NSC Investment Report NTA October 2022

The theme of heightened market volatility continued in October, although somewhat unexpectedly, this volatility was to the upside with the S&P/ASX Small Ordinaires Accumulation Index (XSOAI) posting a rise of +6.46%, and its larger counterpart the S&P/ASX 200 Accumulation Index (XJOAI) increasing by +6.04%. It felt like a month when the NSC investment portfolio should have increased significantly based on the positive portfolio company updates released in October, but the share prices did not react accordingly and subsequently the investment portfolio fell by -4.66%, frustratingly giving up the outperformance generated in the previous month. There were numerous updates provided by the investee companies with COG Financial Services (ASX: COG), Big River Industries (ASX: BRI), MOVE Logistics (NZX: MOV) and Maxiparts (ASX: MXI) all providing trading updates or reaffirming guidance. Eureka Group Holdings (ASX: EGH) also provided updated guidance but only after they completed what we believed to be an ill-timed and poorly executed capital raising.

BRI held their AGM and provided the market with a detailed trading update for Q1 FY23, which in our view was pleasingly strong. Compared to the prior corresponding period, revenue, EBITDA and EBIT were up +33%, +62% and +84% respectively. Annualising these quarterly figures implies an EBIT figure close to $50 million, which compares very favourably to a market capitalisation of just $170 million. Despite this update the share price of BRI finished the month down, which we ascribe to very low levels of liquidity as well as concerns about how the macro environment may affect BRI over the medium term.

COG released a Q1 FY23 trading update and stated that NPATA had grown by +30%, albeit with a significant contribution from previously announced acquisitions. If COG is able to meet consensus FY23 profit estimates of ~$28 million NPATA, then this would imply COG is trading on an NPATA multiple of just 10 times, as the share price of COG also fell over the month of October.

MOV and MXI held their AGMs in October and we felt they both provided positive updates, albeit slightly lacking in detail. MXI reaffirmed their guidance for revenue growth of low double digits without providing any further quantitative commentary, and MOV stated that they expect profit to increase on the prior year result but again without providing further clarity. MOV did state that they expect most of their current initiatives to have a much greater impact on profitability in FY24 as opposed to FY23, which we believe may also be the case for MXI.

Finally, EGH announced a capital raising totalling $28 million at an issue price of $0.47 per share to fund two acquisitions. As the largest shareholder in EGH with a 22% shareholding we were disappointed on several fronts with the capital raising and elected not to participate. EGH has been a successful investment over the past 3 years but more recently management have issued two profit downgrades, which is surprising considering the rental nature of the income stream. These downgrades have come in large part due to significant staff turnover within the business as well as slippage around settlement times of announced acquisitions. In our view, we believed that the board and management needed to demonstrate to investors that they can drive consistent organic earnings growth prior to seeking further external capital. Frustratingly, the board and management have also spoken about a capital management plan that would clearly articulate the most efficient way to fund EGH going forward, but after two years no details have been released. We were also disappointed that no funding costs have been fixed over the past 6 - 12 months which has resulted in a significant increase in interest expense for the business. The EGH business is by no means broken but clearly the business must scale if it is going to achieve any leverage off its significant $8 million corporate cost base. EGH may well become the leader in their respective field, but in our view, management will need to demonstrate continued execution of strategy over the longer-term along with improved capital management.