NAC Investment Report NTA June 2022

Market Insight

The month of June saw the NAC investment portfolio return -7.25%, outperforming the benchmark S&P/ASX-300 Industrials Accumulation Index (XKIAI) by +0.92% and its smaller counterpart the S&P/ASX Small Ordinaries Accumulation Index (XSOAI) by +5.84% as the indexes fell by -8.17% and -13.09% respectively in a brutal month for equities. This brings portfolio performance since inception to +10.30% p.a., outperforming the benchmark index which has returned +5.97% p.a. over the same period. It was a relatively quiet end to FY22 for the NAC investment portfolio with just (ASX: UBN) and Gentrack Group (ASX: GTK) having news flow of any significance.

After an almost 6-month search process for a new Chief Executive Officer (CEO) the UBN board of directors announced that the interim CEO and current CFO Simon Lee would be appointed to the role of full-time CEO and Executive Director. Even though we felt the process took an inordinate amount of time we firmly believe that Simon’s appointment is an excellent decision. Within the announcement a number of other notable points were released, the first of which was that the project with Colliers Australia continues to progress. This in turn has led to engagement with other Colliers entities in their Asia Pacific portfolio. Secondly, management and the board stated that they continue to believe the cash position of the business will be sufficient to get to a sustainable cash position by Q2 FY23. Keeping in mind that UBN recently lost Ventia (ASX: VNT) as a client, if this statement proves correct we believe it will demonstrate the current health of the sales pipeline and management’s ability to convert these leads into signed deals over the short term. UBN will provide a detailed Q4 FY22 update in July, and this should provide more clarity on why the board and management remain comfortable with their current cash position.

In the UK press, a few articles were released regarding the sales process of Bulb Energy, which is a sizeable GTK customer. The list of engaged participants has reduced to just two, namely Octopus Energy which is a large shareholder in GTK competitor Kraken, and a Middle Eastern energy company. The process was due to be finalised on 1 July but at the time of writing no update had been provided.

After the worst financial year in NAC’s history the investment team is firmly looking forward and believes that the current investment portfolio will provide strong long-term risk adjusted returns for our shareholders. In our view, the only silver lining to such a poor year of performance is that we believe we are entering FY23 with a very solid group of investments at prices that represent excellent value as a significant amount of downside risk is already priced in. All core investments outside of property-backed Eureka Group Holdings (ASX: EGH) remain in a net cash balance sheet position and we would argue many of these investments could be entering business-defining years. Such examples include Gentrack, which should see a significant uplift in profitability in FY23 if management are to remain on track to achieve their FY24 20% cash EBITDA target. As mentioned above, UBN should reach a cash flow breakeven level off the back of consistent and not insignificant contract wins; and Maxiparts (ASX: MXI), who are yet to release a clean set of accounts as a standalone entity, should be well on their way to becoming a highly cash generative, predictable, and profitable business. No matter what occurs over the next 12 months, FY23 will certainly be an eventful year for the NAC investment portfolio.

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