NAC Investment Report NTA January 2022

Market Insight

The month of January saw the NAC Investment Portfolio decrease by -8.56%, outperforming both the benchmark S&P/ASX 300 Industrials Accumulation Index (XKIAI) which fell by -8.64% and its smaller counterpart the S&P/ASX Small Ordinaries Accumulation Index which decreased by -9.00% in an extremely volatile month for equity markets. This brings portfolio performance since inception to +15.19% p.a., outperforming the benchmark index which has returned +7.20% p.a. over the same period. From a stock specific standpoint, it was a relatively quiet month with just three companies in the NAC investment portfolio providing any significant announcements. The first of these came from Step One Clothing (ASX: STP), which formally launched its first underwear product for women in both Australia and the UK. Objective Corp (ASX: OCL) released its preliminary guidance for its 1H FY22 result and pleasingly it was another rock-solid result. Finally, after a tumultuous December with the sudden resignation of their CEO, (ASX: UBN) released their Q2 FY22 update which we believe went some way to calming investor nerves about any perceived business issues.

STP formally launched its first women’s underwear product, which we believe will provide the company with a significant runway of growth for the foreseeable future, particularly given the strong initial take-up. For context, the women’s underwear market is worth circa 2 times the male underwear market which is worth ~$590 million in Australia. STP currently has a 6% market share of the men’s underwear market domestically, so if they can capture a 3% market share of the women’s market this has the potential to almost double their current revenue base. Based on initial feedback and stock availability the product has been very well received with most sizes and colours sold out after just 2 weeks in both the UK and Australian markets. As STP increases their women’s range over the next few months this will provide a useful indicator as to whether the sales trajectory of the women’s range will follow that of the men’s product, which has grown to ~$70 million of sales in under 5-years.

OCL provided another very strong trading update for its upcoming 1H FY22 results. In our view, the two key points were the continued strong growth in Annual Recurring Revenue (ARR) which now stands at ~$80 million (a 13% YOY increase), and the growth in EBITDA margins which rose to ~29% despite the fully expensed research and development increasing to 24% of revenue. The cash balance also increased significantly to over $50 million, with CEO Tony Walls stating that “the outlook for the remainder of FY22 remains very positive”. Even after providing such a strong update the share price of OCL was down ~20% for the month of January as the market grappled with the prospect of higher interest rates in the short term and the valuation effect on technology-related businesses regardless of how profitable they may or may not be.

Finally, UBN released its Q2 FY22 Activities Report just a month after the sudden resignation of the previous CEO. Pleasingly both the strata and facilities management divisions both grew their ARR with the combined group finishing with an ARR value of almost $11 million at the end of December, which equates to 22% YOY growth. UBN announced that they intend to take a significant amount of cost out of the business to ensure that the business has enough funding to achieve a cash breakeven level, which we believe is imperative to ensure that all cost centres are achieving a sound return. We estimate that the current annualised cost base is circa $16 million, therefore if UBN can grow ARR at 25% p.a. then within circa 1.50 years the business should be able to achieve cash flow breakeven on ARR alone.

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