NAC Investment Report NTA January 2021

Market Insight

The month of January saw the NAC Investment Portfolio decrease by -2.24%, underperforming the benchmark S&P/ASX 300 Industrials Accumulation Index (XKIAI) which increased by 0.57% and the S&P/ASX Small Ordinaries Accumulation Index (XSOAI), which decreased by -0.25%. This brings portfolio performance since inception to +13.96% p.a., outperforming the benchmark index which has returned +6.99% p.a. over the same period. With half year reporting commencing in February a number of businesses pre-released their earnings expectations for 1HFY21. In the case of NAC this included the core holding Objective Corporation (ASX: OCL) which produced a stellar 1H result. Unfortunately, this result was offset by the disappointing result released in late December from Over The Wire Holdings (ASX: OTW) and weak share price of Experience Co. (ASX: EXP), which continues to fall on low volumes due to uncertainty arising from on & off border closures, especially in Queensland.

OCL pre-reported a very encouraging 1HFY21 result. Despite the fact that research and development (R&D) spend increased to 24% of revenue, all of which is expensed as incurred, the EBITDA of the business still increased by +74% to $11.8 million. From an Annual Recuring Revenue (ARR) perspective, ARR increased to $70.1 million from circa $65 million at the end of FY20. The quality of the revenue base also continues to increase significantly with perpetual licence revenue now just $1.7 million. OCL acknowledged that the environment for new business wins has been more challenging than usual but believe their strong momentum will continue into 2H FY21. As we have said numerous times, we believe that OCL remains a very under-owned and little-known company for many fund managers given its market capitalisation of ~$1.30 billion, organic global growth prospects, and the potential for internally funded M&A given the $30 million net cash on the balance sheet.

After posting a return of 27.73% for the 1H FY21 several investors have asked us how the NAC portfolio is positioned for the medium term, and more specifically the reasons for both maintaining high weightings in our core positions and the lack of stock turnover. We believe these core holdings exhibit all of the characteristics that we look for in our investments that enables us to hold them for the long term. The industry dynamics in which they operate in are conducive to long-term growth, they all possess what we believe is a sustainable competitive advantage, and finally they have proven management teams who have a significant amount of alignment through share ownership. From a capital preservation standpoint these businesses have close to or net cash balance sheets and they generally produce a significant amount of free cash flow after capital expenditure.

Regarding near-term key catalysts across the portfolio which will assist in driving further shareholder value, we will be looking for OTW to deliver a much improved 2H performance relative to the 1H, driven by revenue and margin growth in the recurring division of the business together with a full contribution from the recently completed acquisitions. It is also imperative that OTW can demonstrate that their recurring revenue profile meets the expectations provided in the FY20 result. For MNF Group (ASX: MNF) we believe that an update around the launch of the Singapore network together with any commentary around the Direct division assets will be instrumental to restoring shareholder value. Finally, we expect EXP to be a significant beneficiary from domestic boarders reopening and Australians searching for new domestic travel experiences. We also continue to believe there is significant runway for consolidation in the travel sector with a number of businesses offering unique and scalable business models.

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