NSC Investment Report NTA May 2022

Market Insight

After outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) by >9% in April, the NSC Investment Portfolio underperformed by -2.23% in May after returning -9.24% compared to the XSOAI which fell by -7.01%. Pleasingly, the NSC Investment Portfolio has still significantly outperformed the XSOAI benchmark over the previous 1, 2 and 3-year periods.

There were two significant updates from our core investments in the month, the first of these was from Big River Group (ASX: BRI) which provided a positive trading update leading into the FY22 results. Secondly, Gentrack (ASX: GTK) released their 1HFY22 results which we believe highlight not only the significant potential that this business has over the longer term, but also significant confidence around the growth in EBIT we expect over the next 2-3 years. Frustratingly, even with what we believed to be two positive updates there was not one investment which made a meaningful (>0.50%) positive contribution to performance and 5 of the core investments had a >-1% detraction to performance.

To highlight some of what we believe to be irrational movements in the share prices of our investments that we saw in the month, BRI was the largest detractor to performance even after upgrading FY22 guidance and trading on a price to earnings ratio of <9.50 times FY22 post tax earnings.

Clearly, investors are reducing their exposure to emerging companies (small and micro-cap businesses) and at a very high level, which can be seen by the ~-7% decline in XSOAI compared to the S&P ASX-100 Accumulation Index which fell by just by -2.19%. Based on our past experiences this may continue for some time especially as many institutional investors seek to maintain high levels of liquidity to fund any current or potential investor redemptions together with emerging companies no longer forming part of their investment strategy due to their overall small exposure to such investments as well as the perceived high-risk nature of such investments. We can’t control such events but as an investment team we can control the type of investments that we make and position the Investment Portfolio in a manner that we consider will best maximise performance in times where significant macro events may occur. To highlight how NAOS puts this into action, set out on the following page are some key investment metrics:

• FY22 EBIT: $24.31 million

• Net Debt: $17.11 million

• FCF Yield Pre-Capex: 10.42%

• Insider Ownership: 9.80%

• EBIT Growth FY22: 44.60%

• Dividend Yield: 3.81%

*Figures are based on NAOS’ internal estimates and views

As mentioned earlier, BRI announced that trading conditions have been strong with FY22 full year profitability tracking at the upper end of guidance. As 2HFY22 guidance was originally slightly below 1HFY22 EBITDA, we now assume this to mean at least inline or slightly above the 1H22 result. At the NPAT level this could, in our view, imply a FY22 NPAT of ~$20 million or EPS of ~25cps. This EPS compares to a share price of $2.27 at the end of May which implies a P/E of just 9.36 times.

Finally, GTK released a result that was in line with their previous guidance provided over six months ago. The highlight in our view was the underlying growth rate of ~24% when factoring in customers lost due to the “Supplier of Last Resort” process. Gary Miles (CEO) and his team have only had 12-18 months to implement their strategy so to see such top line traction should in our view, give investors confidence that they can continue to successfully execute on their stated strategy. Many onlookers of GTK remain sceptical of their margin ambition but in our view, this is more than priced in and if the FY24 ambitions prove correct, we believe GTK has the potential to be >$3.50 compared to $1.52 at the end of May.

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