NCC Investment Report NTA March 2022

Market Insight

For the month of March, the NCC Investment Portfolio increased by +0.55%, against the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which increased by +5.26%. The strong performance of the index was driven by outperformance from resources stocks, particularly those correlated to the record high oil price which included lithium, coal and oil and gas producers and/or explorers. The Investment Portfolio has now returned +12.10% p.a. since inception in February 2013, significantly outperforming the XSOAI which has returned +7.06% p.a. over this time. It was a relatively uneventful month for the NCC investments with just Saunders International (ASX: SND) and BSA Limited (ASX: BSA) providing updates of any significance. From a contribution perspective the main positive contributors were SND and COG Financial Services (ASX: COG), with the only detractor of any significance again being BSA.

SND announced that they had won a further $17 million of contracts with a further $11 million of work at the preferred contractor stage. All of the contracts related to some form of infrastructure works, with the majority more specifically related to bridge replacement programs in regional NSW. SND have previously stated that regional bridge replacement programs are an area of focus for the business, so it is pleasing to see them gain a significant amount of traction in this space and diversify from the storage tank work which has been a main driver of recent contract wins.

BSA finally released some positive news after they signed a contract with national grocery retail chain Aldi which will be worth approximately $20 million revenue over the first two years. Although not significant against the entire BSA revenue profile it does highlight the opportunity BSA has to win further clients of this nature due to its national network which gives it a significant competitive advantage over smaller operators. Interestingly a number of BSA’s peers including Ventia (ASX: VNT) and Service Stream (ASX: SSM) have both stated their order books and the tendering environment for maintenance services have increased significantly of late, which in theory should bode well for BSA over the medium term.

Looking forward, after speaking with numerous current and potential investments over the past six weeks it has become very apparent that each business is facing arguably more pronounced challenges then they may have anticipated a year or so ago. At the top of the list would be inflation, driven by significant rising wage costs, logistical costs, and raw materials costs. In our view, the other most notable issue facing businesses is finding quality staff to fill the numerous vacancies they have due to the lack of availability of skilled workers. Businesses have no choice but to be nimble and adjust to this environment as best they can. It is too early to tell how this translates into earnings growth (or negative growth) but all businesses will be impacted in some shape or form. From a demand perspective we feel that many of our core investments will not experience much better conditions than they will over FY22-FY23 which should reduce a significant amount of risk around valuation. Even the worst performing investment in the NCC portfolio should deliver record revenue over the next 12-24 months, though how this translates into profit is simply too early to tell. Overall, we believe that emerging industrials businesses are priced attractively when taking into account their strong balance sheets, ability to reinvest, and inorganic growth opportunities. Many of these businesses have recently taken a back seat to their resource-focused counterparts but we firmly believe that when these companies update the market over the next 3-6 months on their performance there is potential for strong earnings growth against valuation multiples that are only factoring in limited growth at best.

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