NCC Investment Report NTA February 2021

Market Insight

For the month of February, the NCC Investment Portfolio returned +4.28%, outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which increased by +1.55%. The NCC Investment Portfolio has now returned +12.33% p.a. since inception in February 2013, outperforming the XSOAI which has returned +6.71% p.a. over this time. February was an eventful month with the vast majority of the investments within the portfolio issuing their 1H FY21 results.

Overall, we were pleased with the performance of each investment although the monthly performance of the portfolio could have been significantly higher if not for BTC Health (ASX: BTC) detracting over -1.5% to the monthly return, especially after making what we viewed as a positive announcement. Key positive contributors to portfolio performance included Experience Co. (ASX: EXP), Saunders International (ASX: SND) and Big River Industries (ASX: BRI). Even with many of the investments reporting solid first half results we believe a number of the core investments remain undervalued with crucial catalysts that may eventuate over the course of 2H FY21.

EXP released a highly commendable result with the business remaining profitable and cash flow positive in what was a challenging demand backdrop. As we have said many times, we believe a significant amount of progress has been made by the current management team that will have a positive impact on the future profitability of the business with the return of domestic tourism demand. Such initiatives include gross distribution agreements, corporate cost initiatives, new product offerings and asset base rationalisation. Over a 24-month timeframe and with the assistance of small acquisitions we continue to firmly believe EXP has the potential to be a ~$50 million EBITDA business.

SND released what was probably the strongest result within the NCC portfolio. After several half-year periods generating losses or minimal profits, SND reported a significant profit with an EBIT of $4.03 million and declared an interim dividend for the first time in almost 3 years. To put this in perspective SND have exceeded their FY21 guidance in the first 6 months of the financial year. Looking forward, SND has stated that they do not see any slowdown in the financial performance of the business with revised FY21 revenue guidance provided for $100-$110 million, and EBIT margins of 7-8%, which implies a stronger 2H. We believe this may prove to be conservative with several industry tailwinds supporting the SND business for the next 12-36 months including opportunities that could be the largest in the company’s history. These tailwinds include the federal government focus on domestic fuel storage capability, infrastructure spend with a particular focus on regional programs including bridge replacement, and finally the numerous and significant opportunities within Defence.

Finally, BRI produced a strong result with EBITDA coming in +15% higher than the PCP, which was not affected by COVID. Notably, within the 1H release some new information was provided which we believe could potentially result in BRI more than doubling its current annualised NPAT run rate of $6.2 million. The acquisition of Timberwood remains on track with the company trading well and forecast to contribute close to $3 million NPAT based on the current run rate. The net cash inflow resulting from the closure of the Wagga Wagga facility and subsequent relocation to Grafton is expected to be ~$10 million with net profit accretion of ~$1.50 million. In addition, we continue to see the economic backdrop being beneficial for BRI which may further contribute to this growth in future earnings.

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