NCC Investment Report NTA June 2021

Market Insight

For the month of June, the NCC Investment Portfolio returned +1.82%, underperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which increased by +3.08%. The NCC Investment Portfolio has now returned +13.44% p.a. since inception in February 2013, significantly outperforming the XSOAI which has returned +7.58% p.a. over this time. Pleasingly FY21 was the strongest financial year in NCC’s history with the investment portfolio recording a return of +48.34%. This result was outstanding from an absolute perspective but also very strong from a relative perspective with the benchmark finishing up +33.23% for the year. From a contribution perspective it was pleasing to see that a number of our core investments which we have held for many years contributing strongly to overall portfolio performance. As we have said for many years, often the last thing to change after the successful implementation of a proven business strategy is the share price and we feel FY21 proved this once again. Even with the strong FY21 performance it is also worth adding that a number of the NCC core investments didn’t perform as expected and, in some cases, actually detracted from overall performance. These positions included BSA Limited (ASX: BSA) which is in the process of implementing a revised strategy to grow its earnings base, the execution of which has been delayed due to COVID-19 and subsequently delayed contract outcomes. BTC Health (ASX: BTC) remained very much under the radar as the management team refuses to overpay for acquisitions or in-licencing opportunities which may affect the share price in the short term, but over the longer- term this prudent strategy should prove very fruitful for investors (as we will expand on below). Finally, Wingara Ag. (ASX: WNR) was the only significant detractor to performance, after what can only be described as a year to forget. For the month of June there was just one significant development in the portfolio, which came from BTC and surprisingly occurred on the last day of the financial year.

As mentioned above BTC went into trading halt on the last day of June and the following day announced that it had agreed terms to acquire the exclusive distribution rights of the Mannitol portfolio of Pharmaxis (ASX: PXS). Even though the total consideration for these assets is only small ($2 million) we believe this is a highly strategic acquisition and may set BTC up for a transformational FY22. Firstly, these products generate revenue of ~$1.50 million with gross margins of 45%. We believe that BTC will not need to increase their headcount to distribute these assets and hence the EBITDA margin will be significant, potentially enabling BTC to reach a breakeven position or better. Secondly this gives BTC a foothold in the pharmaceuticals sector where they currently do not have any exposure, a factor we believe is key for any larger acquisitions or in licencing opportunities, where they will need to instill confidence that they can execute effectively within the pharmaceuticals space.

Finally, this is further confirmation that BTC can source deals internally and importantly execute on these from both a due diligence and a financing standpoint. Pleasingly, BTC also stated within their presentation materials that based on their unaudited financials, their revenue growth in FY21 should be circa +25% and looking forward they expect to grow at an organic revenue run rate in the mid-teens. We continue to believe that BTC has a significant amount of potential ahead and its unique offering and exposure to the healthcare industry will be closely followed by many. If FY22 is indeed the year when BTC can scale its current platform then we would expect it to be one of the strongest contributors to overall portfolio performance over the coming year.

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