NSC Investment Report NTA September 2021

For the month of September, the NSC investment portfolio delivered a negative return of -0.77%, outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which decreased by -2.14%. From a contribution perspective the only investment to contribute more than 1% during the month was Over The Wire Holdings (ASX: OTW), although this was on no company specific news flow. Conversely the only investment to detract more than -1% was BSA Limited (ASX: BSA), again on no company specific news flow. There was just one announcement of any significance which was came from Gentrack Group (ASX: GTK), who provided a profit upgrade for FY21 as well as a revenue upgrade to FY22 forecasts.

GTK have a September financial year-end and provided FY21 results guidance ahead of the release of their full-year results in November. Pleasingly both the revenue and EBITDA forecasts were ahead of consensus expectations by 5% and 20% respectively. The company stated this was predominantly due to new customer wins, greater throughput and a lower-than expected R&D spend due to supply constraints. We view this as a very commendable result especially against the backdrop of the current B2C market, which is under significant strain, and has seen many recent market entrants cease trading due to a significant increase in wholesale gas prices. To put this into perspective there were 49 energy suppliers at the start of September and this number had reduced by 7 in the space of just a month. Management also stated that FY22 revenue is expected to be higher than that of FY21. Over the past 12-24 months GTK has lost several clients for a variety of reasons and as such many expected FY22 revenue to be lower than that generated in FY21. Although it is still early days, for what is generally a very conservative management team who have historically not provided the most detailed disclosure, we believe this shows that the strategy of improving the technology, increasing market share and expanding into new geographies could be gaining traction. The FY21 results will be released in late November, and we believe that if management were to provide more disclosure around the revenue profile such as the split between B2B clients vs. B2C as well as revenue by geographic region this would allow the market to gain a greater understanding of the business and appreciate the diversified nature of GTK and the defensive nature of the revenue base.

Looking forward, we believe that a number of catalysts exist across the investment portfolio, some of which we expect to occur over the remainder of FY22. We believe that a significant amount of groundwork has been executed upon throughout the period of lockdown and that as some of the major states open over the coming months this will enable these plans and strategies to be enacted upon. The forthcoming annual general meeting (AGM) season in late October and November will be extremely important as it will allow many companies to update the market in regard to trading conditions in what is expected to be a difficult Q1. It will also allow them to provide commentary on the outlook post the easing of lockdowns and whether or not this will translate into a much-improved 2H FY22 as many expect. The demand environment may improve significantly but we expect there will continue to be issues related to supply chains and staff shortage issues which will impact profitability and growth rates across many industries.