NAC Investment Report NTA February 2021

Market Insight

The month of February saw the NAC Investment Portfolio increase by +10.04%, outperforming the benchmark S&P/ASX 300 Industrials Accumulation Index (XKIAI) which decreased by -0.03% and the S&P/ASX Small Ordinaries Accumulation Index (XSOAI), which increased by +1.55%. This brings portfolio performance since inception to +15.52% p.a., outperforming the benchmark index which has returned +6.89% p.a. over the same period. As expected, February was full of significant events with all investments held within the portfolio releasing their 1H FY21 results. With a highly concentrated portfolio it was very pleasing to see significant outperformance against the index during reporting season, when tangible news flow as opposed to momentum tends to drive stock performance. The only notable detractor to fund performance was Objective Corporation (ASX: OCL), who provided a very strong pre-result in January, but the detail within the half-year result potentially did not meet the high expectations of the market. Pleasingly MNF Group (ASX: MNF), Over The Wire (ASX: OTW) Eureka Group Holdings (ASX: EGH) and Experience Co (ASX: EXP) all provided significant positive contributions to performance.

MNF provided what we would describe as its first clean and consistent result for a number of half-year periods, and saw its share price rise by over +11% despite only meeting the expectations of the market. It was refreshing to see a clean result with no one-off financial impacts, and excellent free cash flow generation driven by a growing recurring revenue base. After several years of development, the third MNF network based in Singapore is finally approaching reality with commercial launch due before June and a number of customers already onboarding for the initial test period. MNF also expect that once the Singapore network is commercially launched they will release their plans for further expansion into the South East Asian region, with a one or two country expansion. Looking forward MNF reiterated guidance of an increase in EBITDA of circa 10% for FY21 which we believe is a sound outcome, particularly when considering the operating cost base of Singapore moves from the capex line to the opex line.

Looking further forward, it will be imperative that MNF manages market expectations around a potentially large increase in capex and/or opex with further international expansion, which will be required prior to a corresponding increase in recurring revenue. OTW released their 1H FY21 results after providing a trading update in late December which in essence was a downgrade. Within the 1H result there was enough detail to calm any investor nerves that were present post the trading update. The most important part of the release was that the organic revenue growth of the business remains on track for at least 10% by the end of FY21. The cash flow generation of the business was again excellent especially when factoring in the high recurring nature of the revenue and the reasonable amount of capex spend during the half-year. We believe the two growth avenues for OTW outside of its core business will come from Digital Sense (which provides managed cloud services to government and enterprise clients), and from the voice interconnect network, due to be completed in a couple of months. When finished, this network will allow OTW to focus on the domestic wholesale market and target cloud-based service providers that require a voice capability such as Google, Amazon, Ring Central and Twillio. OTW have stated that they will provide detail around the amount of phone numbers hosted on their network which will give the market a good feel to what sort of traction they are gaining in the marketplace, just as competitor MNF have done for many years.

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