NAC Investment Report NTA October 2021

Market Insight

The month of October saw the NAC Investment Portfolio increase by +4.21%, outperforming the benchmark S&P/ASX 300 Industrials Accumulation Index (XKIAI) which increased by +0.21% as well as its smaller counterpart the S&P/ASX Small Ordinaries Accumulation Index which increased by +0.92%. This brings portfolio performance since inception to +18.10% p.a., outperforming the benchmark index which has returned +8.83% p.a. over the same period. In keeping with the previous months events, October proved to be another eventful month across the NAC portfolio. The key event was from Over The Wire Holdings (ASX: OTW) which announced that they had received a non-binding indicative proposal from Aussie Broadband (ASX: ABB) to acquire all of the shares in OTW for a total consideration of $5.75 per share. (ASX: UBN) released their quarterly activities report which provided greater insight into the growth prospects and execution capability of the business.

OTW announced that they have received a non-binding indicative offer from ABB to acquire all OTW shares for a total consideration of $5.75 per share consisting of a combination of cash and ABB scrip. This process is still preliminary in nature and incomplete and OTW expect the process to be finalised by the end of November. We believe that by combining the two businesses there will be significant revenue and cost synergies but more importantly it will create a true competitor to the likes of Vocus, Optus and Telstra in regard to their SME and enterprise offerings. As ABB have been at pains to articulate, their next leg of growth will be predominantly from these types of customers, and they have already started to build out their product and service offerings. In our view, by acquiring OTW this accelerates their strategy by 2-3 years and gives them access to a customer base which includes the likes of Brisbane City Council, Eagers Automotive (ASX: APE) and Nova Radio. Time will tell whether the deal goes ahead but we think there are significant merits of being a shareholder in the combined entity and this is before factoring in other “soft” considerations such as the significant free cash flow generation and potential inclusion in the ASX 200.

UBN released their quarterly activities report for Q1 FY22. Pleasingly top line revenue increased by +15% on the previous corresponding period, and licence fee revenue outpaced this figure, growing at +29%, albeit off a small base. Interestingly the implementation process with Tier-1 property owner and facilities management firm Nakheel has been finalised which has led to UBN moving from implementation fees to license fees. This is of interest to us as this implementation timeline was significantly shorter than that of fellow Tier-1 client PICA, which hopefully bodes well for recently signed Tier-1 client Colliers International (Australian division) and can serve as a good case study for prospective clients. If UBN can continue to improve on its implementation approach then this will lead to shorter implementation times, a reduction in revenue backlog and faster growth in licence fees over time. Looking forward it is critical that the recent spend on marketing and business development translates into a solid business development pipeline and more critically new client wins in Q2 and Q3 of FY22. Unfortunately, the disclosure provided by management and the board on key KPIs such as new client names, churn statistics and client revenue metrics are minimal. We believe this is partly due to the business transitioning out of a period of being a ‘turnaround’ and partly due to the lack of proven SaaS experience & leadership at UBN. We believe improvements in this area are crucial not only to allow the wider market to appreciate the quality of the UBN business, but also to take advantage of the current opportunity and scale UBN into a best of breed enterprise software company across global operations.

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