NCC Investment Report NTA January 2021

Market Insight

For the month of January, the NCC Investment Portfolio returned +0.23%, outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which decreased by -0.25%. The NCC Investment Portfolio has now returned +11.86% p.a. since inception in February 2013, significantly outperforming the XSOAI which has returned +6.57% p.a. over this time. With 1H reporting season just around the corner a number of investments within the NCC investment portfolio took the opportunity in January to update the market with their anticipated results. Pleasingly, COG Financial Services (ASX: COG) and Saunders International (ASX: SND) provided very positive updates, whereas Wingara Ag (ASX: WNR) continue to go through a business reset process.

Firstly, COG announced that their 1H FY21 Net Profit After Tax and Amortisation (NPATA) would be $10.1 million, an increase of +140% on the PCP. This profit growth has pleasingly translated into strong free cash flow with unrestricted cash and term deposits of $53 million (not including their ~$17 million listed investment in Earlypay Ltd (ASX: EPY), against a market capitalisation of $149 million with minimal gross debt. This profit growth was driven by two main factors, the first of these being the Finance, Broking & Aggregation division, where margins have increased as the business continues to improve efficiencies through automation, as well as offering complementary services to their clients such as insurance broking. The other key driver of the result was the increased ownership in debenture issuer Westlawn Finance. We believe Westlawn has continued to a be a beneficiary in the growth of its debenture book as well as the growth in its insurance broking arm. Finally, COG stated that they will be rolling out a “hub & spoke” insurance broking model to all of their owned and aggregated broker members in the coming months.

In what can only be described as the most frustrating and disappointing NCC investment, WNR made a couple of significant announcements. The first of these was that the CEO and founder Gavin Xing would resign immediately from the business. We believe this is a sound decision from the board as WNR has transitioned from a small business a number of years ago to a business that will generate over $40 million of revenue p.a. and hence requires a different skillset from a CEO. The company also stated later in the month that there will be a write down on an amount of hay in the current inventory. We do not believe this is a systemic issue within the business, but another example of growing pains in a small business that needs to evolve its systems and processes to ensure such issues do not occur again. Looking forward, the next 6 months should be transformational for the WNR business with the appointment of a new CEO, who will need to develop and execute on a simplified strategy to capitalise on WNR’s unique set of assets.

Finally, SND released guidance for 1H FY21. Revenue was in line with expectations, though pleasingly EBITDA was significantly higher than expectations at $5 million, and the cash balance sitting at almost $16 million. To put this into context the full year guidance SND provided at the start of the year was for EBITDA of circa $5 million. We do not believe this result is a one-off as the demand backdrop for SND’s services is significant, as demonstrated by the Federal Governments diesel tank subsidy strategy which in our view SND will be a significant beneficiary of if they can continue to deliver excellent work.

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