H&G High Conviction - June 2022 Update

Updated: Jul 12

OBJECTIVE

We invest in and actively engage with companies that have superior fundamental prospects but are priced at a discount relative to inherent value, usually resulting from non-operating, external events driving a flight of investors. We have significantly outperformed the Australian share market over 14 years.


*Includes the original vehicle, The Supervised Fund, launched in November 2007 by Supervised Investments Australia Limited (SIAL). SIAL was sold in March 2021 to Hancock & Gore Limited, and The Supervised Fund subsequently rebranded as H&G High Conviction Fund. In June 2022, all the assets of H&G High Conviction Fund were rolled into a new company, H&G High Conviction Limited.

The strategy of investing in micro capitalisation listed equities has remained consistent.

Pre-tax performance to 30 June 2022 (after all fees)

1 Month

Last quarter

Last 12 months

10 years

Since inception (1 Nov 2007)

H&G High Conviction Fund

3.0%

3.6%

13.3%

10.0% p.a.

8.7% p.a.

ASX Small Ordinaries Accumulation Index

-13.2%

-20.6%

-18.4%

5.5% p.a.

0.5% p.a.

Key Contributors to performance during June 2022


Dear Shareholder,


H&G High Conviction Fund had an eventful June. The equity market sell-off continued, with the ASX Small Ordinaries Accumulation Index declining by 13.2% as investors continued to retreat from risk assets. By contrast, our portfolio returned 3.0%, benefitting from positive performance in three of our four largest holdings, as well as a high cash position of 24%. Our relative concentration of debt-free stocks with strong asset-backing has enabled us to weather the storm to date. For FY22 we returned 13.3% after all fees, a pleasing return compared to the ASX Small Ordinaries Accumulation's -18.4%.


From a corporate perspective, we completed the conversion of H&G High Conviction Fund into a company, H&G High Conviction Limited (HCL), and were grateful for the support of our longstanding unitholders. We also welcomed three new significant shareholders.


We are currently preparing for an IPO of HCL, which will be a listed investment company quoted on the ASX. We will be communicating this opportunity to potential investors over the coming weeks and look forward to inviting you to a lunch presentation.


TOP FOUR HOLDINGS


Po Valley Energy shares rose by 70% in June. The company received an INTESA, a regulatory permit from the Emilia-Romagna regional government, for the onshore Selva field. This is a crucial step towards first gas, which is anticipated in March 2023. The next step for Selva is receipt of a final production concession from the Ministry of Ecological Transition. Meanwhile, Italian natural gas prices soared by a further 53% as Russia withdrew more than half of its contracted supply to Italy.


Kiland shares increased by 3% in June. The company announced it was undertaking trials to pursue a carbon removal project, which would involve converting its 4.5 million tonnes of fire-damaged timber into around 900,000 tonnes of biochar. This could produce approximately 1.8 million Carbon Removal Certificates (CRC), which are currently selling for A$55 per certificate. At potential total revenue of $99m, this would cover a significant portion of the rehabilitation costs as the company reverts its timberland into sheep farms.


Centrepoint Alliance shares increased by 51% during the month after the company received a non-binding indicative offer from competitor Diverger (ASX: DVR) to acquire the company at $0.325 per share. Centrepoint responded that it was open to continuing discussions with Diverger, noting the current offer was incomplete and did not fully reflect the strategic value of Centrepoint, which boasts 500 high quality financial advisers. We acquired more shares in Centrepoint in June, allocating a further 4% of the portfolio to the company.


Proptech Group is the newest significant addition to H&G High Conviction. The firm is in the process of consolidating several Customer Relationship Management (CRM) platforms for real estate agencies in the property sales and management space into its cloud-based platform 'VaultRE'. Through strategic deals and organic growth, the firm has gained a market share greater than 40% by measure of agency accounts, with the potential to grow to around 60% via further organic growth or M&A. Like many small cap technology stocks, the share price has fallen dramatically over the last few months which provided an entry point around the original 2020 IPO price, and below recent on-market stock purchases by directors. The market appears to have grouped Proptech together with the wider exuberantly valued technology sector; however, we believe it is overlooking the company's strong position considering its large market share, positive cash flow generation, and nil debt. Thematically, we think software that increases productivity in the context of expanding wage expenses and tight labour markets, in this case for property agents/managers, should continue to perform well.


MARKETS


We remain cautious about the short-medium term outlook for the stock market due to the strained global economic environment. To that end, we retain an historically high level of cash, as well as a modest allocation towards gold and put options on the S&P 500. Last month we continued to meet with numerous management teams to add to our "wishlist" of companies we would like to own shares in as valuations become more attractive. We intend to deploy our cash as such opportunities arise.


As ever, please don’t hesitate to reach out to us with any questions.


Sincerely,


The team at H&G Investment Management



PORTFOLIO






DISCLAIMER

This monthly performance report has been prepared by H&G Investment Management Ltd (ACN: 125 580 305; AFSL: 317155) to provide you with general information only. In preparing this report, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither H&G Investment Management Ltd nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Information Memorandum before making a decision about whether to invest in this product.