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H&G High Conviction - September 2022 Update

Updated: Nov 21, 2022

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.


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

1 Month

Last quarter

Last 12 months

10 years

Since inception (1 Nov 2007)

H&G High Conviction Company*

-1.6%

1.5%

7.2%

9.3% p.a.

8.8% p.a.

ASX Small Ordinaries Accumulation Index

-10.6%

0.2%

-20.7%

4.8% p.a.

0.5% p.a.

ASX All Ordinaries Accumulation Index

-6.4%

0.8%

-8.6%

8.6% p.a.

5.3% p.a

*Includes the original vehicle, H&G High Conviction Fund, launched in November 2007, and the pre-tax performance of H&G High Conviction Limited since 23 June 2022.

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

Key Contributors to performance during September 2022


Dear Shareholder,


H&G High Conviction Limited had another busy and fruitful quarter. The equity market sell-off continued, with the ASX Small Ordinaries Accumulation Index declining by 11.2% in the month of September as investors continued to retreat from risk assets. Our portfolio incurred a materially smaller loss, falling by 1.6% after all fees for the month and rising 1.5% after all fees for the quarter. We have continued to benefit from a concentrated portfolio of companies that are debt-free, well-capitalised, and relatively uncorrelated to the vagaries of the broader market.


Following the market sell-off and in particular the investor flight from microcap stocks, we are seeing an increasing level of attractively priced companies. During the quarter, we met with over 30 management teams of potential targets. We deployed 4% of the portfolio into a new holding, Cirrus Networks (CNW; see below for further information). We also took the opportunity to invest a further 3% of capital into existing holdings at what we believe are cheap valuations.


We intend to continue to deploy our cash into existing holdings and new positions over the coming months as compelling opportunities arise.


From a corporate perspective, we brought to market an initial public offer (IPO) of shares in the Company. It has been a productive experience communicating our specialised active microcap focus to a wider audience and we have been pleased with the positive feedback from potential new investors.


If you would like further information, please read our target market determination and prospectus on our website. Following this, if you think H&G High Conviction Limited meets your investment goals, you can contact your stockbroker or us for more information on how to participate in the IPO (contact details below). The offer is due to close on 7 October with shares to commence trading on the ASX on 25 October.


TOP FOUR HOLDINGS


Po Valley Energy shares rose by 24% during the September quarter. The company had an eventful period, receiving the final production concession for its onshore Selva field. In addition, it released an independent expert's report that valued the company's 2P reserves at a base case of $138m (12c per share). The company also conducted a well-supported $4.5m capital raise, meaning it is fully funded until first gas at Selva in mid-2023. With board representation, we continue to work closely with the company to realise value for shareholders.


Kiland shares increased by 3% during the quarter. The company announced it had begun the remediation process of its timberland into sheep farms, with the first step being tree harvesting. It also entered into an agreement with Biocare to undertake the world's largest biochar production project. Additionally, the company announced a 41% uplift in the valuation of its 18,000 hectares of land on Kangaroo Island, according to independent land valuers.


Centrepoint Alliance shares returned -9% during the quarter. The company announced takeover talks with Diverger had not progressed any further. Meanwhile, Centrepoint reported a good FY22 result, with dividends totalling 1.5c for the year (an attractive 6% net yield at the current share price), and EBITDA up 112% year-on-year. The company has stated it will continue to progress industry consolidation opportunities.


Cirrus Networks is the newest significant addition to H&G High Conviction. The firm is an IT services provider focused on providing technology solutions to government and large enterprises. We participated in a block trade of stock to take out Webcentral (WCG), who had made an unsuccessful takeover bid last year. We were attracted to Cirrus because we believe it is cheap, at less than 5x EV/EBITDA, with the stock price having been adversely impacted by corporate turbulence, including board and management changes and the failed Webcentral takeover. Having done extensive due diligence, including visiting the company's operations in Canberra, and after considerable dialogue with the new board and management, we believe Cirrus is well-placed to benefit from industry tailwinds including the continued shift towards the cloud. We are also encouraged that Cirrus director Adam Waterworth has invested a significant amount of cash to buy more than 5% of the company's shares on market around current prices. In sum, we are excited by Cirrus because it is a cash generative business winning high margin managed IT service contracts with government organisations and large enterprises off much larger incubments.


MARKETS


While we believe market volatility is likely to remain high as numerous uncertainties unfold, including inflation, the Chinese property market and the war in Ukraine, we note that general market valuations have significantly fallen, especially amongst smaller companies. The S&P 600 Small Cap Index has a price to earnings ratio of 10.6x, nearing the 2008 two-decade low of 9.5x reached in the depths of the global financial crisis. This should continue to provide us compelling investment opportunities over the coming months.


MEDIA


If you would like to catch up on some releases by the investment team during the quarter, follow these links:



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


Sincerely,


The team at H&G Investment Management



PORTFOLIO STATISTICS



 

DISCLAIMER

This 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.

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