NSC Investment Report NTA October 2021

After 3 consecutive months of relatively flat returns the NSC investment portfolio produced a much-improved performance in October, finishing the month up +4.15% and outperforming the benchmark S&P/ ASX Small Ordinaries Accumulation Index (XSOAI) which increased by +0.92%. October was full of noteworthy events across the NSC investment portfolio, most notably from Over The Wire Holdings (ASX: OTW) which confirmed that they had received a non-binding indicative offer from Aussie Broadband (ASX: ABB). Big River Industries (ASX: BRI) provided a very resilient and upbeat trading update at their AGM and COG Financial Services (ASX: COG) provided a Q1 trading update as well as completing a capital raising to increase their ownership interest in two non-wholly owned subsidiaries.

OTW announced that they have received a non-binding indicative offer from ABB to acquire all OTW shares for a total consideration of $5.75 per share consisting of a combination of cash and ABB scrip. This process is still preliminary in nature and incomplete and OTW expect the process to be finalised by the end of November. We believe that by combining the two businesses there will be significant revenue and cost synergies but more importantly it will create a true competitor to the likes of Vocus, Optus and Telstra in regard to their SME and enterprise offerings. As ABB have been at pains to articulate, their next leg of growth will be predominantly from these types of customers, and they have already started to build out their product and service offerings. In our view, acquiring OTW this accelerates their strategy by 2-3 years and gives them access to a customer base which includes the likes of Brisbane City Council, Eagers Automotive (ASX: APE) and Nova Radio. Time will tell whether the deal goes ahead but we think there are significant merits of being a shareholder in the combined entity and this is before factoring in other “soft” considerations such as the significant free cash flow generation and potential inclusion in the ASX 200.

BRI provided what we believed was a very upbeat trading update at their AGM in late October. FY22 revenue is now expected to be at the top end of the previous guidance i.e., ~$350 million, and this figure does not allow for any contribution for the recently acquired United Building Supplies which could add another ~$10 million revenue for FY22. Notably the company also stated that not only has there been strong demand from segments relating to infrastructure and new homes, but multiresidential and commercial sectors are also showing signs of growth which the company expects to flow through in FY23.

Finally, COG completed a $20 million equity raise to fund the acquisition of a further 25% stake in Westlawn Finance Group (taking their ownership to 75% with an option to go to 100%) as well as the final 30% in Platform Finance Group to take their ownership level to 100%. We estimate the acquisitions will be >10% accretive on an EPSA level, given they are on terms agreed several years ago when the original acquisitions were made. Having said this, we believe the board decision to raise equity to fund these acquisitions was a poor and illogical decision. COG has moved to a predominantly broker and distribution model which is capital light, and together with the run-off of the legacy lease book the business generates a significant amount of free cash, so we would argue the capital raising was unnecessary. We also believe the 17% stake in Earlypay (ASX: EPY) is a poor allocation of capital in the absence of a stated intended strategic outcome.