NSC Investment Report NTA March 2021

The NSC Investment Portfolio returned +4.51% for the month of March, outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which increased by +0.79%. March was a significantly less eventful month relative to February which brought with it half year reporting for the entire investment portfolio. There were no significant negative detractors to portfolio performance in March, and four investments contributed more than 1% to the monthly return. The only notable event across the portfolio was the addition of two new investments which we believe in time could become core holdings, albeit they are both currently small positions due to liquidity constraints. The first quarter of CY21 has been highly volatile, not in terms of overall index movements, but more so due to the significant industry and style rotation we have seen recently. We would argue that this volatility has led to the mispricing of some businesses which we believe can generate significant compounding returns over the long term, and with substantially less downside risk then many of their counterparts.

In the case of the first of the new positions we have added to the portfolio, we believe this opportunity has arisen for two main reasons; the first of these is due to a founding shareholder selling a part of their holding at a sharp discount, and secondly the business being caught up the wider technology selloff despite having a maturity profile similar to other technology businesses that have operated in Australia for over 20 years. Regarding the second investment we have added, this opportunity has arisen in part for more directly company specific issues. The business acquired another listed entity in an all-scrip deal approximately 12 months ago, which resulted in a significant amount of new shareholders entering the register who may not have been keen to remain as shareholders of the new merged entity. To make matters worse the investment strategy of the business has not been as high conviction and simple/transparent as in previous years. This has arguably provided shareholders with enough motivation to leave the larger merged entity regardless of whether or not the business was over or undervalued at the time. Hopefully over the next few months we can add significantly to these investments and provide more detailed commentary on both positions.

In the previous investment update we spoke in detail about three of our core investments and their respective 1H FY21 results. One of the businesses which we did not touch on was Eureka Group Holdings (ASX: EGH) which was been one of the best performing NSC investments with a total return (including dividends) of +180% in 24 months. Clearly the market has re-rated EGH from what we have said for some time were undervalued levels based on basic metrics such as FCF yield and asset capitalisation rates. Even after this re-rating we firmly believe that the future for EGH has never been more promising, and hence we expect EGH to remain a core part of the NSC portfolio going forward. The asset class in which EGH operates remains one of the last real-estate sub-classes that has not been institutionalised. This provides EGH with a significant first mover advantage from an industry consolidation perspective to acquire and build new assets, and potentially the opportunity to implement a scalable strategy such as the funds management model employed by large real-estate players such as Dexus and Charter Hall, to generate scale in an efficient manner. If EGH can execute on such a model, then in our view the runway for future growth could last for at least another 5-7 years.