NAC Investment Report NTA October 2022

Market Insight

October saw a continuation of the recent significant market volatility, although this month the volatility was very much to the upside, with the S&P/ASX 300 Industrials Accumulation Index (XKIAI) up +7.69% and its smaller counterpart the S&P/ASX Small Ordinaires Accumulation Index (XSOAI) up +6.46%. Put simply it was a very disappointing month for the NAC Investment Portfolio which finished down -7.62%, with not one of the core investments registering a positive return for the month, and Eureka Group Holdings (ASX: EGH), one of the largest investments in the investment portfolio, announcing a discounted capital raising. Annual General Meeting (AGM) season ramped up in October and with it came a number of updates from across the NAC portfolio, including Maxiparts (ASX: MXI), MOVe Logistics (NZX: MOV), and (ASX: UBN) which we will elaborate on below.

As touched on above, EGH announced a capital raising totalling $28 million at an issue price of $0.47 per share. The reasons for the raising are to fund two acquisitions, the greenfield development of the Brassall village expansion, and to reduce debt and provide financial flexibility. As the largest shareholder in EGH with a 22% shareholding we were disappointed on several fronts with the capital raising and elected not to participate. EGH has been a successful investment over the past 3 years but more recently management have issued two profit downgrades which is surprising considering the rental nature of the income stream. These downgrades have come in large part due to significant staff turnover within the business as well as slippage around settlement times of announced acquisitions. In our view, we believed that the board and management needed to demonstrate to investors that they can drive consistent organic earnings growth prior to seeking further external capital. Frustratingly, the board and management have also spoken about a capital management plan that would clearly articulate the most efficient way to fund EGH going forward but after two years no details have been released. We were also disappointed that no funding costs have been fixed over the past 6 - 12 months which has resulted in a significant increase in interest expense for the business. The EGH business is by no means broken but clearly the business must scale if it is going to achieve any leverage off its significant $8 million corporate cost base. EGH may well become the leader in their respective field, but in our view, management will need to demonstrate continued execution of strategy over the longer-term along with improved capital management.

MOV and MXI both held their AGMs in October and we felt they both provided positive updates, albeit slightly lacking in detail. MXI reaffirmed their guidance for revenue growth of low single digits without providing any further quantitative commentary, and MOV stated that they expect profit to increase on the prior year result but again without providing further clarity. MOV did state that they expect most of their current initiatives to have a much greater impact on profitability in FY24 as opposed to FY23, which we believe may also be the case for MXI.

Finally, UBN released their Q1 activities report which showed continued, albeit marginal, growth in both of their business segments. Of particular note was the reference made to the Colliers integration which remains on track for integration in Q2 FY23 with recurring billing to commence thereafter. UBN also announced that they have secured a new tier-1 facilities maintenance client in New Zealand as well as new clients in the Middle East. The company remains in numerous discussions with potential clients across both divisions with annual contract values ranging from $10,000 - $600,000 p.a.

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