NCC Investment Report NTA May 2022

Market Insight

After posting a positive return against a negative benchmark in April the NCC Investment Portfolio underperformed the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) by -2.07%. The Investment Portfolio has now returned +11.29% p.a. since inception in February 2013, significantly outperforming the XSOAI which has returned +5.92% p.a. overthis time.

From a news flow perspective, it was a relatively quiet month with the exceptions being Big River Group (ASX: BRI) which updated earnings expectations to be at the upper end of previous guidance, as well as Wingara Ag (ASX: WNR) which posted a commendable FY22 result as well as updating the market on a number of key strategy initiatives. When reviewing the significant detractors to the investment performance for May, notably six of the core investments made a negative contribution of >-1%.

To highlight some of what we believe to be irrational movements in the share prices of our investments that we saw in the month, BRI was the largest detractor to performance even after upgrading FY22 guidance and trading on a price to earnings ratio of <9.50 times FY22 post tax earnings.

Clearly, investors are reducing their exposure to emerging companies (small and micro-cap businesses) and at a very high level, which can be seen by the ~-7% decline in XSOAI compared to the S&P ASX-100 Accumulation Index which fell by just by -2.19%. Based on our past experiences, this may continue for some time especially as many institutional investors seek to maintain high levels of liquidity to fund any current or potential investor redemptions together with emerging companies no longer forming part of their investment strategy due to their overall small exposure to such investments as well as the perceived high-risk nature of such investments. We can’t control such events but as an investment team we can control the type of investments that we make and position the Investment Portfolio in a manner that we consider will best maximise performance in times where significant macro events may occur. To highlight how NAOS puts this into action, set out below is a list of some key investment metrics* across the NCC Investment Portfolio, which are weighted in line with their respective holding weights:

• FY22 EBIT: $17.04 million

• Net Debt: $4.36 Million

• FCF Yield Pre-Capex: 2.49%

• Insider Ownership: 13.18%

• EBIT Growth FY22: 21.4%

• Dividend Yield: 2.73%

*Figures are based on NAOS’ internal estimates and views.

As mentioned earlier, BRI announced that trading conditions have been strong with FY22 full year profitability tracking at the upper end of guidance. As 2HFY22 guidance was originally slightly below 1HFY22 EBITDA, we now assume this to mean at least in line or slightly above the 1H22 result. At the NPAT level this could, in our view, imply a FY22 NPAT of ~$20 million or EPS of ~25cps. This EPS compares to a share price of $2.27 at the end of May which implies a P/E of just 9.36 times. Clearly, the market is pricing in a deteriorating earnings profile over the next 12-24 months, in theory due to a sharp slowdown in overall building/construction activity together with a potential for a sharp increase in bad debts clients such as new home builders struggling with cost increases and supply change bottlenecks.

However, we do not subscribe to such views for a number of reasons including the diversity of the revenue exposure by industry segment, the significant pipeline of unfinished work and the large number of clients that BRI has which minimises the risk of a significant dollar exposure

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