February 06, 2023
Commentary: NCM Income Growth Class
On February 6, 2023, Portfolio Manager Alex Sasso provided an update on NCM Income Growth Class including details on two highly compelling positions in the portfolio.
Hi, everybody. Today is February 6, 2023. My name is Alex Sasso, manager of the NCM Income Growth Fund. The NCM Income Growth Fund is a small-mid cap dividend focused fund. We have a small 13% fixed income weight, mostly focused on double Bs and triple Bs corporates. The yield on those is 4.8%. The duration is 3.8 years. On the equity side, we have 28 positions and our top ten make up about 37% of the fund.
Financials, industrials, energy, they make up the biggest sector weights. Note that the energy weight is made up of a few companies that are not dependent on the price of oil and gas to go up. On the financial side, I'll talk about a company that we recently added. It's a company called Canadian Western Bank. The bank specializes on catering to what I would call the mid-market business.
Now, if you think about Canadian Western Bank, their revenues in 2008 were about $240 million. Now we're 14 years later and revenues are greater than a billion. So you can see that the company is growing rapidly. Loan growth over that time period has had a compound annual growth rate of about 11%. And then we've also seen that the bank branch deposits are growing about 16% per year, outperforming the big six banks, yet their deposit costs are lower.
And that's what we really like, that their deposits are growing faster and their deposit costs are lower. It's very impressive growth, in my opinion, for a bank. And it's not just in the West that they're growing, even though their name is Canadian Western Bank, Ontario has been accelerating for them with 14% loan growth over the past five years.
Now, at the December Investor Day, which is only a few weeks ago, they had been talking about some of their targets for ‘23 and ’24. This is where I became pretty excited about the prospects for this company. Now, those investor targets talked about income growth of 10% and a return on equity of 12%. A return on equity of 12% might not sound all that impressive, for a bank, it's impressive.
And they're currently at around 10% return on equity. Now, with regards to loan loss (credit) performance, they have had a long history of very low net write offs as a percent of average loans, and over the past 15 years they've averaged about 16 basis points. So very low number and ‘22 calendar - sorry, it might be fiscal or might be calendar, I can't remember - but their ’22 number came in at around 7 basis points.
So I really like that relatively new addition to the fund. Now switching gears here, let's talk about a position that we recently added to. It's a company called Dexterra Group. So I don't think I've talked about this position recently, so I thought I'd give you just a quick insight into the reasons why we think that this company is mispriced by the market despite its recent underperformance.
So what does Dexterra do? Well, they have about 8,500 employees in three different divisions. And I'll just quickly talk to you about the three divisions. The first is called workforce accommodations. So think of remote camps for the natural resource sector. In this division, we see really strong occupancy growth and asset utilization, and that provides them higher rents. Think of a hotel and what happens as the hotel starts to fill up, they start raising prices and it provides better margins.
Now the second division is called Modular Solutions. They build modular buildings with all the customization capabilities, the same architectural appeal and meeting all the same building codes. But they do it in half the time, and that's really their competitive advantage. Here, we're seeing strong backlog and we're seeing improving margins. Okay. So let's talk about the third division.
And the third division is called what they call facilities management, or I should be more specific, integrated facilities management. Now here they provide cleaning and janitorial services, technical and trade services. They provide food services, staffing services, etc.. Now, this really caters to government clients, educational clients, retail, health care industries, etc., etc. Really strong backlog. And this division has really been plagued by high inflationary cost pressures, which we think are fading, and so we're expecting margins to improve here as well. Stock looks really cheap to us at 11 times price earnings ratio and a free cash flow yield of around 17% is expected for 2023. That's another reason why we like this, because free cash flow yield is one of our favorite measures and that's how it came up in our quant work.
And then we rolled up our sleeves and did the fundamental work on it. Now, NCM Income Growth to me is a really unique product in the marketplace. Very high active share in a category where many of the funds look very similar to the index. And this to me could be really visible through the fund’s attributes. So again, these are January 31st attributes, but NCM Income Growth’s trailing price earnings was 11.3 times versus the TSX at 14 times. Our trailing price to cash flow is 5.6 versus the TSX at 7.9, showing that the holdings in the portfolio offer better value than the overall broad index.
Yet our earnings surprise measures, our estimate revision numbers and what we call our quarterly earnings momentum all show much better than the TSX. And of course the free cash flow yield, which in my in my opinion is one of the best predictors of future stock price movements for the fund is 8.59% versus 5.1% for the TSX.
I'll leave it there if you have any other questions on the Income Growth fund, please reach out to your local NCM salesperson at firstname.lastname@example.org.
The information in this video is current as of February 6, 2023 but is subject to change. The contents of this video (including facts, opinions, descriptions of or references to, products or securities) are for informational purposes only and are not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. The communication may contain forward-looking statements which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Alex Sasso, CFA
Chief Executive Officer and Portfolio Manager of NCM Small Companies Class and NCM Income Growth Class.