NSC Investment Report NTA August 2021

Market Insight

As was the case in July the NSC Investment Portfolio produced a largely flat return, delivering a slight negative return of -0.18%, underperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which increased sharply by +4.98%. It is worth noting that none of the holdings within the NSC investment portfolio form any part of the XSOAI as they are too small and/or too illiquid to be included. August was a very eventful month with all but one of the NSC portfolio companies reporting their FY21 full-year results. All results were broadly in line with our expectations, and importantly we believe the holdings across the NSC investment portfolio are well-placed for growth in FY22 assuming the domestic economy is in an improved position by the end of CY21. From a contribution perspective there were surprisingly few notable movements, with COG Financial Services (ASX: COG) being the only investment to contribute more than 1% to monthly performance, and Over The Wire Holdings (ASX: OTW) the only investment to detract more than 1% to monthly performance over the course of August.

COG released a record result with NPATA growing by over +132%, and pleasingly the result had increased transparency compared to previous years along with excellent cash generation, which is what many would expect from a capital light distribution focused business. The quality of the result led to a record final fully franked dividend of 6cps being declared, representing an increase of +295% on the prior year and a payout ratio of 62%. More transparency was also provided around COG’s insurance broking strategy which is now starting to be implemented. COG have stated that their ambition is to grow this to 50% of the earnings of the FB&A division. If this target can be achieved, then we believe the insurance broking business could potentially contribute $15 million of EBITDA in 5 years’ time.

BSA Limited (ASX: BSA) produced a result consistent with what we have seen for a number of years, in that it was a credible underlying result, particularly in a trying business environment, but it was masked by numerous one-off costs. There was plenty of commentary provided regarding laying the foundations for the future and as underlying margins increased in FY21 this may prove accurate. The lack of any meaningful comments on capital management as well as a lack of tangible progress around M&A was disappointing as we firmly believe that BSA has a sound foundation to build on which could lead to significant compounding returns for shareholders over time, and we are hopeful that this potential will start to be realised in FY22. Interestingly, management confirmed they were on track to hit their FY24 targets of $750 million revenue and increased EBITDA margins of 6-8%.

Eureka Group Holdings (ASX: EGH) reported a result that confirmed the momentum that the business has been building off over the past 24 months. Underlying EBITDA was up by ~22% and all key metrics such as occupancy levels remain robust. The only slight negative in our view was that greater detail was not provided on a capital management strategy that will enable EGH to scale significantly going forward. As we have said for some time, we believe the opportunity exists for EGH to develop into a much larger business but whether it needs to own 100% of all assets on its own balance sheet remains debatable. With Greg Paramor on the board, who has significant experience at Folkestone Limited and more recently Charter Hall Group (ASX: CHC) the option to launch a funds management model is clear and is a strategy we believe could be very beneficial for EGH shareholders over the longer term.

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