gap with smaller companies

Source: Bloomberg

70 75 80 85 90 95 100 105 110 115 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19

Small Companies (Blue) vs. Microcap Companies (Green)

ASX Accumulation Small Cap Ordinaries Index S&P/ASX Emerging Comp Total Return Index

17% 5%

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Performance History

SEC Portfolio performance

Net Portfolio Performance as at 30th Sep 2019

Period 1 month 3 month 6 month 1 year Since Inception (pa) Inception Date SEC Mandate 4.7% 1.8% 3.5% 1.0% 6.1% 30/11/2017 S&P/ASX Small Ordinaries Accumulation Index 2.6% 3.1% 7.0% 3.9% 7.0% Outperformance 2.1%

• 1.3%
• 3.5%
• 2.9%
• 0.9%

Net portfolio performance are net of management fees.

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SEC portfolio performance*

* Net Portfolio performance = investment performance of mandate after investment management fees but before taxes. Source: Spheria Asset Management

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Investment philosophy

10 20 30 40 50 60 70 80

FY07A FY08A FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY18A

A$m

Sirtex – Cash Flow Dynamics

Free Cash Flow before Tax and Interest EBITA

• 160
• 140
• 120
• 100
• 80
• 60
• 40
• 20

FY12A FY13A FY14A FY15A FY16A FY17A FY18A

A$m

Mesoblast – Cash Flow Dynamics

Free Cash Flow before Tax and Interest EBITA

• Sirtex strong free cash flow generation versus Mesoblast burning ~$100 million p.a.
• Both had market caps >$800 million and similar enterprise values ~$750 million.

Source: Spheria Asset Management, IRESS

GBST Holdings (ASX:GBT)

Fallen angel with strategic value

• Company materially de-rated during FY17 after admitting some underinvestment in product necessitated

c$50m capital spend over 3 years;

• Spheria recognised value in customer base and built a position;
• View recently supported by multiple bids for GBT (BVS, SS&C, FNZ)
• $3.85 formalised bid (low conditions) from FNZ plus up to 15c worth of franking credits.

100 200 300 400 500 600 700 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19

Share Price (c)

Share Price

Spheria buying

90% 0% 20% 40% 60% 80% 100% 0.0 5.0 10.0 15.0 20.0 25.0 FY05A FY06A FY07A FY08A FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY18A FY19A

Cash Flow Conversion (EBITA)

Free Cash Flow before Tax and Interest EBITA Cash Conversion (Average) Source: Spheria Asset Management, Morningstar

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• Transformational sale of loss-making legacy brands left CCX with $35m net cash
• Australasia’s leading premium plus size fashion retailer
• Profitable US online operations with enormous potential
• Valuation: Trading on PE of 21x (net cash adjusted) with strong growth prospects

15.0% 18.5% 21.0% 0% 5% 10% 15% 20% 25% 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 1H17A 1H18A 1H19A

Cash Flow Trend

EBITDA EBITDA Margin

City Chic Collective (ASX:CCX)

Focused high growth/return brand

Source: Spheria Asset Management, Company reports

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• Sales more than doubled from $287m in FY14 to $614m in FY19, yet margins flat
• Swisse EBITA margins > 30% vs BKL 13.5%
• Change required with emphasis on cost efficiencies.

73% 0% 20% 40% 60% 80%

• 20

20 40 60 80 100 120 140 160 FY00A FY01A FY02A FY03A FY04A FY05A FY06A FY07A FY08A FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY18A FY19A

Cash Flow Dynamics

Free Cash Flow before Tax and Interest EBITA Cash Conversion (Average) 287 614 13.8% 13.5% 0% 5% 10% 15% 20% 25% 30% 100 200 300 400 500 600 700 20082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Net Sales (A$m)

BKL - Net Sales vs EBITA margin

Net Sales EBIT margin

Blackmores (ASX:BKL)

Bloated cost base – will be remedied

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Source: Spheria Asset Management, Morningstar

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Company Positions

Source: IRESS

Spheria Emerging Companies Limited – September 2019

Ticker Name % Portfolio HT1 Ht&E Limited 5.0% GBT GBST Holdings.. 4.5% BKL Blackmores Limited 4.5% BGA Bega Cheese Ltd 4.4% FBU Fletcher Building 4.3% HLS Healius 4.2% PTM Platinum Asset 4.0% ABC Adelaide Brighton 3.9% SGM Sims Metal Mgmt Ltd 3.9% CCX City Chic Collective 3.9% Top 10 42.7%

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Outlook

• Valuations inexpensive towards micro end of the small-cap market
• SEC beneficiary of M&A activity
• cash flow generative businesses;
• balance sheets strong; and
• most importantly valuations attractive
• Economically sensitive stocks offering good relative value

Initiatives to close the discount to NTA

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Shareholder engagement

• Investor communication – more regular insights and video updates, Pinnacle listed

products investor relations team

• Investor events - Pinnacle Listed Investments Summit, manager roadshow, industry

events

• Transparency - Weekly NTA, NTA history chart on website

On-market buyback

• Up to $5m (4% of shares) starting 1 July 2019

Alignment of interest with shareholders

• Ownership – Spheria Asset Management and staff own 558k shares

Questions

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Disclaimer

Spheria Asset Management Pty Ltd (“Spheria”) ABN 42 611 081 326, a corporate authorised representative (No. 1240979) of Pinnacle Investment Management Limited (“PIML”) ABN 66 109 659 109, AFSL 322140, is the investment manager of Spheria Emerging Companies Limited ABN 84 621 402 588 (‘SEC or the ‘Company’). This communication is not, and does not constitute, an offer to sell or the solicitation, invitation or recommendation to purchase any securities and neither this communication nor anything contained in it forms the basis of any contract or commitment. Any offer or sale of securities are made pursuant to definitive documentation, which describes the terms of the offer (‘Offer Document’) available at https://spheria.com.au/spheria-emerging-companies-limited/. Prospective investors should consider the Offer Document in deciding whether to acquire securities under the offer. SEC is the issuer of the shares under the Offer Document. Prospective investors who want to acquire under the offer will need to complete an application form that is in or accompanies the Offer Document. The Offer Document is an important document that should be read in its entirety before deciding whether to participate in the offer. Prospective investors should rely only on information in the Offer Document and any supplementary or replacement

• document. Prospective investors should contact their professional advisers with any queries after reading the Offer Document. Past performance is not a reliable indicator of

future performance. Unless otherwise specified, all amounts are in Australian Dollars (AUD). Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from SEC and Spheria. While SEC and Spheria believe the information contained in this communication is based on reliable information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Spheria and SEC disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. Any opinions and forecasts reflect the judgment and assumptions of Spheria and its representatives on the basis of information at the date of publication and may later change without notice. Disclosure contained in this communication is for general information only and was prepared for multiple distribution.

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