NSC Investment Report NTA June 2022

June brought with it an end to a horrendous year for small cap equities but did not provide any respite for investors with the benchmark S&P/ASX Small Ordinaires Accumulation Index (XSOAI) falling by -13.09%, the worst month of performance since the onset of COVID-19 in March 2020. The NSC investment portfolio outperformed the benchmark in June by +5.18% after returning -7.91%, and pleasingly has outperformed the XSOAI over the 1-, 2-, 3-year & inception time periods. There was a reasonable amount of investment specific news flow during the month, with an FY22 trading update from COG Financial Services (ASX: COG), an updated investor presentation from Big River Industries (ASX: BRI), and an update provided around the sales process of Gentrack Group (ASX: GTK) customer Bulb Energy, which is currently under the control of the UK Government.

BRI released an investor presentation to coincide with a site tour of three BRI sites in and around Melbourne which we attended. Although no singular point in the presentation deck was significant in its own right, there were a few key points in the release which provided more detail than previously. Firstly, FY22 revenue is expected to be ~$400 million which implies a 2H revenue of $206 million compared to $194 million in 1H FY22. Management also stated that they are targeting a sustainable 10% EBITDA margin and provided more clarity around net working capital to sales targets, and minimum return on funds employed hurdles. Finally, more granularity was provided around the network expansion potential of the business with the ambition to expand the current network of 23 sites by a further 12 sites, which in our view arguably provides a medium-term revenue ambition of >$600 million with EBITDA of >$60 million.

COG provided FY22 NPATA guidance of between $22.4 - $23.9 million, a significant increase on the $17.7 million NPATA profit achieved in FY21 (on an underlying basis). What we found of more interest was the detail around the composition of this NPATA, with 35% derived from COG owned finance brokers, 26% via the aggregation network and 9% and 6% from funds management activities and insurance broking respectively. The balance is made up of lending, the stake in Earlypay (ASX: EPY) and head office costs. This granular information has not been released previously and highlights that 75% of COG earnings are derived from capital light earnings streams and are somewhat repeatable in nature. The insurance broking and funds management earnings streams are still very much in their infancy, but in the case of insurance broking management have previously stated this has the potential to be ~50% of the NPATA derived from finance broking.

Early in July COG also announced the acquisition of a Queensland based broking firm via their subsidiary QPF. This highlights the significant opportunity that exists for COG to acquire high-quality brokers which they are familiar with through use of the COG aggregation platform; a similar model to Steadfast Group (ASX: SDF) acquiring member brokers.

Finally, in the UK press, a few articles were released regarding the sales process of Bulb Energy, which is a sizeable GTK customer. The list of engaged participants has reduced to just two, namely Octopus Energy, a large shareholder in GTK competitor Kraken, and a Middle Eastern energy company. The process was due to be finalised on Friday the 1st of July but at the time of writing no update had been provided.