NSC Investment Report NTA January 2022

Market Insight

For the month of January, the NSC investment portfolio outperformed the benchmark by +2.49%, producing a negative return of -6.51% compared to the benchmark S&P/ASX Small Ordinaries Accumulation Index which fell by -9.00%, in an extremely volatile month for equity markets. It was a relatively eventful month with a number of significant releases across the NSC investment portfolio. COG Financial Services (ASX: COG) provided a positive trading update for 1H FY22, in advance of its half-year results to be released in February, Step One Clothing (ASX: STP) officially launched its initial range of women’s underwear in Australia and the UK, and finally (on 1st February) MaxiPARTS (ASX: MXI) announced a trading update as well as the acquisition of a large private truck parts distributor.

Only a few months after announcing a rather technical divestment, MXI slightly surprised us and announced the acquisition of privately owned truck parts distributor Truckzone Group. We believe this acquisition benefits MXI in two key ways, the first of these being increased scale and a more diversified store network; and secondly it gives MXI a wholesale business with access to Japanese aftermarket auto parts which should be a significant contributor to future growth due to attractive margins (which we believe has historically benefitted listed competitor Bapcor). The acquisition was funded via a $25 million equity raising which should leave the business in a net cash position and provide plenty of financial flexibility to initiate its organic store rollout as well as acquire smaller operators that in our view should give MXI a clear strategic advantage. On a full year run rate we expect the business to report a revenue base in excess of $200 million with an EBITDA margin >10%, along with the potential to grow this closer to 14-15% over time. The company also has significant tax losses which should assist in maximising free cash flow generation going forward.

STP formally launched its first women’s underwear product, which we believe will provide the company with a significant runway of growth for the foreseeable future, particularly given the strong initial take-up. For context, the women’s underwear market is worth circa 2 times the male underwear market which is worth ~$590 million in Australia. STP currently has a 6% market share of the men’s underwear market domestically, so if they can capture a 3% market share of the women’s market this has the potential to almost double their current revenue base. Based on initial feedback and stock availability the product has been very well received with most sizes and colours sold out after just 2 weeks in both the UK and Australian markets. As STP increases their women’s range over the next few months this will provide a useful indicator as to whether the sales trajectory of the women’s range will follow that of the men’s product, which has grown to ~$70 million of sales in under 5-years.

COG also provided a trading update for its upcoming 1H FY22 results. Pleasingly, the company expects NPATA to be $10.4 million which compares favourably to the $8.4 million generated in 1H FY21, excluding the impact of government grants and subsidies. Importantly the quality of the earnings has increased dramatically with the broking and aggregation division generating $6.9 million of NPATA compared to the lending division which generated $3.8 million. The funds management business of Westlawn is included within the lending division meaning the earnings generated from pure finance funding are even lower than the $3.8 million stated. Looking forward, COG expects the two recent acquisitions to contribute significantly in 2H FY22 and the company continues to consider acquisitions that fit their strategic direction. We believe that at the full year result COG should post a very strong funding position which will highlight how much capital it has available to pursue internally funded acquisitions.

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