NAC Investment Report NTA July 2022

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Market Insight

The month of July saw the NAC investment portfolio return +8.72%, outperforming the benchmark S&P/ASX-300 Industrial Accumulation Index (XKIAI) which rose by +8.33% but underperforming its smaller counterpart the S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which increased by +11.43%. This brings portfolio performance since inception to +11.38% p.a., outperforming the benchmark index which has returned +7.01% p.a. over this period. July is a blackout period for most of the NAC investments prior to the release of their full year results in August, so predictably it was a quiet month with regards to stock-specific news flow. From a contribution perspective, it was pleasing to see that there were no detractors to performance of any significance and a few substantial contributors to performance for the month.

However, it was not all good news in July, with Eureka Group Holdings (ASX: EGH) releasing their 2nd downgrade to FY22 earnings within the last 4 months. This time much of the downgrade was driven by the closure of the Lismore facility, following the tragic natural disaster events that occurred in the region recently. At this stage, we do not expect this facility to be a contributor to the EGH group earnings profile over the medium term and potentially not at all. Disappointingly, the remainder of the downgrade was due to the delayed settlement of recent acquisitions as well as an increase in operational expenditure. The company maintains the view that the drivers of the FY22 downgrade outside of the Lismore facility will not affect earnings into FY23. Whilst we believe that the effect on earnings will be minimal, in our view this downgrade brings a level of uncertainty around FY23 earnings. Thankfully, the industry tailwinds for EGH remain strong which should see occupancy levels remaining in the high 90 percentiles, however if a further downgrade were to occur in the near-term we believe the market’s confidence in EGH would be significantly shaken.

Although not released to the ASX, Gentrack Group (ASX: GTK) released a PR statement that they had won a contract from one of Singapore’s largest and most established energy generators and retailers as part of a consortium which includes Accenture and Smart Energy Water. Although the contract is not material in its own right, we view this as another tick for management’s strategy to not only reinvest into GTK’s systems to maintain their current client base, but also expand into new geographies and potentially adjacent market opportunities.

Finally, Urbanise.com (ASX: UBN) released its Q4 FY22 quarterly activities & cash flow report. Pleasingly, UBN produced a cash flow positive quarter, and new CEO Simon Lee appears to be making considerable progress with regard to reaching a cash flow sustainable position in the near-term. A key part of this strategy revolves around a refreshed go-to-market strategy, to increase the conversion rate of sales leads into signed contracts, and this focus appears to be paying dividends. Arvida, a large, aged care operator in New Zealand signed as a customer in Q4, together with a national tyre distribution retail business, and a medium-sized strata management business. Notably, the clients mentioned above do not all operate in industries where UBN has gained most of its clients to date. This highlights the significant market opportunity that UBN has, assuming it can continue to deliver a product and an associated service that clients need and demand. We expect the full-year result to provide more clarity around its sales pipeline, and where UBN is seeing the most demand for its products.

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