NSC Investment Report NTA December 2021

Market Insight

For the month of December, the NSC investment portfolio produced a positive return of +3.89%, outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index return of +1.41%. From a contribution perspective it was a relatively benign month with the top contributors being COG Financial Services (ASX: COG) and Gentrack Group (ASX: GTK), both of which contributed >1% to portfolio performance. The only detractor of any significance was again BSA Limited (ASX: BSA) but as with COG and GTK there was no news flow of any significance. Importantly, a number of new investments have been made over the past few months, which we discuss below.

MXI was added to the NSC Investment Portfolio in December after being on our watchlist for several years. MXI was originally a manufacturer of truck trailers and over time has built up a parts distribution business to support the client relationships that had been developed via selling trailers. More recently the underperforming and highly capital-intensive trailer manufacturing business was divested with the proceeds split between paying a special dividend to shareholders as well as supporting the MaxiParts business, which would remain as a listed entity. We believe that over the next 3-5 years the prospects for MXI to grow at a reasonable rate are excellent as the market is highly fragmented with the three largest players holding ~30% market share. There should also be significant potential for MXI to grow its margins as it gains scale and diversifies, and the demand prospects for truck parts should also be relatively healthy given the global shortage of new trucks due to supply chain constraints. The investment is not without risk, but as fellow listed truck and bus part distributor Supply Network Ltd (ASX: SNL) has shown, if MXI can execute on their strategy then the valuation outcome could be significant.

Move Logistics (NZX: MOV) became the first solely New Zealand listed business to be part of the NSC investment portfolio, and is already a core investment within the portfolio. What most attracts us to the MOV investment proposition is the highly aligned executive team, some of whom are very highly regarded following their >15 years of experience in the early days of Mainfreight (NZX: MFT). MOV has the scale and market position to be a much more efficient and profitable business than it is today, and we believe with a degree of expansion the business could look rather different and over time command a richer valuation multiple. We will expand on this investment thesis over the next few months.

There are not too many businesses listed on the ASX where you can say that you use their product/service frequently because you believe the product/service is best of breed. For us STP fits that bill and is a business we have been analysing and getting to know in more detail ever since it considered listing 6 or so months ago. Within the last 5 years STP has gone from virtually $0 in revenue to potentially ~$75 million in annual sales of men’s underwear, mainly in Australia and the UK. The business listed in November at an issue price of $1.53 with the shares soaring to $3.00 shortly after issue. Following a company update that revenue growth would be 1-5% higher than the prospectus forecast of 19.9% for FY22, the shares fell back to the IPO price. The share price reaction to the trading update suggested that the guided growth figures were well below the markets very bullish expectations (despite still being ~25% p.a.). We initiated the STP investment post the trading update and believe that via geographic and product expansion STP will continue to grow at a reasonable rate over the coming years.

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