NSC Investment Report NTA June 2021

The NSC Investment Portfolio returned +0.32% for the month of June, underperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which increased by +3.08%. Pleasingly FY21 proved to be an exceptionally strong year for the NSC Investment Portfolio, which finished up +58.40% which was a strong result from both an absolute and relative perspective as the benchmark retuned +33.23% for the financial year. The majority of the returns were generated from core long- term investments, some that NSC has held for over 3 years, and it was pleasing to see the progress these businesses have made being reflected in significant valuation increases across many of the portfolio holdings. As we have always said, in our view often the last thing to change in a successful business strategy is the share price and this year was no different. Over the course of FY21 the investment team also made a small number of significant changes to the portfolio and hopefully used some of the share price strength to our advantage. There were significant de-weightings in both Enero Group (ASX: EGG) and MNF Group (ASX: MNF), and a new core investment was added late in the year in the form of Gentrack (ASX: GTK). For the month of June there were two notable events, these came from Eureka Group (ASX: EGH) which announced the acquisition of a sizeable seniors’ accommodation village, and Over The Wire (ASX: OTW) which updated the market in regards to its full year earnings and some of the key drivers of this figure.

Firstly, EGH announced the acquisition of a 106-unit independent rental village located in Ipswich, north of Brisbane. The current facility has 59 relocatable homes with development approvals and infrastructure to accommodate a further 47 homes. The total consideration was $6.5 million, and management has stated that the acquisitions will be EPS accretive in year 1. We believe that this is again a very sound acquisition and the fact that it is EPS accretive from year 1 without the earnings from the as-yet undeveloped units highlights the very sound multiple paid for the business, and the future earnings growth it will provide EGH as the new units are developed. Longer term we expect EGH to continue to internally fund 2-3 of these acquisitions per year and not require additional equity. It is also worth noting the significant interest in property and infrastructure assets with large high-quality assets exchanging on cap rates of 4% or less. This compares to the last cap rate of ~10% used for EGH’s entire asset base.

OTW informed the market that they do not expect to meet FY21 consensus expectations due to a hardware supply deal not being delivered until July 2021, and thus not recognised until FY22 (the resultant EBITDA effect was $1.50 million). Management also made several other notable points; organic revenue growth for 2H FY21 was ~7% (or ~+15% annualised), new recurring revenue signed in Q4 FY21 will exceed $350,000 contracted monthly recurring revenue (MRR), and 50% of the EBITDA benefit from the Tier 1 Voice Provider project will be realised from 1st July. From our point of view the miss to earnings is a disappointment, mainly because OTW management have made a regular habit of missing expectations solely due to the non-recurring part of the business. Looking through this, the underlying core of the business looks sound and if anything, looks to be expecting stronger growth going forward. The CEO’s comments that FY22 is expected to generate +15% organic recurring revenue growth driven by a solid pipeline of opportunities were also reassuring. In the FY21 result we will also be looking for further clarification around large new client wins for wholesale clients who can utilise OTW’s Tier-1 voice capability.