NAC Investment Report NTA August 2021

Market Insight

The month of August saw the NAC Investment Portfolio increase by +1.05%, underperforming the benchmark S&P/ASX 300 Industrials Accumulation Index (XKIAI) which increased by a substantial +5.61% and its smaller counterpart the S&P/ASX Small Ordinaries Accumulation Index which increased by +4.98%. This brings portfolio performance since inception to +16.70% p.a., outperforming the benchmark index which has returned +9.14% p.a. over the same period. August was a very eventful month for the NAC investment portfolio with all but one holding reporting their full year results for FY21. Overall, we felt the results across the portfolio were solid and provide all holdings with a base to further grow their earnings into FY22 and more significantly into FY23 assuming that the domestic economy returns to a slightly more normal rhythm. From a contribution perspective there was surprisingly little movement with only Objective Corporation (ASX: OCL) contributing greater than+1% to the monthly portfolio return, and Over The Wire Holdings (ASX: OTW) being the only detractor of greater than -1% in August.

Objective Corporation (ASX: OCL) pre-released their FY21 results in July but provided greater detail in August on release of their audited FY21 results. The key highlight was the outstanding cash conversion as well as the transparency provided around the growth in Annual Recurring Revenue, which was disclosed at a monthly level. At today’s valuation OCL is trading on a trailing revenue multiple of >18 times. Although some would argue that OCL is presently over-valued, we believe this is justified considering its dominant market position, a client base that is largely made up of many levels of government, and the optionality around international expansion into a market such as North America which would be many multiples the size of the Australian and New Zealand markets.

Eureka Group Holdings (ASX: EGH) reported a result that confirmed the momentum that the business has been building off over the past 24 months. Underlying EBITDA was up by ~22% and all key metrics such as occupancy levels remain robust. The only slight negative in our view was that greater detail was not provided on a capital management strategy that will enable EGH to scale significantly going forward. As we have said for some time, we believe the opportunity exists for EGH to develop into a much larger business but whether it needs to own 100% of all assets on its own balance sheet remains debatable. With Greg Paramor on the board, who has significant experience at Folkestone Limited and more recently Charter Hall Group (ASX: CHC) the option to launch a funds management model is clear and is a strategy we believe could be very beneficial for EGH shareholders over the longer term.

Experience Co. (ASX: EXP), the provider of adventure experiences within Australia and New Zealand, posted a solid FY21 result in line with our expectations and pleasingly reported a stellar balance sheet position considering that FY21 was a year filled with numerous state-wide lockdowns. Significant transparency was provided around the number of customers who either completed a skydive or a great barrier reef experience. We believe this data shows that once the state-wide lockdowns ease and domestic travel returns there is clear ability for volumes to return to 70-80% of pre-COVID levels without any international travel. Interestingly when analysing the average ticket price of each division, there was no evidence of any price discounting and if anything, prices showed evidence of increasing and margins expanding. We continue to believe that EXP is one of the best domestic tourism plays listed on the ASX and that the profitability of the business will surprise many over the next few years.

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