NAC Investment Report NTA March 2022

Market Insight

The month of March saw the NAC Investment Portfolio decrease by -1.13%, underperforming both the benchmark S&P/ ASX 300 Industrials Accumulation Index (XKIAI) which increased by +5.72% and also its smaller counterpart the S&P/ ASX Small Ordinaries Accumulation Index which increased +5.26%. In the case of the XSOAI the strong performance was driven by materials and businesses that have a high correlation to energy prices i.e., lithium, coal and oil. This brings portfolio performance since inception to +13.38% p.a., outperforming the benchmark index which has returned +7.94% p.a. over the same period. After a number of eventful months for many of the NAC investments, March was much quieter in regard to investee company news flow. Gentrack Group (ASX: GTK) publicly stated that they had been selected to upgrade the IT systems and customer experience for NZ-based energy and broadband retailer Pulse Energy and Eureka Group Holdings (ASX: EGH) provided two updates. The first was related to the recent flooding events in Northern NSW and the second relating to the settlement of a previously announced acquisition.

As mentioned above GTK publicly stated that they have partnered with NZ- based energy and broadband retailer Pulse Energy to assist in transforming their IT systems to deliver a new and innovative customer experience across their entire business. This contract is not material in its own right but does go a long way to solidifying our investment thesis. For the last couple of years GTK has been very much internally focused which has seen a refreshed executive team, a rebuilding of its technology stack, and a focus on ensuring GTK achieves acceptable margins for high quality client outcomes. The management team of GTK has made no secret that a culmination of this strategy would be signing tier-1 clients. Although Pulse is not a tier-1 client it does show that GTK can, once again, compete effectively against the likes of Kraken who many believe have a superior technology offering. We believe that GTK has not only an excellent technological offering but also a flawless implementation track record which for most clients is just as important as the technological offering itself. With this in mind we believe a tier-1 client signing is just a matter of time. This should in turn lead to a significant re-rate in the GTK share price.

EGH updated the market regarding their village based in Lismore, NSW. Unfortunately, this village was completely destroyed by the catastrophic flooding events in the region. Fortunately, none of the tenants or employees were seriously injured during these events. EGH will now lose the earnings contribution from this village which we estimate to be circa 6% of group earnings. EGH also settled on the acquisition of a large management rights portfolio which comprises over 300 individual units. This should provide EGH with a long runway of units that they can acquire as and when they become available. In our view, this further demonstrates the management of EGH preparing the business for a significant increase in scale, as we have also seen through the recent executive hires.

The past few months have clearly been difficult from a performance perspective for the NAC investment portfolio. Looking forward the investment team continues to believe that significant value remains across all core NAC investments. When reviewing these investments we can categorically say they are all organically growing their earnings, they have solid balance sheets, and they operate within industries that are conducive to long term structural growth. Valuations have clearly moved against them more recently, but over the long term if these businesses continue to execute well, we believe these investments will re-rate significantly, just as a number of them did 18 months ago after the initial Covid-related volatility.

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