BRM – June 2023 Quarterly Newsletter

Barramundi built on its strong start to the year, rising a further +7.2% (gross
performance) in Q2, (adjusted NAV return was up 6.6%), well ahead of the +1.8%
return of the benchmark index. This takes Barramundi’s gross performance return to
+16.1% in the 2023 calendar year to date, a pleasing six months after a difficult 2022.
Q2 performance across the broader Australian market was mixed. Information
Technology was by far the strongest sector, rising 21% in the period. Constituent
companies generally delivered strong trading updates (see below). The sector was
further helped by positive investor sentiment to companies deemed to benefit from
Artificial Intelligence (“AI”) as well as modestly improving global inflation data.
The worst performing sector, Healthcare (-3.2%), was weighed down by bellwether
CSL’s (-4.0%) profit downgrade (see below) and some poor updates from other sector
constituents. Softer economic data out of China weighed on the Materials sector
(-2.6%). In addition, having been relatively cautious in its fight against inflation, the
Reserve Bank of Australia (“RBA”) became more hawkish, lifting interest rates by 0.5%
across the last two months of the period. This weighed on companies with a focus on
the domestic Australian economy.
Against this backdrop we were pleased with the overall performance of our portfolio.
It wasn’t only AI that drove information technology
share prices higher
There has been a lot of talk about AI in the past few months. This may have contributed
positively to the performance of some of our technology shareholdings. However, many
of our technology companies are also performing well operationally. Strong reported
revenue growth has been supported by a disciplined focus on costs (a recent, welcome
development for technology businesses). This has resulted in a strong increase in
underlying profitability which has been taken well by investors.
Life insurance claims software provider Fineos (+66% in A$ in Q2) was a clear case
in point. The company has had a busy period of announcements. It guided to strong
revenue growth in FY23 from expansion within its existing client base. It has also
converted customers using legacy on-premise versions of its software to a cloud based
version, which incrementally also adds to its revenues. Most importantly, after a few
years of having its sales cycle impacted by the pandemic, Fineos has also announced
new multi-year landmark contracts with a couple of large new North American
customers. And Fineos’ cost-cutting initiatives are on track to also meaningfully improve
its cash flows.
Accounting software provider Xero’s (+33%) FY23 financial result released in May
similarly demonstrated a strong growth in revenue (+28%) during the year. This
included a re-acceleration in subscriber growth in the UK, a key growth market for
the company. Like Fineos, Xero has also undertaken a broad cost-cutting initiative. It is
actively prioritising profitability and cash generation over a historic focus of reinvesting
every spare cent into growth initiatives. Xero also announced another round of price
increases in the ANZ markets to take effect in September 2023 which has been well
received.
NEXTDC (+21%) clearly benefits from the rise of generative AI which will likely require
vastly increased data storage and computing power to be housed in data centres like
those built by NEXTDC. However, during Q2, NEXTDC also announced its largest level
of incremental customer contract wins in its history. It announced a 43% increase in
the total level of contracted utilization of its facilities, the majority of which has been
sold at its Sydney (S3) data centre site. The increased growth in demand for data centre
capacity globally also saw NEXTDC raise A$618m in new equity in May to accelerate
its expansion within Australia and international markets including Malaysia and New
Zealand.
How bad are profit downgrades? The devil lies in
the detail!
It has not been all plain sailing for our portfolio companies in Q2. A handful of
companies announced disappointing trading updates, weighing on their returns.
In oOH!Media (-27%) and CSL’s (-4%) cases, the reasons for their downgrades lie
largely out of the control of management. The headwinds facing them will abate and
we think the growth outlook for both companies is sound.
After rising strongly during Q1, oOHMedia!’s share price fell sharply in May in what we
view as an overreaction to a trading update early in the month. This update indicated
March quarter revenue was up by 3% on the prior year and that the June quarter to
that date was slightly ahead of 2022. At the company’s AGM a week later, the June
quarter was reported as running 3% ahead of last year, with May and June pacing at
double digit growth. This was a meaningful offset to April’s 10% decline which was a
key source of the downgrade. Softer Government-related spend versus last year (COVID
& Federal election advertising) are obvious current headwinds.
Near-term, as the impact of higher interest rates continues to hurt consumer spending,
the advertising market has showed signs of softening. Within this, we think oOH!Media
is doing a credible job managing what it can control – including most recently securing
the strategically important new Sydney Metro City and Southwest contract in late June.
Over the longer term, we remain optimistic about oOh!Media’s future prospects. We
think out-of-home advertising should continue to take share from other media formats.
This will be driven by ongoing digitisation of its asset base, increasingly sophisticated
audience measurement giving advertisers confidence of the return on their spend,
and greater programmatic trading of out-of-home inventory giving advertisers more
flexibility.
In CSL’s case, it announced in June that currency headwinds would detract from its
FY23 financial results. Excluding the currency impact, it guided to the top end of its
previous profit range. It also dampened down expectations for FY24 profit growth
noting it expects to still grow profits a healthy 13%-18%. Although this was below
market expectations, the currency headwinds are clearly out of CSL’s control. The
slower than expected recovery in post-pandemic profit margins is also somewhat out of
management’s control.
Overall, the CSL management team are performing well. Throughout the pandemic
they continued investing in adding manufacturing capacity and improving the efficiency
of their operations – essentially widening the moat of the business. They have given
the business a great platform to be successful. Even if it is a bit slower than the market
would like, CSL’s profit margin recovery and earnings growth is heading in the right
direction.
In contrast, in Domino’s (-7%) case, another disappointing earnings downgrade in
June followed on from the profit warning delivered in February and which we discussed
in the March quarterly newsletter. The inflationary cost pressures and Domino’s
response to these pressures such as, increasing menu pricing and introducing delivery
fee surcharges, continues to weigh on its sales and profit margins.
The management team has taken a number of steps to address these challenges.
However, the trading update in June highlighted that, while it has made progress, these
measures are yet to bear any meaningful fruit. Domino’s announced that it is taking
further steps to reduce costs and improve profitability during FY24. It has also decided
to close a handful of unprofitable stores across its network.
We are still of the view that Domino’s results are a function of a very unusual operating
environment. We recognise that management are working hard to address their
errors around pricing and performance. And we think the shares do look attractively
priced, should management achieve their objectives. Hence, we have topped up
our shareholding in the business. That said, for us to add more meaningfully to our
position, we would like to see evidence of management delivering on these objectives.
Portfolio changes
During Q2 we exited our Cochlear position and downweighted our Woolworths
position, both on valuation grounds.
In contrast, we have upweighted and added to our Resmed position, and topped up
our CSL, oOH!Media and Domino’s shareholdings post their trading updates.
We also participated in the equity raisings undertaken by NEXTDC and AUB Group
during the period.
1
¹ Share price discount to NAV (using the net asset value per share, after expenses, fees and tax, to four decimal places).
1 April 2023 – 30 June 2023
$
0.7 1
Share Price
as at 30 June 2023
QUARTERLY NEWSLETTER
BRM NAVDISCOUNT
1
$
0.7 21. 6
%
Robbie Urquhart
Senior Portfolio Manager
Fisher Funds Management Limited
17 July 2023

PERFORMANCE
as at 30 June 2023
3 Months
3 Years
(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder
Return
+5.0%+11.5%+14.3%
Adjusted NAV Return +6.6%+12.4%+10.6%
Portfolio Performance
Gross Performance
Return
+7.2%+14.9%+13.6%
Benchmark Index¹+1.8%+11.7%+7.5%
1
Benchmark Index: S&P/ASX 200 Index (hedged 70% to NZD)
Non-GAAP Financial Information
Barramundi uses non-GAAP measures, including adjusted net asset value, adjusted NAV return, gross performance
return and total shareholder return. The rationale for using such non-GAAP measures is as follows:
»adjusted net asset value – the underlying value of the investment portfolio adjusted for capital allocation
decisions after expenses, fees and tax,
»adjusted NAV return – the percentage change in the adjusted NAV value,
»gross performance return – the Manager’s portfolio performance in terms of stock selection and currency
hedging before expenses, fees and tax, and
»total shareholder return – the return combines the share price performance, the warrant price
performance, the net value of converting any warrants into shares, and the dividends paid to
shareholders. It assumes all dividends are reinvested in the company’s dividend reinvestment plan, and
that shareholders exercise their warrants, (if they were in the money), at warrant expiry date.
All references to adjusted net asset value, adjusted NAV return, gross performance return and total shareholder
return in this newsletter are to such non-GAAP measures. The calculations applied to non-GAAP measures are
described in the Barramundi Non-GAAP Financial Information Policy. A copy of the policy is available at
http://barramundi.co.nz/about-barramundi/barramundi-policies/
Company% Holdings
Ansell2.1%
ANZ Banking Group2.1%
AUB Group6.3%
Audinate Group2.0%
Brambles4.0%
Carsales5.7%
Commonwealth Bank4.4%
Credit Corp4.0%
CSL9.3%
Domino's Pizza4.3%
Fineos Corporation Holdings2.3%
James Hardie Industries3.4%
Macquarie Group4.2%
Nanosonics1.8%
National Australia Bank2.6%
NEXTDC4.4%
oOh! Media3.0%
PWR Holdings2.0%
REA Group4.5%
ResMed4.5%
SEEK4.1%
Westpac2.3%
WiseTech Global6.4%
Woolworths Group2.4%
Xero Limited4.8%
Equity Total96.9%
Australian cash2.5%
New Zealand cash0.4%
Total cash2.9%
Forward foreign exchange contracts 0.2%
Total 100.0%
PORTFOLIO HOLDINGS
SUMMARY
as at 30 June 2023
COMPANY NEWS
Dividend Paid 23 June 2023
A dividend of 1.41 cents per share was paid to Barramundi
shareholders on 23 June 2023, under the quarterly
distribution policy. Interest in Barramundi’s dividend
reinvestment plan (DRP) remains high with 36% of
shareholders participating in the plan. Shares issued to DRP
participants are at a 3% discount to market price. If you
would like to participate in the DRP, please contact our share
registrar, Computershare on 09 488 8777.
Disclaimer: The information in this newsletter has been prepared as at the date noted on the front page. The information has been prepared as a general summary of the matters covered
only, and it is by necessity brief. The information and opinions are based upon sources which are believed to be reliable, but Barramundi Limited and its officers and directors make no
representation as to its accuracy or completeness. The newsletter is not intended to constitute professional or investment advice and should not be relied upon in making any investment
decisions. Professional financial advice from a financial adviser should be taken before making an investment. To the extent that the newsletter contains data relating to the historical
performance of Barramundi Limited or its portfolio companies, please note that fund performance can and will vary and that future results may have no correlation with results historically
achieved.
Barramundi Limited
Private Bag 93 502, Takapuna, Auckland 0740, New Zealand
Phone: +64 9 489 7074
Email: enquire@barramundi.co.nz | www.barramundi.co.nz
If you would like to receive future
newsletters electronically please email
us at enquire@barramundi.co.nz
FOREIGN TAX COMPLIANCE ACT (FATCA) AND COMMON
REPORTING STANDARD (CRS)
As a result of the New Zealand Government agreeing to participate in the exchange of information with other jurisdictions under
the Foreign Tax Compliance Act (FATCA) and Common Reporting Standard (CRS), Financial Institutions are required to undertake
due diligence to determine the account holders’ jurisdiction of tax residence. If shareholders have not previously self-certified,
they will receive a Tax Residency Self-Certification form from Computershare depending on when they first purchased their
securities. Please ensure you complete and return this important document if you have not already done so. For more information
please visit the IRD website: https://www.ird.govt.nz/international-tax/exchange-of-information/crs/registration-and-reporting or
contact Computershare if you are unsure of whether you have completed your form.
SIGNIFICANT RETURNS IMPACTING
THE PORTFOLIO DURING THE
QUARTER IN AUSTRALIAN DOLLARS
FINEOS CORP
+66
%
XERO
+33
%
JAMES HARDIE
INDUSTRIES
+25
%
WISETECH
GLOBAL
+23
%
oOH!MEDIA
-27
%