ICE Fund update with portfolio manager Roger Walling

ICE Fund – September 2024 Update

18th Oct 2024

September 2024 Quarter Update, Roger Walling

Overview*

August reporting season is and is always the key event for the September quarter. And we felt, as has been the case recently, there was a very volatile reporting period with a number of companies reporting, you know, quite volatile moves on the days of their results. For the ICE Fund however, it was a very positive period. The core franchise investments within the fund recorded very solid profit growth, median earnings per share growth and quite affirmative outlook statements as you would expect from franchise investments. For the quarter the ICE Fund returned 5.9% and for the rolling year to the end of September, the fund returned 26% net of fees. At ICE, as you know, we’re benchmark unaware, we’re bottom-up investors, but for comparative purposes, the small industrials accumulation index returned 23.2% for the period and the small ordinaries accumulation index, which includes materials and resources stocks returned 18.8% for the period.

Key Contributors to ICE Fund performance

I’d like to touch on a few of the key contributors for the fund during the quarter, starting with Temple and Webster.  The business delivered 27% organic revenue growth for the period and that’s in an environment where many are saying the consumer is reluctant to spend money and facing various headwinds from you know cost of living and more. So that 27% revenue growth result we feel highlights how Temple and Webster is entrenching itself as the number one homeware and furniture online retailer in Australia. And do you know that success for franchises bringing success, so Temple and Webster growing revenue at that rate is investing a certain percentage of their revenue back into marketing and brand awareness. So, as they do that, they grow revenue strongly and they have a larger budget to spend on brand awareness and marketing, which creates a large Moat and it’s very hard for any of their competitors to compete. And that marketing spend really dwarfs what others can do, so it helps to further entrench the position of Temple and Webster.

So, the second key contributor I’d like to mention is Australian Clinical Labs. They’re Australia’s second most profitable pathology company. They have hundreds of collection centres across Australia. And several key labs creating a nationwide footprint. They also believe, we believe, a technology advantage in that their systems and processes provide excellent communication tools to doctors and a really strong service that others don’t match. The headwind for Australian Clinical laboratories in recent times has been the lack of GP’s or general practitioners post COVID and in particular, the lack of access to bulk billing doctors. Recently, we’ve seen those conditions thaw and those headwinds ease. And so, for Australian clinical labs what that means is more normal pathology volumes, better revenue growth and better profit margins. So, we always felt that the doctors who use Australian clinical lab services were sticky, but what we’re now seeing is a normalisation there, which is positive for ACL and there’s been positive for the share price.

The final company I’d like to discuss is Catapult. Catapult provide performance software and analytics for elite sporting teams, and they’re the leading provider at sporting wearables globally. For some time, their video product has dominated Formula One globally. And their wearables product has been the real go to and the leading player in America for NFL, for hockey and in Australia for AFL. And in more recent times, we’re really seeing that footprint expand. So, they’re winning elite sporting teams in basketball, in volleyball and in soccer in Europe. And they’re also expanding very strongly in Southeast Asia and South America by region. So, it’s a company after several years of investment that we really feel is hitting its straps and is delivered for the portfolio.

For the 18 1/2 years of the fund’s existence, we’ve been focused on franchises we seek to invest in companies with assets that are difficult to replicate, and where that company is well managed, such that the product or service is sticky, such that the client is reluctant to leave, and we seek to do that on behalf of our investors at an appropriate long-term investment and valuation.

Touching on three of the larger stocks in the fund, firstly EQT Holdings or Equity Trustees as it used to be known, that’s essentially financial services infrastructure for our industry. EQT provides superannuation and corporate trustee services and they’ve done that for more than 100 years. Equity Trustees is financial services infrastructure, they provide corporate and superannuation services, which allows many financial service businesses to operate each day and in turn, for its customers to keep servicing their clients each day. It’s done that for more than 100 years and we believe the Moat around equity trustees is only getting stronger.

A second company to touch on is Chorus. Chorus is the monopoly fibre Internet. Provider in New Zealand, similar to Australia’s NBN, but a superior technology offer. In a small country. Chorus’s product and service is essentially impossible to replicate. The customers are sticky and in the absence of any material technology change, we expect that business to endure and to remain as it is. New management of that business have focused a little more on operations and then a little more on cash flow and their more recent results were really well received and their share price responded accordingly.

Finally, I’d like to just discuss Monash IVF. Monash was the founding IVF technology company in the world, and in Australia, they continue to be a key service provider and continue to make market share gains. Recently, they’ve been winning share of consultant doctors and also market share for treatments on an annual basis. The company’s investment in Southeast Asia and IVF services there – after many years of investment, is finally beginning to deliver and is turning towards profit for their investors.

Recent position changes

We’ve built a position in Paragon Care. A listed company that provides hospital supplies and medical devices across Australia and New Zealand, that company has merged with a larger private company called CH2. So effectively CH2 was taken over Paragon. Now the combined business is a really strong business in Australia, providing healthcare distribution and wholesaling to many, many customers. They’re areas of strength, a supply of hospital consumables and supplies, also hospital devices and equipment, and also a really strong Challenger brand providing medicines to retail pharmacists. So, they provide a low-cost offering compared to other companies such as EBOS which is listed and also Sigma. We expect that the new entrepreneurial management of Paragon can deliver very strong growth in revenue and profits for several years utilising this key infrastructure asset that they hold. We also added to Monash IVF and EQ2 Holdings during the quarter as discussed earlier.

And finally, Webjet, which we’ve owned in the portfolio for some time, was the subject of a demerger splitting itself into Webjet travel group and also Webjet Group Limited.  So Webjet Group Limited houses the online Webjet travel brand, which most of us are familiar with – we exited that position on the demerger because we don’t feel they have a strong competitive advantage in that sort of online travel space. However, we continue to hold the Webjet travel group, which owns the WebBeds brand, so that is a differentiated provider of hotel inventory. Globally and we expect that company to free of the other business to continue to grow its share and to deliver profit growth for several years.

Corporate Activity

The ICE Fund and its investments have demonstrated very solid profit growth over the life of the fund. Similarly, the Fund has delivered very strong returns for its investors overtime. This reporting season was once more evidence of the strong growth in earnings per share or median profit delivered by stocks within the fund. And so, at the end of August reporting season, we feel very positive about the stocks held in the fund. Secondly, and for some time, we’ve been calling out the large disconnect between small and large cap segments of the market. With the small cap segment of the market materially underperforming the large CAP segment over. The last three years. And although it’s been really pleasing to witness the very strong returns for the fund over the last year, over the last three years, the returns have been somewhat more muted. And so, we feel that there’s still plenty more gas in the tank for the Small Cap segment of the market.

CLICK HERE TO FIND OUT MORE ABOUT THE FUND.

*The text has been edited for clarity.


The document contains general information only. Reference to either individual securities or other investments should not be considered as investment advice. We strongly encourage you to obtain professional advice before making an investment in securities that have been mentioned. Documents you should consider prior to making an investment could include the relevant Product Disclosure Statement and the accompanying Target Market Determination. If you would like further information on financial products that SG Hiscock & Company Ltd (AFSL 240679) is the investment manager for, contact the Client Services team on 1300 133 451, visit the website www.sghiscock.com.au or contact your financial adviser.  Any investment is subject to risk, including possible loss of income or capital invested.