Spheria profit falls 91% as four holdings drag on performance

Small-cap underperformance drives profit collapse

Spheria Emerging Companies Limited (ASX:SEC) has posted a sobering year for shareholders, with profit after tax collapsing to $1.498 million from $16.401 million as its small-cap portfolio fell well short of the market benchmark.

The portfolio returned 0.3% for the year ended 30 June 2026, compared with an 8.1% gain for the S&P/ASX Small Ordinaries Accumulation Index. That 7.8 percentage-point shortfall was the central investment result in the annual report, with the company attributing the relative underperformance largely to its underweight position in resources.

The accounting result also reflects more than portfolio performance alone. Net losses on financial instruments were $1.096 million, compared with a $17.427 million gain a year earlier, while dividend income fell to $4.343 million from $6.750 million. Management fees rose to $1.555 million, although no performance fee was payable for the year, compared with $672,838 in FY2025.

Healius and technology holdings weigh on returns

The manager identified four holdings as the principal drags: Healius, down 50%; Iress, down 20%; Supply Network, down 12.8%; and Technology One, down 27%. It said the reasons differed, ranging from weaker pathology volumes and higher labour costs at Healius to investor caution around Iress’s restructuring and valuation pressure at Supply Network and Technology One.

Several positions moved the other way. Sims, L1 Group, Imdex and Deterra Royalties made positive contributions, with Sims rising 83% during the year. Yet those gains were not enough to offset the weaker holdings and the portfolio’s positioning away from resources, a sector that performed strongly over the reporting period.

The manager remains positive on the longer-term opportunity in smaller companies, arguing that the segment trades at a substantial discount to large-cap stocks. That is an investment view rather than a near-term forecast: the report records a disappointing absolute and relative result for the year, even as performance since inception remains ahead of the benchmark by 1.3 percentage points per annum after fees.

Monthly dividends continue despite weaker earnings

SEC maintained its income proposition, paying quarterly dividends of 3.8 cents per share for the September and December 2025 quarters before shifting to monthly payments. February and March dividends were 1.3 cents per share, followed by 1.1 cents per share for April, May and June.

The move had been flagged in the company’s monthly dividend transition, and SEC has since resolved to pay three further fully franked monthly dividends of 1.1 cents per share through September 2026. The board says distributions remain subject to available profits, cash flow and franking credits. The franking account stood at $3.697 million at year end, or $4.088 million after adjusting for current tax items.

The profits reserve increased to $80.105 million from $74.159 million, despite $10.241 million in dividends paid during the year. That reserve provides some accounting support for future distributions, but does not remove the investment risks attached to a portfolio concentrated in smaller and potentially less liquid companies.

SEC retains LIC structure after premium test

SEC also cleared the capital-management issue that had hung over its listed structure. Under the conditional proposal, a discount of more than 5% to pre-tax NTA over the year to 31 March 2026 would have triggered a shareholder vote on whether to remain a listed investment company or convert to a managed fund.

Instead, the shares traded at an average 0.3% premium to pre-tax NTA during the measurement period, following the conditional LIC proposal. The company therefore avoided the vote and retained its LIC structure. At 30 June, the share price was $2.30 against pre-tax NTA of $2.238, a 2.8% premium.

That premium is a useful counterweight to the weak investment result, but it is not the same thing as portfolio outperformance. SEC’s company performance was 0.0% for the year, while total shareholder return was 1.1%, including dividends and excluding the value of franking credits.

NTA falls as portfolio remains exposed to market risk

Net assets declined to $133.613 million from $142.078 million, while pre-tax NTA per share fell to $2.238 from $2.411. The portfolio held 44 listed investments valued at $132.496 million, with larger exposures including Supply Network, Fletcher Building, Deterra Royalties, Imdex, Perpetual, Sims and Orora.

SEC’s own sensitivity analysis estimates that a 15% movement in equity prices, with other variables unchanged, would alter net assets after tax by approximately $13.912 million. The figure illustrates the blunt reality of the structure: regular income may appeal to shareholders, but the underlying capital remains tied to volatile Australian and New Zealand smaller companies.

The next test is whether the manager’s conviction in small caps can translate into relative performance before the company’s longer investment cycle comes into view. The annual meeting is scheduled for 20 November 2026, but the more immediate signals will be the next NTA movements, portfolio returns and whether the 1.1-cent monthly dividend remains supported by cash generation and franking capacity.