NAC Investment Report NTA December 2021

Market Insight

The month of December saw the NAC Investment Portfolio decrease by -1.26%, underperforming the benchmark S&P/ ASX 300 Industrials Accumulation Index (XKIAI) which increased by +1.79% and its smaller counterpart the S&P/ASX Small Ordinaries Accumulation Index which increased by +1.41%. This brings portfolio performance since inception to +16.84% p.a., outperforming the benchmark index which has returned +8.65% p.a. over the same period. After an 18-month period of strong outperformance with very few significant drawdown events we were unpleasantly reminded of what can go wrong at a stock specific level, not just once but twice in December. Two core positions being Urbanise.com (ASX: UBN) and Step One Clothing (ASX: STP) combined to detract over -5.50% for the month, more than offsetting some of the significant positive contributions generated by the likes of Gentrack Group (ASX: GTK) and Experience Co. (ASX: EXP) which increased +12% and +6% respectively in December.

UBN fell sharply after what some considered to be an abrupt exit of the CEO and the subsequent search for a replacement. We believe that what most likely unnerved the market is the risk of UBN not converting on its immediate sales pipeline and subsequently requiring some degree of equity funding. If this were to eventuate, we would not consider this to be a major issue assuming that growth rates (especially in the strata division) continue to be +20% p.a. The more immediate issue that needs to be addressed from our perspective is clearly defining and implementing a strategy that has measurable and tangible outcomes and plays to UBN’s strengths. It continues to be our view that UBN has a dominant position within the strata space and therefore must focus on achieving a >65% market share of a ~$40 million p.a. recurring revenue market in the shortest time possible. With a current ARR/market capitalisation of just 5 times there is clearly little faith from the wider market that UBN can grow in the medium term, but if UBN can demonstrate that it can grow at ~20% p.a. then the resultant multiple applied to a B2B enterprise SAAS business is likely to be significantly higher.

There are not too many businesses listed on the ASX where you can say that you use their product/service frequently because you believe the product/service is best of breed. For us STP fits that bill and is a business we have been analysing and getting to know in more detail ever since it considered listing 6 or so months ago. Within the last 5 years STP has gone from virtually $0 in revenue to potentially ~$75 million in annual sales of men’s underwear, mainly in Australia and the UK. The business listed in November at an issue price of $1.53 with the shares soaring to $3.00 shortly after issue. NAC initially acquired shares at ~$2.25 in early December, and following a company update that revenue growth would be 1-5% higher than the prospectus forecast of 19.9% for FY22, the shares fell back to the IPO price. The share price reaction suggested this update was well below the markets very bullish expectations with many shareholders selling out until they see more evidence of consistent growth again. We added to our STP investment post the trading update and believe that via geographic and product expansion STP will continue to grow at a reasonable rate over the coming years.

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