NCC Investment Report NTA June 2022

Market Insight

June brought an end to what has been a disastrous year for small cap equities and those expecting a relief rally at the end of the financial year were left very disappointed as the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) fell by -13.09%, its worst monthly decline since the onset of the COVID-19 pandemic in March 2020. The NCC investment portfolio fared slightly better, returning -9.74% for June, outperforming the benchmark by +3.35% for the month. The NCC investment portfolio has now returned +9.97% p.a. since inception in February 2013, significantly outperforming the XSOAI which has returned +4.29% p.a. over the same period. From a news flow perspective, it was a relatively eventful month with COG Financial Services (ASX: COG) providing an FY22 trading update, as well as greater detail around the earnings drivers of the business, and Wingara Ag (ASX: WNR) finally delivered some positive news, announcing the sale of their loss-making division Austco Polar Cold Storage.

COG provided FY22 NPATA guidance of between $22.4 - $23.9 million, a significant increase on the $17.7 million NPATA profit achieved in FY21 (on an underlying basis). What we found of more interest was the detail around the composition of this NPATA, with 35% derived from COG owned finance brokers, 26% via the aggregation network and 9% and 6% from funds management activities and insurance broking respectively. The balance is made up of lending, the stake in Earlypay (ASX: EPY) and head office costs. This granular information has not been released previously and highlights that 75% of COG earnings are derived from capital light earnings streams and are somewhat repeatable in nature. The insurance broking and funds management earnings streams are still very much in their infancy, but in the case of insurance broking, management have previously stated this has the potential to be ~50% of the NPATA derived from finance broking.

Early in July COG also announced the acquisition of a Queensland based broking firm via their subsidiary QPF. This highlights the significant opportunity that exists for COG to acquire high-quality brokers which they are familiar with through use of the COG aggregation platform; a similar model to Steadfast Group (ASX: SDF) acquiring member brokers.

WNR released what we believe to be a significant event in WNR’s relatively short corporate life by announcing the sale of the Austco Polar Cold Storage division. The funds received from the sale of the business are relatively immaterial but when viewed in the context of removing a +10-year lease liability together with an annual EBIT loss contribution of -$1.30 million we believe this is an outstanding outcome for the WNR business. This now allows management to focus on their core competency, namely the processing and exporting of hay-related products. The success of processing hay not only comes down to buying sound inventory but being able to run an efficient processing facility with little unplanned down time and delays. In mid-June the WNR shares were suspended pending the announcement of a proposed transaction, which we will discuss next month pending further details.

We do not expect significant company updates prior to the release of FY22 financial results in mid to late August, but we will be eagerly awaiting the full-year results from core investments Saunders International (ASX: SND) and Big River Industries (ASX: BRI), both of which have gone through a period of significant revenue growth which should in theory flow through to a meaningful growth in profitability.

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