NAC Investment Report NTA May 2021

Market Insight

The month of May saw the NAC Investment Portfolio increase by +4.27%, outperforming the benchmark S&P/ASX 300 Industrials Accumulation Index (XKIAI) which increased by +2.55% and also its smaller counterpart the S&P/ASX Small Ordinaries Accumulation Index which increased by +0.27%. This brings portfolio performance since inception to +16.78% p.a. outperforming the benchmark index which has returned +8.19% p.a. over the same period. The monthly performance was driven by Objective Corporation (ASX: OCL) which saw its share price increase by over +15% which we believe was due to the OCL’s inclusion into the MSCI Global Small Cap Index, and also Over The Wire Holdings (ASX: OTW) which increased by almost +8%. In a quiet month for portfolio news flow the only notable event came from (ASX: UBN), a more recent inclusion to the portfolio who released a business update and quarterly activities report. We also discuss our thesis below on another new inclusion in the investment portfolio, the 360 Capital REIT (ASX: TOT).

Firstly, as mentioned above UBN released their quarterly activities and cash flow report. Total revenue grew by +15.1% compared to PCP with cash receipts following very closely and pleasingly recurring licensing fees increasing by +17.3%. UBN also provided an update on its rollout with PICA with several branch rollouts completed in NSW and the company stating that they are now close to completing the entire rollout, which has taken a number of years. From a contribution perspective the Strata division contributed the lion’s share of the growth with the Facilities Management division growing its licence fees by just +3.9%; although we believe this figure was skewed by the loss of a large legacy contract which when backed out would have resulted in growth of +18%. As expected, no outlook was given though we were disappointed that no order book colour was provided in the update. Regardless of this, we believe the business has a reasonable platform to grow its recurring revenue base from where it stands today. The industry tailwinds are significant and with little competition at present this should provide the company with the ideal environment to grow its recurring revenue base by least ~+20% per annum.

Finally, the NAC investment portfolio has been building a position in the 360 Capital REIT. TOT is a company that NAOS has followed for a number of years, as we were also a shareholder a number of years ago. TOT is an investment trust with a focus on property-related investments with the long-term aim of generating positive absolute returns. The reasons why we have revisited TOT as an investment are essentially three-fold. Firstly, after several years of attempting to modify their investment strategy, TOT has returned to its investment roots with a pure focus on property investments in a simple and transparent structure. Secondly, the current discount to NTA is significant with the last reported NTA $1.14 (as at 31 December 2020) well above a share price that has fluctuated between $0.95 and $0.97 over the past month, with assets that we believe are both undervalued and readily saleable if required. Finally, TOT has over 50% of its NTA invested in listed property trust Irongate Group (ASX: IAP) which has a diverse range of metro office assets and industrial assets. The last stated NTA of IAP was $1.43, which we believe is somewhat conservative especially in relation to industrial assets with similar assets selling for cap rates of 4% or less. As such, over time we believe the IAP NTA may rise in a reasonable way and thus lead to significant returns for TOT shareholders.

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