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

Spheria Emerging Companies Limited ASX : SEC ASA Listed Investment Company Showcase

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

3 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 •

4 The great re-rating PE re-rating by PE quintiles over last year 400% • Highest rated PE stocks one Quintile 1 Quintile 2 year ago, have had a huge Quintile 3 300% re-rating during the year Quintile 4 Quintile 5 • Unjustified by growth in 200% earnings, likely driven by 100% growth in quant/ passive funds. 0% Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Source: Spheria Asset Management

5 Relative valuations – WAAAX * vs Spheria Basket Aggregate Market Valuations (A$bn) WAAX vs Spheria Basket 160x A select basket of five 140x Spheria stocks is valued at Aggregate Profit (EBIT) Multiple only 11% of the WAAAX WAAAX* 120x $35bn complex and yet has a 100x similar level of profitability 80x 60x 40x $4bn 20x 0x 150 200 250 300 350 Aggregate Profit (EBIT) * WAAAX consists of Wistech, Afterpay, Altium, Appen and Xero Source: Spheria Asset Management

6 Microcaps – closing the gap with smaller companies Small Companies (Blue) vs. Microcap Companies (Green) 115 110 105 5% 100 17% 95 90 85 80 75 70 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 ASX Accumulation Small Cap Ordinaries Index S&P/ASX Emerging Comp Total Return Index Source: Bloomberg

7 Performance History SEC Portfolio performance Net Portfolio Performance as at 30th Sep 2019 Since Inception Period 1 month 3 month 6 month 1 year Inception Date (pa) 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.

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

9 Investment philosophy Mesoblast – Cash Flow Dynamics Sirtex – Cash Flow Dynamics 0 80 -20 70 -40 60 -60 50 A$m -80 A$m 40 30 -100 20 -120 10 -140 0 -160 FY09A FY11A FY13A FY14A FY15A FY17A FY18A FY07A FY08A FY10A FY12A FY16A FY12A FY13A FY14A FY15A FY16A FY17A FY18A Free Cash Flow before Tax and Interest EBITA 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

10 GBST Holdings (ASX:GBT) Fallen angel with strategic value Share Price Cash Flow Conversion (EBITA) 700 25.0 100% 90% 20.0 80% 600 Spheria buying 15.0 60% 500 Share Price (c) 10.0 40% 400 5.0 20% 300 0.0 0% 200 FY05A FY06A FY07A FY08A FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY18A FY19A 100 0 Free Cash Flow before Tax and Interest 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 EBITA Cash Conversion (Average) 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. Source: Spheria Asset Management, Morningstar

11 City Chic Collective (ASX:CCX) Focused high growth/return brand Cash Flow Trend 20.0 25% 21.0% 18.0 18.5% 16.0 20% 14.0 15.0% 12.0 15% 10.0 8.0 10% 6.0 4.0 5% 2.0 0.0 0% 1H17A 1H18A 1H19A EBITDA EBITDA Margin • 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 • Source: Spheria Asset Management, Company reports

12 Blackmores (ASX:BKL) Bloated cost base – will be remedied Cash Flow Dynamics BKL - Net Sales vs EBITA margin 160 80% 700 30% 73% 140 600 25% 120 60% 614 100 500 Net Sales (A$m) 20% 80 40% 400 60 13.8% 13.5% 15% 40 300 20% 20 287 10% 200 0 FY00A FY01A FY02A FY03A FY04A FY05A FY06A FY07A FY08A FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16A FY17A FY18A FY19A -20 0% 5% 100 0 0% Free Cash Flow before Tax and Interest 20082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 EBITA Cash Conversion (Average) Net Sales EBIT margin • 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. Source: Spheria Asset Management, Morningstar

13 Company Positions 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% Source: IRESS

14 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

15 Initiatives to close the discount to NTA • Investor communication – more regular insights and video updates, Pinnacle listed products investor relations team Shareholder • Investor events - Pinnacle Listed Investments Summit, manager roadshow, industry engagement events • Transparency - Weekly NTA, NTA history chart on website On-market • Up to $5m (4% of shares) starting 1 July 2019 buyback Alignment of interest with • Ownership – Spheria Asset Management and staff own 558k shares shareholders

16 Questions

17 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.