NAC Investment Report NTA June 2021

Market Insight

The month of June saw the NAC Investment Portfolio increase by +6.33%, outperforming the benchmark S&P/ASX 300 Industrials Accumulation Index (XKIAI) which increased by +2.78% and also its smaller counterpart the S&P/ASX Small Ordinaries Accumulation Index which increased by +3.08%. This brings portfolio performance since inception to +17.72% p.a., outperforming the benchmark index which has returned +8.53% p.a. over the same period. Pleasingly, FY21 was an exceptionally strong year for the NAC investment portfolio, recording its strongest financial year return since inception in 2014, with the investment portfolio finishing up +63.36%. This was both a strong absolute and relative performance with the benchmark producing a gain of +27.93% for the financial year. This performance was predominantly driven by several of the core long-term investments which have been held for a number of years. As we have always said, business strategies can be successfully implemented and produce excellent tangible results but more likely than not the share price will only recognise this at a later date, and we believe FY21 was a great example of this. Even with the very strong investment performance through FY21 we believe FY22 is shaping up as a year that could produce several significant value-creating catalysts across the core long-term NAC investments. Such examples include how the Experience Co (ASX: EXP) business performs from a margin perspective in a post COVID-19 environment, as well as their ability to scale the business via acquisition. Secondly, Over The Wire (ASX: OTW) will need to prove their doubters wrong by showing they can grow organically at 15% and importantly achieve a degree of margin benefit. We will also be looking for any clarity around large wholesale client wins. Finally, Objective Corporation (ASX: OCL) has had a stellar few years and yet remains a very under-owned business given its market capitalisation of >$1.50 billion. FY22 should provide some good insights into a number of recent product launches as well as greater understanding of the performance and integration of the FY21 iTree acquisition. As we have been saying for some time we believe the OCL products have significant scale optionality which could be applied to numerous organisations globally i.e. North America or Western Europe. If OCL can develop and implement a strategy that targets this opportunity the total addressable (and realistic) market size for OCL’s products could increase significantly.

Finally, the only significant announcement during the month from the NAC investment portfolio came from OTW. OTW informed the market that they do not expect to meet FY21 consensus expectations due to a hardware supply deal not being delivered until July 2021, and thus not recognised until FY22 (the resultant EBITDA effect was $1.50 million). Management also made several other notable points; organic revenue growth for 2H FY21 was ~7% (or ~+15% annualised), new recurring revenue signed in Q4 FY21 will exceed $350,000 contracted monthly recurring revenue (MRR), and 50% of the EBITDA benefit from the Tier 1 Voice Provider project will be realised from 1st July. From our point of view the miss to earnings is a disappointment, mainly because OTW management have made a regular habit of missing expectations solely due to the non-recurring part of the business. Looking through this, the underlying core of the business looks sound and if anything, looks to be expecting stronger growth going forward. The CEO’s comments that FY22 is expected to generate +15% organic recurring revenue growth driven by a solid pipeline of opportunities were also reassuring. In the FY21 result we will also be looking for further clarification around large new client wins for wholesale clients who can utilise OTW’s Tier-1 voice capability.

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