NSC Investment Report NTA May 2021

Market Insight

The NSC Investment Portfolio returned +6.52% for the month of May, outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which increased by just +0.27%. From an investment portfolio perspective this brings the NSC performance to +8.96% p.a. and pleasingly the portfolio has outperformed the benchmark XSOAI over 1 year, 2 year, 3 year and inception time periods for the first time since its inception. The main contributors to monthly performance were Big River Industries (ASX: BRI) and COG Financial Services (ASX: COG) which increased by ~+27% and ~+13% respectively, the main detractor was Enero Group (ASX: EGG), which fell by ~-14% in the month. From a news flow perspective Over the Wire (ASX: OTW) announced they have become a tier 1 voice carrier network, and we significantly reduced our holding in EGG.

NSC sold a significant portion of its holding in EGG, which has been one of our best returning investments since inception of the investment portfolio and has been a holding across NAOS portfolios for over 8 years. As an NSC investment the EGG share price has appreciated from roughly $1.00 to $2.80 and has also paid over 20cps of fully franked dividends. Over recent times EGG has seen its profitability margins rise to levels that are almost unheard of in the world of advertising agencies and completed 3 complementary and well-run acquisitions in Australia, US and the UK. We would argue that people are the ultimate drivers of these businesses, and they tend to feed off the momentum that they currently have. From a momentum perspective it would be hard for EGG to be in any better place as they have a fantastic group of clients across numerous geographies and business units. Having said that, over the past 12-18 months a significant amount of key staff churn has occurred with the Chairman, CEO and CFO all departing the business. EGG has also been the beneficiary of a very low tax rate coupled with a significant net cash balance sheet which has allowed it to internally fund acquisitions. Going forward we believe EGG will have fully utilised their tax losses which will provide an earnings headwind at the NPAT level and the ability to internally fund acquisitions that can move the dial on a larger EBITDA base has also reduced. As such, we believe from a risk reward perspective the outcome is balanced at best and even though we believe the short-term prospects for the business are sound, in the world of advertising and PR things can change at very short notice.

OTW announced they have become a nationwide tier 1 voice carrier network, a significant milestone which puts OTW alongside Telstra, Optus, TPG, Vocus & MNF Group as a tier 1 network carrier. Given the high barriers to entry in becoming a tier 1 voice carrier and large addressable market, we believe this has increased OTW’s overall competitive advantage. Having their own network has the potential to provide OTW with numerous strategic benefits. Firstly, OTW could shift their existing customers’ traffic from other networks onto their own network and enjoy cost savings. Secondly, opportunities exist for revenue synergies through the customer base of their Fonebox/Zintel division as the majority of these 9,000 customers currently buy voice traffic from other providers. Thirdly, the global shift to VoIP will open up new short/medium/long customer opportunities that were potentially not available beforehand, namely amongst the high growth UCaaS, CPaaS and CCaaS companies who look to partner with best of breed voice networks to host their voice traffic.

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