• GrainCorp (GNC) was the portfolio’s top contributor to performance, returning 12% over the June quarter. GNC is the leading bulk grain handling company in Australia, with a network of high-quality infrastructure assets utilised to store, handle, and connect grain to customers domestically and worldwide. In April the company announced a material upgrade to FY22 earnings guidance in a year that is already proving to be one of its best on record. GNC is experiencing a rare alignment of factors all working in its favour, including favourable planting conditions and bumper crops due to East Coast rains, high global demand for Australian grain and oilseeds (partially driven by the war in Ukraine), and strong margins on its exports.

• NIB Holdings (NHF) was another positive contributor to the portfolio’s performance in a challenging period, returning 16% over the quarter. NHF is a leading provider of private health insurance in Australia and New Zealand, while also offering inbound traveller health insurance and travel insurance. NHF provided a positive update at the annual Macquarie Conference in early May, indicating that it expects policyholder growth to be slightly higher in FY23 (3-4%), with strong recovery occurring in international inbound, as well as travel insurance as broader travel markets began to reopen post Covid lockdowns. Net margins are also expected to be higher in the short term (above long-term target of 6-7%) as Covid affected businesses recover.

• GrainCorp (GNC) was the portfolio’s top contributor to performance, returning 80% during the financial year. The stock was added to the portfolio in July 2021. Following a strong year, GNC has guided its FY22 EBITDA to be broadly double that of FY21 (which itself was a higher-than-normal earnings year). The outlook for FY23 looks set to be another strong one as soil conditions remain conducive to another substantial crop. The free cashflow generation gives GNC significant flexibility to pursue additional growth opportunities and/or return capital to shareholders.

• Spark Infrastructure (SKI) was the second-best contributor to the portfolio’s performance, returning 34% before it was acquired in November 2021 by a consortium led by Kohlberg Kravis Roberts (KKR) and the Ontario Teachers’ Pension Plan (OTPP). An initial indicative proposal of A$2.70 per share was subsequently increased to $2.95 per share following rejection of the original offer by the SKI Board and further engagement with the bidding consortium. SKI engages in the investment in regulated utilities infrastructure, holding equity positions in electricity and gas distribution and transmission assets in Australia. It is also growing direct investment exposure to renewables assets, including solar farms. Our investment thesis for SKI was premised on its quality asset base that facilitates the growth of renewable energy generation in Australia, while also offering valuation upside and an attractive dividend yield.

• EML Payments (EML) was the single biggest detractor from performance, declining 59% over the quarter. EML is a fintech company, offering a broad range of global payment solutions. The platform is an end-to-end payment management solution operating in a large addressable TAM and is aiming to displace legacy models in the payments space. After reiterating earnings guidance in mid-March after winning the Up Spain deal, EML announced a surprising downgrade to earnings guidance in April, due to a range of issues including currency and slower growth in their GPR (reloadable) division. We think the sell-off in the share price was overdone, but it will take some time for management to rebuild its credibility with investors. We are attracted to EML because it is a scalable and global platform with high gross margins and is free cashflow generative.

• Healius (HLS) was another detractor from performance, declining 17% over the quarter. As the largest weighting in the portfolio, the decline had a meaningful impact on portfolio performance. While HLS has been one of the top contributors to portfolio performance since inception, the reduction in testing requirements as Covid lockdowns have been removed has reduced the demand for PCR tests provided by HLS. Additionally, pathology testing volumes (ex-PCRs) have been lower than expected, while there have been some additional expenses in the business due to Covid related personnel absences. As a high operating leverage business these issues have impacted the bottom line in FY22. Over the longer term, the acquisition of Agilex Biolabs will serve to diversify HLS’s revenue streams going forward, while we continue to like HLS for its relatively low risk set of assets and attractive valuation multiples compared to peers in the healthcare sector.

• Mirvac Group (MGR) was the largest detractor from the portfolio’s performance, declining 29% over the prior 12 months. MGR owns, develops, and manages properties across residential, office & industrial, and retail segments. We like MGR because of its exposure to an asset class with long-term structural growth potential, its high quality asset base, strong management team, and balance sheet strength. The share price underperformance over the year is largely attributable to Covid impacts on the business during the 1H, while inflation concerns resulting in interest rate increases have dampened enthusiasm for higher yielding sectors like REITS, as well as causing concern around the outlook for the housing market in Australia. Despite these issues, we continue to believe MGR is a solid long-term investment and will deliver good performance through the cycle.

• Nitro Software (NTO) was the second largest detractor from the portfolio’s performance, declining 58% over the prior 12 months. NTO is a global SaaS company providing document productivity tools and e-signing solutions to business customers. Despite NTO continuing to grow its revenue base strongly (+30-35% in FY22), NTO experienced share price pressure over the year as early-stage technology companies were sold down in favour of more established companies with near-term positive cash flows. NTO wasn’t alone with global peer DocuSign also experiencing share price weakness from the broader selloff in the technology sector. NTO was replaced in the portfolio in March with a holding in EML Payments (EML).

• There were no new additions or divestments in the portfolio during the June quarter.

• During the quarter we upgraded the portfolio’s weightings in Domain (DHG), Contact Energy (CEN), G8 Education (GEM), EML Payments (EML), Fisher & Paykel Healthcare (FPH), and Pexa Group (PXA), while reducing weightings in Graincorp (GNC), Westpac (WBC), and Cochlear (COH).

Additions

• Graincorp (GNC) is the leading bulk grain handling company in Australia, with a network of high quality infrastructure assets utilised to store, handle, and connect grain to customers domestically and worldwide. We are attracted to GNC as the market leader in Australia, its network of infrastructure assets, strong cash generation and valuation appeal.

• Blackmores (BKL) is a leading Australian developer and marketer of vitamins and mineral nutritional supplements for humans and animals. We are attracted to BKL for its strong market position, good cash generation and healthy balance sheet.

• Pilbara Minerals (PLS) is a leading Australian developer and producer of a lithium raw material, spodumene, that is a critical component in the manufacture of batteries used in electric vehicles. We are attracted to PLS given its position as a sizeable independent producer of lithium, favourable industry long-term demand/supply dynamics, and healthy balance sheet.

• EML Payments (EML) is a fintech company, offering a broad range of global payment solutions. The cloud first, scalable platform is an end-to-end payment management solution operating in a large addressable TAM and is aiming to displace legacy models in the payments space. We are attracted to EML because it is capital light, has high gross margins, is free cashflow generative, has a well-regarded management team, and offers significant valuation upside.

• Pexa Group (PXA) is the leading digital property settlements platform in Australia with more than 90% market share in NSW/Victoria and has largely replaced the previous title transfer system which was paper based. We are attracted to PXA because it has high margins, generates strong free cashflows, has a high level of predictability of property transaction volumes each year, and has growth options in the UK market.

Divestments

• Vocus (VOC) was acquired by Macquarie Infrastructure Real Assets (MIRA) and Aware Super for $5.50 per share, with shareholders receiving cash receipts on 22 July 2021 when the acquisition completed. Since its inclusion in the portfolio, VOC has returned 52%.

• Australian Finance Group (AFG) failed to meet our ongoing internal liquidity requirements needed to remain in the portfolio and was therefore replaced. Since inclusion into the portfolio, AFG returned +86%.

• Spark Infrastructure (SKI) was the subject of a successful takeover approach from KKR, Ontario Teachers’ Pension Plan, and PSP Investments for a total cash amount of $2.8875 per stapled security. Since its inclusion in the portfolio, SKI returned +50%.

• Nitro Software (NTO) failed to meet our ongoing internal liquidity requirements needed to remain in the portfolio and was therefore replaced. Since its inclusion in the portfolio, NTO returned -55%.

• Bravura Solutions (BVS) failed to meet our ongoing internal liquidity requirements needed to remain in the portfolio and was therefore replaced. Since its inclusion in the portfolio, BVS returned -47%.