NSC Investment Report NTA July 2022

Market Insight

The NSC investment portfolio returned to positive performance in July, delivering a return of +3.46%. From an absolute standpoint this was a pleasing outcome, but in a relative sense the portfolio did not keep up with the benchmark S&P/ ASX Small Ordinaries Accumulation Index (XSOAI) which had a very strong month, returning +11.43%. As the majority of the companies within the NSC investment portfolio will be releasing their full year results in August they are in a blackout period, so there was little news flow of significance in July. COG Financial Services (ASX: COG) released their unaudited FY22 results, and Eureka Group Holdings (ASX: EGH) also updated their FY22 profit expectations. Gentrack Group (ASX: GTK) also made some pleasing progress regarding their international expansion strategy, which we will elaborate on below.

COG released their unaudited FY22 results, reporting NPATA of $25.0 million in excess of their previously released guidance in May. In our view, this is an outstanding result and again reinforces the multiple organic and in-organic growth levers that COG has at its disposal. Based on feedback from the business post the release of their unaudited results, the demand for COG’s services remains strong. This is despite the recent significant interest rate rises, and in our view is due to the significant amount of demand that remains within the economy in addition to the long lead times that remain for equipment orders to be fulfilled. Importantly, from a finance broking standpoint, COG brokers do not book revenue until the equipment has been financed and received by the customer. So given the significant backlog of unfulfilled orders, COG should have excellent visibility over their short-term revenue pipeline. Management also stated that their insurance broking division continues to gain traction, and further updates on this division will be provided to the market in due course.

However, it was not all good news in July, with Eureka Group Holdings (ASX: EGH) releasing their 2nd downgrade to FY22 earnings within the last 4 months. This time much of the downgrade was driven by the closure of the Lismore facility, following the tragic natural disaster events that occurred in the region recently. At this stage, we do not expect this facility to be a contributor to the EGH group earnings profile over the medium term and potentially not at all. Disappointingly, the remainder of the downgrade was due to the delayed settlement of recent acquisitions as well as an increase in operational expenditure. The company maintains the view that the drivers of the FY22 downgrade outside of the Lismore facility will not affect earnings into FY23. Whilst we believe that the effect on earnings will be minimal, in our view this downgrade brings a level of uncertainty around FY23 earnings. Thankfully, the industry tailwinds for EGH remain strong which should see occupancy levels remaining in the high 90 percentiles, but if a further downgrade were to occur in the near-term, we believe the market’s confidence in EGH would be significantly shaken.

Although not released to the ASX, Gentrack Group (ASX: GTK) released a PR statement that they had won a contract from one of Singapore’s largest and most established energy generators and retailers as part of a consortium which includes Accenture and Smart Energy Water. Although the contract is not material in its own right, we view this as another tick for management’s strategy to not only reinvest into GTK’s systems to maintain their current client base, but also expand into new geographies and potentially adjacent market opportunities.

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