NAC Investment Report NTA AUGUST 2022

Market Insight

As ever, the August reporting season was an exceptionally busy month, with the vast majority of listed companies releasing their FY22 results and some providing trading updates for the first two months of FY23. Pleasingly the NAC investment portfolio returned +0.52% for the month, outperforming the benchmark S&P/ASX-300 Industrials Accumulation Index (XKIAI) which fell by -0.45%. This brings portfolio performance since inception to +11.33% p.a., outperforming the benchmark index which has returned +6.87% p.a. over this period. Across the NAC investment portfolio, the results were largely in line with our expectations and those of the wider market, which resulted in the relatively flat return generated in August. We believe the results from Maxiparts (ASX: MXI), Move Logistics (NZX: MOV) and (ASX: UBN) delivered the most progress towards realising significant profitable growth over the next 3 years. Eureka Group Holdings (ASX: EGH) produced the most disappointing result of the reporting season as the business suffered from growing pains as well as impacts associated with the severe weather events in Northern NSW, although this had already been pre-released.

MXI and MOV produced results and commentary on their longer-term strategies that were rather similar and which in our view show the significant potential of these businesses. MXI released a set of results which contained a 2-month contribution from their divested trailer business which resulted in the financial statements being somewhat convoluted. However, there were several green shoots evident with low double digit revenue growth expected in FY23 and a clear strategy around increasing EBITDA margins from the current <10% to a figure closer to those of its listed peer over a 3-year period. MOV is following a similar path, albeit with a greater degree of complexity due to its scale. Again, some green shoots were seen at the profit margin level but more pleasingly was the qualitative progress with regards to the new management team, client churn, client pricing, a new ERP system and the onboarding of new equipment (namely their first bulk/cargo haulage vessel), all of which form the basis of a more efficient, productive, and profitable business.

UBN delivered its first set of financial results under a new CEO, and we were pleased to see what we view as a step change in transparency and accountability. In what was a slightly tumultuous year internally for UBN, the business was still able to grow revenue by +13%, with recurring revenue increasing by +20% over the period. Importantly we expect the business to reach a cash flow positive level in FY23 as the current backlog of work stands at >$1 million and the cost base reverts to a more sustainable level. Looking forward, we believe the outlook for new client wins remains solid across both the facilities management and strata offerings. It will continue to be imperative that as UBN improves its service offerings that it can continue to win large clients in both the FM and strata sides of the business and effectively implement them. These larger clients should have an outsized effect on margins given the lower marginal cost to serve compared to a number of smaller clients. Over the longer-term if UBN cements its position as the leading technology provider to strata managers in Australia it will be of high strategic value for many other businesses looking to access strata management businesses and their underlying clients. Partnering with such businesses may prove to be highly capital efficient over the longer term and provides a further growth opportunity for UBN.

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