NCC Investment Report NTA August 2022

As ever, the August reporting season was an exceptionally busy month, with the vast majority of listed companies releasing their FY22 results and some providing trading updates for the first two months of FY23. Pleasingly the NCC investment portfolio finished the month up +4.78%, significantly outperforming the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which retuned +0.58%. Since inception the Investment Portfolio has now returned +10.71 p.a., substantially outperforming the XSOAI which has returned +5.47% p.a. over the same period. Across the NCC investment portfolio, the standout results came from Big River Industries (ASX: BRI) and Saunders International (ASX: SND), both of which we will expand upon below. As has been the case over the past two reporting seasons much of the focus was on current trading conditions as well as the potential for significant market deterioration with an ever-changing and increasingly challenging macro backdrop. Many of the NCC investments will not be immune from such challenges. However, the core investments across the NCC investment portfolio operate in industries which we believe should provide a level of earnings support over the medium term. These investments also generally have a balance sheet structure that is of a more flexible nature to supplement their earnings over the medium-term and in some cases the resources to internally fund growth initiatives or acquisitions.

BRI produced the strongest result of the FY22 reporting season across the NCC investment portfolio. Revenue, EBITDA and NPAT were up +45%, 113% & 191% respectively, demonstrating just how strong the result was. Importantly, and unlike many of its peers, cash conversion was excellent which brought net debt levels down to $21 million and resulted in a record 10cps final dividend being declared. BRI now trades on a historical P/E of just ~9 times.

Clearly, many investors are unsure of the outlook for construction generally and how changes in the wider operating environment will affect the earnings of BRI over the short to medium term. In our view, BRI operates in a very large addressable market and should be well-placed to win work regardless of market conditions. BRI has arguably only just achieved a profit margin that is on par with some of its unlisted peers, and with the scale that BRI has, this should only continue to improve. We continue to believe that over the longer-term there is a significant consolidation opportunity for BRI in a market dominated by baby boomer owners. We see no reason why BRI cannot double its revenue base over the next 5 years and continue to grow its market share as its size and scale give it a significant competitive advantage over smaller operators.

Finally, SND produced a solid result in an environment that produced several challenges due to staff shortages, wet weather, and inflation in raw material costs. Like BRI, SND is also a business that has scaled significantly recently, which brings with it its own challenges. To highlight this from a staffing perspective the number of employees at SND has increased more than three times in the past 24 months as SND has continued to win significant contracts and expand its product offering. FY22 was a sound year but we believe this is just the start of the journey for SND to become a much larger, more diversified, and more profitable business. The live tender pipeline now stands at a record $1.3 billion with an order book of $193 million, even without a significant contract win since November 2021.