Ellerston Australian Micro Cap Fund June 2020 1
Performance 2
Outcomes & Portfolio Characteristics AS AT 31 MAY 2020 Since 3 Years Inception Net Performance 3 Months 6 Months FYTD 1 Year p.a. p.a.* Ellerston Australian Micro Cap Fund -1.98% -5.51% 13.58% 15.32% 16.52% 17.36% S&P/ASX Small Ordinaries Accumulation -1.91% -7.66% -3.80% -2.91% 7.51% 6.58% Index Relative performance (post-fee) -0.07% 2.15% 17.37% 18.23% 9.01% 10.78% FY20e Fund Benchmark Price / Earnings 19.1x 17.8x Dividend Yield 1.8% 2.8% Net Debt / EBITDA 0.2x 2.02x *Inception Date: 1 May 2017. Note: net returns are calculated after fees & expenses. Past performance is not a reliable indication of future performance Source: Ellerston Capital Limited 3
The case for Micro Caps 4
Strong Investment Case & Capability Australian micro cap stocks are under-researched, have greater alignment to shareholders and are less correlated to the ASX100 No broker coverage on over 60% of the micro cap market Average Insider Ownership (Grouped by Market Cap) Correlaton with ASX100 100% 0.4 36.9% 84% 85% 90% 0.35 80% 0.3 80% 70% 5+ 26.4% 0.25 60% 4 21.6% 75% 3 50% 0.2 2 70% 40% 0.15 70% 1 11.6% 30% 0 0.1 20% 65% 0.05 2.7% 10% 0 0% 60% <$400m $400m - $750m - $3bn $3bn - $10bn >$10bn Small Cap Micro Cap Small Caps Micro Caps $750m Ellerston Capital has a long track record of successful investing in unlisted and listed small and micro cap companies. We operate as the legal insider, assisting businesses get IPO ready, restructuring and making strategic acquisitions 5 Source: Macquarie
Ellerston Micro Cap team Chris Hall (30) CIO David Keelan (16) Alexandra Clarke (14) Portfolio Manager Co-Portfolio Manager • Joined Ellerston in 2017 • Joined Ellerston in 2008. • 11 Years Financial Markets experience gained at Morgans. • 16 Years Financial Markets experience • Experienced in equity analysis and corporate advisory • 11 years experience in Australian & ASEAN micro/small caps. • Bachelor of Laws, QUT; Bachelor of Business majoring in Bachelor of Engineering (Honours); UK IMC Banking & Finance, QUT; Grad.Dip Applied Finance, • Finsia/Kaplan Daniel Ragonese (10) Analyst Ellerston team of 32 investment professionals with an average of 19 years experience International Venture Capital Micro Cap Small Cap Large Cap Equities Middle Office, Risk Team and Legal & Compliance 6 Source: Ellerston Capital as at May 2020. Numbers in parentheses denote years’ investment experience.
Investment Process 7
Investment Philosophy “Smaller and micro cap companies offer compelling opportunities for investment returns. Businesses get missed for so many reasons. If you do the work you can get rewarded.” David Keelan, Portfolio Manager We believe in the inefficiency of markets. Companies in the micro sector are under-followed and under-owned, we believe we can: Market • Discover companies earlier in their growth life-cycle Inefficiencies Identify businesses that are in the middle of a solid and sustainable turnaround or restructure • • Find assets that have a strategic value and are being miss priced Active, research – driven approach to smaller and micro cap companies Active • Each stock must pass in-depth analysis, along with competitor and industry benchmarking Management • High activity level and company meeting schedule • Aim to make 50% absolute total return over 3 years (15% per annum) from each position Solve for the downside as volatility is embedded in the micro cap universe Risk • 3:1 return to risk requirement Management Liquidity is a major consideration • Create a GARP portfolio, which is mispriced Low levels of gearing • Outcomes • High level of optionality with minimal risk Focused Alpha will be generated through: stock picking, risk management, understanding liquidity & expertise with • private businesses 8
Investment Process The process combines quantitative & qualitative analysis and is disciplined, repeatable and tested Unlisted/Corporate Advice Listed Equities 50+ 1400+ Preliminary Due Diligence / Initial Screen Industry Networks, Proprietary Quantitative Screen connections and Deal flow Focus List ~ 300 Companies Detailed Company & Industry Meetings, phone calls & Opportunity Assessment High level Financial, Industry & Research Industry Due Diligence & Scaling Competitor Analysis Watch List ~ 100 Companies Internal Investment & Financial Modelling, Monitoring & Liquidity Deep dive industry and Micro cap Scorecard Legal Structuring Valuation Upside/Downside Management competitor analysis Portfolio Construction Risk/Return Liquidity Position Sizing 30 – 60 Stock Portfolio 9 Source: Ellerston Capital
Liquidity in Micro Caps is very different Average Daily Value Traded Median Daily Value Traded Median Basis points traded per day 3,500,000 0.30% Median Basis Points per day traded (ADV / Market Cap) 3,000,000 0.25% Daily Value Traded 2,500,000 0.20% 2,000,000 0.15% 1,500,000 0.10% 1,000,000 0.05% 500,000 0 0.00% True supply and demand can be found in off market transactions. Volume leads price action & price action creates liquidity. 10 10 10 10 Source: Macquarie
Investment Process - Watch List Once a company progresses through to the watch list, a deep dive analysis is completed Valuation & Bottom up Management Micro Cap Top down risk/return analysis Assessment Scorecard analysis assessment Fully Supportive track Full industry Company & Over a 3 year integrated record research, 360 ESG view financial model Alignment degree analysis Deep Dive Analysis The companies that make it through to the watch list are put through rigorous fundamental analysis and ranked based • on the opportunity and risk/return. This forms the basis for regular review and re-visiting • Activity levels on watch list companies is high with ongoing 360 analysis on the industry, competitors and company • Valuation and risk/reward changes regularly and create opportunities for portfolio inclusion 11 11 11 11
Investment Process - Portfolio Construction Portfolio Characteristics Stock Entry Portfolio Aim • To create a GARP portfolio, which is mispriced. • Companies that provide an asymmetrical 3:1 risk/return payoff • Low level of gearing • Fit within the current portfolio will look to be • High level of optionality with minimal risk. added • Risk return, liquidity and the current portfolio will 50% - 70% core mispriced stocks. determine the position size • Target position sizing • High Conviction; 3 – 6% • Core; 2 – 2.5% 10% - 20% High conviction • Prospective; 0.5 – 1% companies Ellerston can add value to, both listed and unlisted (maximum 5% pre IPO) 5% - 10% opportunistic & prospective companies Up to 20% New Zealand companies. • Will look to hold around 10% - 20% cash. • Resources will be opportunistic. • Alpha will be generated through; stock picking, risk management, understanding liquidity & expertise with private businesses. 12 12 12 12
Portfolio Positioning 13 13 13 13
Sector Allocation 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Cash Consumer Discretionary Communication Services Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate Other Utilities Source: Ellerston Capital 14 14 14 14 Inception Date: 1 st of May 2017
Market Capitalisation* 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% $0-50M $50-100M $100-200M $200-300M $300-400M $400-500M $500M+ Cash Source: Ellerston Capital 15 15 15 15 Inception Date: 1 st of May 2017 *End of Month
Atomo Diagnostics – AT1 AU AT1 AU • Atomo Diagnostics (AT1) is an Australian medical device company that makes rapid diagnostic tests. Entry Price $0.16 • AT1 patents simplifies the testing procedure to enable the test Valuation $0.63 to be carried out by both healthcare professionals and self-use. Current Price $0.34 • The business has some very well-known backers; Global Return p.a 14.0% Health Fund, Lang Walker; Allan Moss as well as a respectable Australian domestic institutions. • Solid base in HIV testing obtaining some excellent partners Screen Score Notes including Mylan who supplies 40% of the worlds HIV Valuation TR 2 DCF on current contracts medication. The plan is to move onto other areas for their test DCF on 30% less current Downside TR 0 including blood based pregnancy, prostate testing. contracts • AT1 business charged by COVID-19 as their device does not Industry Structure 1 Strong demand for product require pathology labs and provide answers within minutes. In Management & 2 Board owns <10% the past 4 weeks the company has received an order from one Board of their customers for 2.5m devices for 2020 and remain in Funding Ability 1 Recently raised IPO fund discussions with two US based COVID-19 test manufactures ESG Score 0 ESG disclosure is low for supply of OEM test devices. Total 6 • Since IPO, share price has performed strongly and we believe there is still further upside from here in AT1 ’s core HIV business as well as the emerging COVID-19 markets. As at 31 May 2020 16 16 16 16 Source: Ellerston Capital/Bloomberg
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