Spheria Emerging : 1H FY2022 Financial Highlights

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SEC Results 1HFY22

Highlights

• 1HFY22 net profit after tax of $9.6m
• Company performance of +8.1%, Portfolio outperformance of +2.7%
• Two quarterly dividends declared during the period totalling 5.1 cents per share (fully franked)2
• Trailing dividend yield equal to 4.0%3 (5.8%4 including franking)
• DRP to commence upon payment of March 2022 quarterly dividend

We are pleased to announce Spheria Emerging Companies Limited's (ASX:SEC or the Company) results for the half-year ended 31 December 2021 (1HFY22). SEC recorded a profit of $9.6m for the half-year off the back of strong investment portfolio performance of 8.2% that pleasingly exceeded its S&P/ASX Small Ordinaries Accumulation Index benchmark by 2.7%.

The Company has commenced paying quarterly dividends during the period at a target rate of 1.0% of the post-tax net tangible assets (NTA) at the end of each calendar quarter. The target annual dividend yield of 4.0% (5.8% including franking) of post-tax NTA per annum places the Company in the top half of Australian equity LICs from a dividend yield perspective5.

The Company has implemented a dividend reinvestment plan (DRP) that will be operative from the March 2022 quarterly dividend.

In 1HFY22, the pre-tax NTA increased by $0.100, from $2.599 at 30 June 2021 to $2.699 at 31 December 2021. The primary contributors to the change in the NTA over the period was portfolio performance that added $0.211 per share while the dividends paid during the period reduced the NTA by $0.075 per share.

1. Calculated as the Company's investment portfolio performance after fees excluding tax on realised and unrealised gains/losses and other earnings, after Company expenses.
2. September 21 quarter dividend of 2.5 cents (paid 31 October 2021) plus December 21 quarter dividend of 2.6 cents (paid 31 January 2021).
3. Trailing dividend yield when combined with FY21 final dividend of 5.0 cents per share, calculated on share price as at 31 December 2021 of $2.50.
4. Trailing dividend yield when combined with FY21 final dividend of 5.0 cents per share, calculated on share price as at 31 December 2021 of $2.50 using 30% tax rate.
5. Bell Potter December 2021 LIC quarterly report

1. Calculated on share price as at 31 December 2021 of $2.50.
2. Calculated on share price as at 31 December 2021 of $2.50 using 30% tax rate.
3. Bell Potter December 2021 LIC quarterly report

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Dividend Reinvestment Plan

The Company has put in place a dividend reinvestment plan (DRP) which will be operative from the payment of the March 2022 quarterly dividend.

The DRP has been designed so that participants will always receive the lowest reinvestment price possible, without their reinvestment diluting the post-tax NTA of those shareholders who choose not to participate in the DRP.

When the Company's share price is greater than or equal to its post-tax NTA per share, dividends are paid as newly issued shares in the Company. If the Company's share price is above its post-tax NTA per share on the dividend ex-date, participating shareholders will be issued new shares at the greater of the share price (less such discount as the Board may determine for the relevant dividend) or the post-tax NTA value per share of the Company on dividend ex-date.

If the Company's share price is less than its post-tax NTA per share on the ex-date, cash available for distribution as dividends on shares subject to the DRP will be used to acquire the Company's shares on-market in accordance with the terms set out in the DRP. These acquired shares will be distributed to shareholders participating in the DRP.

Shareholders who would like to find out more about the DRP can visit the Company's website: https://spheria.com.au/funds/spheria-emerging-companies-limited-asx-sec/.

Shareholders who would like to participate in the DRP can enrol at: https://investor.automic.com.auor alternatively please contact the Company's share registry, Automic, for assistance on 1300 902 587 (in Australia) / +61 2 7208 4521 (International).

1. Based on pre-tax NTA of $2.699 and share price of $2.50 at 31 December 2021.
2. Based on post-tax NTA of $2.582 and share price of $2.50 at 31 December 2021.

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Additional shareholder information

Performance as at 31 December 2021

• Calculated as the Company's investment portfolio performance after fees excluding tax on realised and unrealised gains/losses and other earnings, after company expenses.
• Shows how the portfolio, for which the Manager is responsible, has performed after deducting management fees, costs and taxes and performance fees (if applicable).
• S&P/ASX Small Ordinaries Accumulation Index.

Manager's commentary

Portfolio performance

The investment portfolio increased 8.2% for the six-month period ending 31 December 2021, outperforming the Benchmark by 2.7%. It appears inflation is beginning to wreak havoc across economies as global demand recovers due to the easing of COVID related restrictions and supply chains struggle to keep up with demand. This is finally leading to central banks reassessing their monetary policy settings - the result being rising interest rates and bond yields. We believe this is a landmark shift and will present challenges for long duration asset prices and may well deflate rampant market speculation. We think this will play into our hands as we are naturally tilted away from many of those overheated sectors and overhyped company valuations. We have witnessed this before in 2000/01 and in 2007/08 and suspect the script will be repeated with valuation-based managers like ourselves performing well.

It was a strange six months in Australia with State based lockdowns continuing to impact many businesses particularly those that rely on people movement. Despite this the largest contributor to performance was Michael Hill International (MHJ.ASX), a jewellery retailer, that pre-announced a record profit result for the half year. The company benefited from catch-up spend when lockdowns were eased in the last couple months of year and from great execution by a relatively new management team which has significantly reshaped the business over the last two years. Further normalisation in its key operating markets of Australia, Canada and New Zealand will in theory continue to improve profitability and yet the valuation remains undemanding and a balance sheet possessing nearly $100m of cash provides plenty of firepower for an acquisition and capital management initiatives.

During the period, Class Limited (CL1.ASX) - a long-term holding - was subject to a takeover from HUB24 at a significant premium to its undisturbed share price. We believe the businesses are highly complementary in nature with the datafeeds CL1 have compiled being of strategic importance as the platform market shifts to a non-custodial type of arrangement. We feel that HUB24 is ahead of its competitors from a technical and strategic perspective and will likely continue to gain market share due to its willingness to disrupt its own business model. Whilst this comes at the short-term expense to profitability, we feel it's well placed to win the market and be the scale player in a rapidly evolving platform market.

Seven West Media (SWM.ASX) continued its stellar recovery from the COVID abyss of early 2020. The balance sheet has been repaired and de-risked, and profitability has markedly improved due to better programming and cost improvements. The acquisition of Prime Media (SWM's regional TV affiliate) provides the company national reach and the ability to enhance its streaming service in regional markets. Putting aside the strategic benefits, SWM has paid