NAC Investment Report NTA November 2021

Market Insight

The month of November saw the NAC Investment Portfolio decrease by -3.57%, underperforming the benchmark S&P/ ASX 300 Industrials Accumulation Index (XKIAI) which decreased by -1.48% as well as its smaller counterpart the S&P/ ASX Small Ordinaries Accumulation Index which decreased by -0.31%. This brings portfolio performance since inception to +17.27% p.a., outperforming the benchmark index which has returned +8.49% p.a. over the same period. After an eventful October, November didn’t disappoint, with numerous events occurring which included Eureka Group (ASX: EGH) providing a trading update as well as announcing an acquisition, Gentrack Group (ASX: GTK) releasing their FY21 results, along with numerous Annual General Meetings (AGMs) for companies such as (ASX: UBN), Experience Co. (ASX: EXP) and Objective Corporation (ASX: OCL).

EGH announced the acquisition of a management and letting rights portfolio based in Queensland for a consideration of $6.10 million, which is expected to generate a 13% per annum return on a pre-tax basis. On face value we believe this is an excellent acquisition for EGH as it allows the business to scale its management rights portfolio, but more importantly it provides the business with a pipeline of units that they can acquire as and when they come up for sale. EGH also held their AGM and provided FY22 EBITDA guidance of $11.5 - $11.8 million, which reflects growth of ~10% YOY. We believe this guidance is conservative after factoring in both the contributions from prior year acquisitions and margin expansion from increased efficiency gains. We continue to believe the outlook for EGH has never been brighter as they now have a sound 2–3-year growth outlook driven by greenfield expansion, acquisition opportunities and converting managed units into owned units. Once EGH clearly articulates how they plan to fund this growth pipeline we believe that the shares will significantly re-rate as the business now has the capability and runway to increase the number of units it owns by 2-3 times over the next three to five years. In our view, such a scale increase would lead to an institutionalisation of the industry and a significant reduction in cap rates applied to the asset values which may result in EGH’s Net Tangible Assets per share increasing significantly to >$0.75.

The most notable event for the month came from one of our more recent portfolio additions, Gentrack Group, as they released their FY21 results. In our view we believe the result was a significant positive step in reaching, and potentially exceeding, their FY24 targets. In our view, there were three key highlights to the result. Firstly, the number of new business wins in both the utility and airports divisions arguably exceeded management’s expectations and has led to stronger revenue growth in the short term. This is also clear vindication that the GTK software and service offering is highly competitive and has improved significantly in a short period of time under the stewardship of a new management team. Secondly, the working capital management was excellent with few, if any bad debts, which has resulted in GTK sitting on a very healthy net cash balance sheet. Finally, disclosure has also improved which has allowed current and potential investors to make more objective and rational decisions about the businesses outlook. In our view, the market continues to heavily discount the growth potential of the business (which has multiple avenues) as well as applying a discount to a management team who have successfully worked together at a much larger organisation in an adjacent industry to that of GTK.

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