NSC Investment Report NTA February 2022

Market Insight

For the month of February, the NSC investment portfolio produced a negative return of -2.96% compared to the benchmark S&P/ ASX Small Ordinaries Accumulation Index which fell by -0.01%, in what was again an extremely volatile month for equities. As expected, February was an eventful month for the NSC investment portfolio with most companies reporting their half-year results. In our view, the majority of NSC investments provided positive trading updates, however this was not reflected in the resultant share price movements. Such examples included:

- Gentrack Group (ASX: GTK) provided a positive trading update and upgraded FY22 guidance for revenue growth of ~10% and EBITDA margins in the low single digits ($m) (post expensing all research and development costs), yet the share price fell ~-10% for the month.

- Big River Industries (ASX: BRI) posted a record profit and dividend and subsequently the stock increased by ~+7%, yet on a price to FY22 earnings ratio of <11 times, BRI trades on a 40% discount to other listed building materials businesses.

- COG Financial Services (ASX: COG) announced a capital light acquisition that we believe should increase NPATA by approximately +10% on an annualised basis, as well as signing a term sheet for an inaugural acquisition debt facility of $31 million. The 1H FY22 result was pre-released with the previous months trading update, which saw adjusted EPS increase by ~+16%. Pleasingly COG also declared a record $0.035 fully franked interim dividend. The COG share price finished flat for the month.

- MOV Logistics (NZX: MOV) posted a flat 1H FY22 revenue result and reported a decrease of -12% at the EBITDA line compared to the prior comparative period. Considering the effects of the recent COVID lockdown in New Zealand we thought this was a commendable result. Importantly, the strategic shift towards owner-operator drivers remains on track and the recent spate of executives who have joined from the likes of Mainfreight (NZX: MFT) continued with the new Chief Information Officer (CIO) a former MFT executive. The MOV share price decreased by ~-10% in February.

Based on the above share price reactions, the wider market appears to be expecting the earnings of these businesses to either flatline or decline over the next 12-24 months. We hold a differing view and expect earnings per share for each of these businesses to grow (in some cases significantly) over this period due to a mixture of industry tailwinds (structural change), margin expansion and acquisitions. Time will tell whether we will be proved correct but, in some cases, such as BRI and MOV, if earnings continue to increase then we would argue there is also potential for the earnings multiple to be re-rated by the market by 40-60%.

It was somewhat surprising that GTK was one of the major detractors for the month, as the company provided a strong trading update at their AGM. GTK’s initial guidance for FY22 was for “revenue growth” though this was amended to revenues of “around $115 million” with EBITDA expected to be in the low single digits ($’m). This guidance implies revenue growth of circa 10% even though management have previously disclosed that there is a $5-10 million headwind from a customer who announced they were leaving GTK some time ago. Taking this into account the true revenue growth of the business is closer to +15-20%. On face value the EBITDA generated could be considered low for a business of GTKs’ scale, but it should be noted that all research & development is expensed. If GTK were to capitalise a majority of this (as most Australian technology companies do) then EBITDA could be closer to $10 million. We continue to believe that GTK remains extremely undervalued and that its growth prospects are more tangible than the wider market appreciates. With an EV/Revenue multiple of just over 1x, in our view GTK has the potential to be valued over 2-3 times higher especially if the current management team’s track record of under promising and overdelivering continues.

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