NSC Investment Report NTA November 2021

For the month of November, the NSC investment portfolio produced a negative return of -2.17%, compared to the benchmark S&P/ASX Small Ordinaries Accumulation Index return of -0.31%. From a contribution perspective it was a relatively benign month, with only one investment delivering a >1% contribution or detraction, namely BSA Limited (ASX: BSA). From a news flow perspective, it was again an eventful month. Gentrack Group (ASX: GTK) released their FY21 results, BSA held their Annual General Meeting (AGM) and provided a number of notable comments, and Eureka Group (ASX: EGH) announced an acquisition and provided guidance at their AGM.

Without a doubt the most notable event for the month came from one of our more recent portfolio additions, Gentrack Group, as they released their FY21 results. In our view we believe the result was a significant positive step in reaching, and potentially exceeding, their FY24 targets. In our view, there were three key highlights to the result. Firstly, the number of new business wins in both the utility and airports divisions arguably exceeded management’s expectations and has led to stronger revenue growth in the short term. This is also clear vindication that the GTK software and service offering is highly competitive and has improved significantly in a short period of time under the stewardship of a new management team. Secondly, the working capital management was excellent with few if any bad debts, which has resulted in GTK sitting on a very healthy net cash balance sheet. Finally, disclosure has also improved which has allowed current and potential investors to make more objective and rational decisions about the businesses outlook.

Even though GTK was able to upgrade guidance just a month ago and deliver a result that arguably surpassed this upgraded guidance, the stock price remains at the same level as it was in May 2021, so sentiment remains negative towards the business. We appreciate there remains significant risks associated with an investment in GTK such as the current issues within the UK energy market and associated potential client losses, as well as the headwinds from a tight labour market particularly in technology related roles. However, we believe these risks are offset by two key points. Firstly, the growth potential that exists in the business which could come from new tier-1 customer wins, traction in their managed service offering, geographic expansion, M&A or further traction in adjacent industries such as water utilities. These points were not spoken about at length in the FY21 results presentation, yet in our view one or two of them are significant near-term opportunities for GTK.

Secondly, we would argue the valuation currently applied to GTK of <1.5 times recurring revenue assumes that the current business goes backwards at a significant rate. We do not believe it would be possible to acquire a technology B2B business that operates in several international markets and has over 550 staff for less than 5 times ARR, let alone <1.5 times. If the high calibre management team, who have successfully worked together at a much larger organisation, can deliver on their FY24 targets then the ARR valuation multiple applied to GTK will be significantly higher than <1.5 times and which we believe would be more appropriate for a global technology business that is arguably the leader within its industry.