NSC Investment Report NTA August 2022

The August reporting season saw all bar one of the NSC investments report their full-year FY22 results. Pleasingly there were no negative surprises, which resulted in the NSC Investment Portfolio returning +4.41% for the month, outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which retuned +0.58% The standout results came from Big River Industries (ASX: BRI) and COG Financial Services (ASX: COG), with plenty of longer-term promise found in the Maxiparts (ASX: MXI) and Move Logistics (NZX: MOV) results. The major disappointment, which had already been pre-released, came from Eureka Group Holdings (ASX: EGH) which has suffered from growing pains and issues related to the severe weather events in Northern NSW. As has been the case over the past two reporting seasons much of the focus was on current trading conditions as well as the potential for significant market deterioration with an ever-changing and increasingly challenging macro backdrop. Many of the NSC investments will not be immune from such challenges. However, the core investments across the investment portfolio operate in industries which we believe should provide a level of earnings support over the medium term. These investments also generally have a balance sheet structure that is of a more flexible nature to supplement their earnings over the medium-term and in some cases the resources to internally fund growth initiatives or acquisitions.

MXI and MOV produced results and commentary on their longer-term strategies that were rather similar and which in our view show the significant potential of these businesses. MXI released a set of results which contained a 2-month contribution from their divested trailer business which resulted in the financial statements being somewhat convoluted. However, there were a number of green shoots evident with low double digit revenue growth expected in FY23 and a clear strategy around increasing EBITDA margins from the current <10% to a figure closer to those of its listed peer over a 3-year period. MOV is following a similar path, albeit with a greater degree of complexity due to its scale. Again, some green shoots were seen at the profit margin level but more pleasingly was the qualitative progress with regards to the new management team, client churn, client pricing, a new ERP system and the onboarding of new equipment (namely their first bulk/cargo haulage vessel), all of which form the basis of a more efficient, productive, and profitable business.

BRI produced the strongest result of FY22 reporting season across the NSC investment portfolio. Revenue, EBITDA and NPAT were up +45%, 113% & 191% respectively, demonstrating just how strong the result was. Importantly, and unlike many of its peers, cash conversion was excellent which brought net debt levels down to $21 million and resulted in a record 10cps final dividend being declared. BRI now trades on a historical P/E of just ~9 times. Clearly, many investors are unsure of the outlook for construction generally and how changes in the wider operating environment will affect the earnings of BRI over the short to medium term. In our view, BRI operates in a very large addressable market and should be well-placed to win work regardless of market conditions. BRI has arguably only just achieved a profit margin that is on par with some of its unlisted peers, and with the scale that BRI has, this should only continue to improve. We continue to believe that over the longer-term there is a significant consolidation opportunity for BRI in a market dominated by baby boomer owners. We see no reason why BRI cannot double its revenue base over the next 5 years and continue to grow its market share as its size and scale give it a significant competitive advantage over smaller operators.