NCC Investment Report NTA February 2022

For the month of February, the NCC Investment Portfolio fell by -3.00% against the benchmark S&P/ASX Small Ordinaries Accumulation Index (XSOAI) which fell by -0.01% in another extremely volatile month for domestic equities. The NCC Investment Portfolio has now returned +12.15% p.a. since inception in February 2013, significantly outperforming the XSOAI which has returned +6.52% p.a. over this time. As expected, February was a very eventful month with all bar one of the NCC investments releasing their 1H FY22 results. In our view, the majority of results were very strong and importantly sets these businesses up for further growth over the next 12-24 months. Despite this, the share prices of many of the NCC investments were relatively unchanged or down for the month of February. Those companies which in our view fall into this category included Saunders International (ASX: SND), COG Financial Services (ASX: COG) and Big River Industries (ASX: BRI). The only negative result came from BSA Limited (ASX: BSA) which we elaborate on below.

SND announced their 1H FY22 result, after pre-releasing 1H earnings guidance in late January. As expected, SND produced a stellar result with the financial metrics in line with the pre-released figures. Cash flow was again excellent, the balance sheet has no bank debt and cash of circa $30 million, and full-year FY22 guidance was upgraded for revenue between $115-$130 million and EBIT margins of ~7%. Looking to the longer-term, SND is now tendering on a record amount of work with an estimated value of ~$1 billion. The SND share price for the month of February fell ~-2%.

COG Financial Services (ASX: COG) announced a capital light acquisition that we believe should increase NPATA by approximately +10% on an annualised basis, as well as signing a term sheet for an inaugural acquisition debt facility of $31 million. The 1H FY22 result was pre-released with the previous month’s trading update, which saw EPSA increase by ~+16%. Pleasingly COG also declared a record 3.50 cents per share interim dividend. The COG share price finished flat for the month.

Big River Industries (ASX: BRI) posted a record profit with earnings per share increasing over +100% on the prior corresponding period due to strong organic growth in the core business as well as the more recently acquired businesses. This has led to a significant de-leveraging of the business with net debt to EBIT now ~2 times. The strength of this result also resulted in BRI declaring a record interim dividend of 5.50 cps. Following the result, the share price increased by ~+7% yet BRI is still on a p/e multiple of <11 times FY22 earnings, a 40% discount to other listed building materials businesses.

BSA was again the major disappointment of the reporting season, releasing a result that was in line with the previously downgraded trading update. Looking forward we still believe that there is a clear and realistic path to restoring and achieving fair value for our investment in BSA. Listed peer Service Stream (ASX: SSM) demonstrated at their 1H FY22 result that COVID has had little impact on their business, and they were able to extract reasonable margins in work from clients such as NBN Co. (which is a major BSA client). BSA reported revenue of >$210 million for 1H FY22 which in our view is of sufficient scale to generate reasonable margins. The BSA client base now includes the likes of TPG Telecom, Telstra and Aldi to complement NBN Co. which for many contracting businesses would be considered a tier-1 client list. Execution is key for BSA to restore value and in our view the macro backdrop for the services that BSA provide will remain strong for at least the medium term.