NCC Investment Report NTA January 2022

Market Insight

For the month of January, the NCC Investment Portfolio outperformed the benchmark S&P / ASX Small Ordinaries Accumulation Index (XSOAI) by +5.83% with the investment portfolio decreasing by -3.17% compared to the benchmark which fell by -9.00% in an extremely volatile month for domestic equities. The NCC Investment Portfolio has now returned +12.64% p.a. since inception in February 2013, significantly outperforming the XSOAI which has returned +6.58% p.a. over this time. January brought with it a number of notable events in lead up to the February reporting season where the majority of the NCC investee companies will report their 1H FY22 earnings. Both Saunders International (ASX: SND) and COG Financial Services (ASX: COG) provided strong trading updates and Contango Asset Management (ASX: CGA) provided a Q2 FY22 Quarterly Activities Report which showed that the company was cash flow positive after a steady increase in funds under management (FUM) over the last couple of years.

SND continued its impressive run of positive announcements, providing a 1H FY22 trading update which saw revenue in line with guidance, but reported EBIT that was almost double the previous guidance due to margins remaining as strong as at the FY21 full-year result. In our view this was an extremely pleasing result and highlights how much the SND business has improved and matured over the past few years. Management also stated that they will be updating the FY22 guidance at the 1H FY22 result. SND was recently awarded the largest contract in the company’s history, and as such we would expect revenue and EBIT to be significantly upgraded. We will be looking for detail as to how the benefits of scale flow through to the EBIT line and therefore how much EBIT margins can further increase from the current level of circa 9%. It is also worth noting that the cash balance of the business now sits at $36 million with minimal to no debt.

COG also provided a trading update for its upcoming 1H FY22 results. Pleasingly, the company expects NPATA to be $10.4 million which compares favourably to the $8.4 million generated in 1H FY21, excluding the impact of government grants and subsidies. Importantly the quality of the earnings has increased dramatically with the broking and aggregation division generating $6.9 million of NPATA compared to the lending division which generated $3.8 million. The funds management business of Westlawn is included within the lending division meaning the earnings generated from pure finance funding are even lower than the $3.8 million stated. Looking forward, COG expects the two recent acquisitions to contribute significantly in 2H FY22 and the company continues to consider acquisitions that fit their strategic direction. We believe that at the full year result COG should post a very strong funding position which will highlight how much capital it has available to pursue internally funded acquisitions.

Finally, CGA released their Q2 Quarterly Activities Report and reported a positive net cash flow of $0.29 million. This figure was assisted by a small amount of annual fees not being paid in the second quarter but does highlight that the recurring revenue base has continually increased for several years to a level which is almost self-sustaining. It was also notable for the month of January (to the 28th of January) CGA had achieved net FUM inflows of circa $8.6 million, which is a commendable achievement considering many global stock markets were down ~10% for the month at that time. We will eagerly await the 1H FY22 result which will hopefully shed more light on the new product partnership that CGA announced in December, as well as the potential for the business to be profitable for 2H FY22.

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