NSC Investment Report NTA January 2021

Market Insight

The NSC Investment Portfolio returned +1.05% for the month of January, outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which decreased by -0.25%. After an eventful month in December with significant releases from BSA Limited (ASX: BSA) and Big River Industries (ASX: BRI) we expected January to be a little slow on the news front especially with half year reporting just around the corner. Consolidated Financial Services (ASX: COG) was the sole investment to provide any meaningful update, who updated the market with their 1H FY21 guidance.

COG announced that their 1H FY21 Net Profit After Tax and Amortisation (NPATA) would be $10.1 million, an increase of +140% on the PCP. This profit growth has pleasingly translated into strong free cash flow with unrestricted cash and term deposits of $53 million (not including their ~$17 million listed investment in Earlypay Ltd (ASX: EPY), against a market capitalisation of $149 million with minimal gross debt. This profit growth was driven by two main factors, the first of these being the Finance, Broking & Aggregation division, where margins have increased as the business continues to improve efficiencies through automation, as well as offering complementary services to their clients such as insurance broking. The other key driver of the result was the increased ownership in debenture issuer Westlawn Finance. We believe Westlawn has continued to a be a beneficiary in the growth of its debenture book as well as the growth in its insurance broking arm. Finally, COG stated that they will be rolling out a “hub & spoke” insurance broking model to all of their owned and aggregated broker members in the coming months.

Looking forward, we believe there are several key catalysts within the NSC Investment Portfolio that should assist in driving the performance of the fund, in our view BSA Limited (ASX: BSA) and Enero Group (ASX: EGG) are two such investments with significant short-to-medium term upside.

Even though BSA had a highly eventful CY20 we believe there remains some significant catalysts. The first of these relates to the $4.5 billion that the National Broadband Network (NBN) is seeking to spend over the next 3 years to continue to upgrade specific parts of the network. We believe BSA is well positioned to secure part of this work as it continues to deepen its relationship with NBN, as demonstrated through its recent contract win. Secondly, in our view the recent acquisition of Catalyst One provides an opportunity to potentially transform a <$15 million revenue business into a $100 million business over the next 3 – 5 years if BSA can successfully combine the Catalyst One offering with their existing skillset to offer a onestop solution for customers around both their current and future wireless capability needs. In addition, we see no reason why BSA cannot be more aggressive on the capital management front where an active buyback would be earnings accretive and a higher payout ratio could be achieved given the significant cash balance on the balance sheet.

Finally, Enero Group (ASX: EGG) provided a stellar Q1 trading update late in CY20. Investors will be seeking to understand whether this momentum has continued into Q2 and even Q3 of FY21. We also believe the market is seeking greater transparency around the EGG subsidiary OB Media, an ad tech business based in the US, with key clients including both Microsoft and Google. Such ad tech businesses in the US are currently trading on significant revenue multiples which we believe if applied to OB Media could value the business at a compelling amount.

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