NSC Investment Report NTA February 2021

Market Insight

The NSC Investment Portfolio returned +11.30% for the month of February, significantly outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which increased by +1.55%. All NSC investments released their 1H FY21 financial results, and pleasingly all either met or exceeded market expectations which drove the significant outperformance relative to the index. As we have said for some time, it is imperative as an investment team that we concentrate on what we can control when investing and not get caught up in the momentum of the market and its highly subjective views, which we believe can create significant mispricing events. There were numerous positive contributors to monthly performance with standout results coming from Enero Group (ASX: EGG), COG Financial Services (ASX: COG) and Big River Industries (ASX: BRI), all of which have solid momentum moving into 2H FY21.

Firstly, EGG released what was by far the strongest result out of all the NSC investments. Net profit after tax was up +129.2% compared to the PCP, with EBITDA margins increasing by 13.8% to 30.0%, and this in-turn leading to the interim fully franked dividend increasing to $0.105. All of EGG’s PR and creative agency businesses have shown significant earnings resilience as most of their client base operates within the technology, healthcare and government sectors which have continued to operate relatively normally in a COVID affected environment. The other significant earnings driver for EGG was their 50.1% holding in US-based cutting edge ad-tech business OB Media. We believe that OB Media is on track to earn over AUD $22 million EBITDA, compared to just a couple of million just a few years ago. After years of heavy reinvestment in people and technology together with fostering relationships with Google and Microsoft, OB is now reaping the benefits of this investment. On a standalone basis we believe OB Media could command an EBITDA multiple well into the mid-teens (i.e., a total valuation >$300 million) given it is a high growth technology company that is highly profitable with a negative working capital balance.

COG released their 1H FY21 results after providing a very positive trading update in January. The company announced an inaugural HY fully franked dividend as the low capital intensity nature of the business has resulted in COG being in a strong net cash position with ample flexibility for both capital management and further acquisitions. Further clarity was provided around the imminent rollout of the COG insurance broking capability, which if successful we believe has the potential to generate earnings to match those of the finance broking divisions when taking a 3 – 5-year view.

Finally, BRI produced a strong result with EBITDA coming in +15% higher than the PCP, which was not affected by COVID. Notably, within the 1H release some new information was provided which we believe could potentially result in BRI more than doubling its current annualised NPAT run rate of $6.2 million. The acquisition of Timberwood remains on track with the company trading well and forecast to contribute close to $3 million NPAT based on the current run rate. The net cash inflow resulting from the closure of the Wagga Wagga facility and subsequent relocation to Grafton is expected to be ~$10 million with net profit accretion of ~$1.50 million. In addition, we continue to see the economic backdrop being beneficial for BRI which may further contribute to this growth in future earnings.

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