Commentary: NCM Small Companies Class

Transcript:

Hello, everybody. Today is February 6th, 2023. My name is Alex Sasso manager of the NCM Small Companies Fund. Some of the stats I will be quoting today will be as of the previous month’s end on January 31st, 2023. So we're talking about the NCM Small Companies fund. We have about 38 holdings currently. Some positions are relatively small. We're transitioning out of some of those.

Our top ten currently make up about 40% of the portfolio. And traditionally we run around 30 to 35 names and our top ten makes up between 40 and 50% of the fund. Now the fund is 100% weighted towards Canada. Energy makes up 22% of the fund. Bear in mind that we have some names in the energy sector that aren't influenced by the price of natural gas or the price of oil.

One of them is called North American Construction Group. The other one's called Parkland Industries. And then we have a relatively new name called Shawcor at a 2.7% weight. I would characterize all three of those as independent of the energy price. And so that makes the true energy weight in the portfolio around 14%. Industrials make up 18% of the fund.

The only change here is we added Ag Growth. It's a new position in the fund Ag Growth. Now, Ag Growth is, what do they do? They're a supplier of what I would call farm infrastructure equipment, different equipment and technologies in 31 different manufacturing plants across the globe. They do about $1.4 billion in sales and about $225 million of EBITDA.

EBITDA’s just a measure that we use to judge the earnings of the business. Now, our thesis is that global food security has become of importance for every government around the world, post Russia's invasion of Ukraine. And as many of you know, when many of you heard me say the invasion really put a spotlight on the importance of not just energy security, defense security, but very importantly, food security.

Now, recall, Ukraine and Russia together are the world's biggest producers of wheat. And if I remember correctly, that number comes in around 30% of the worldwide production of wheat, 20% of the worldwide production of corn. And I think the sunflower oil production number is 60%. So they're significant players, and it's made every government around the world focus in on this issue that they have.

Now, you have a growing worldwide population. You have increasing importance of green trade. And, you know, you have to reduce spoilage. There's a need to improve crop yields. These are all things that Ag Growth does really, really well. So we're excited about this new position. As I mentioned, it did $1.4 billion in sales last year. Now, back in 2014, they did $400 million in sales and in 2020 they did about a billion in sales.

So you can see that trajectory’s a really nice, rapidly growing trajectory. EBITDA was $78 million in 2014, in 2020, EBITDA was $149 million, as I said, in 2022, EBITDA was $228 million. Now, the geographic mix is, if I remember correctly, about 45% U.S. 20% Canada, Asia-Pac comes in around 10%, South America around 15%, and EMEA comes in at around 10%.

And really what they want to do in their growth plan is to increase the proportion of business that they do with emerging economies. And over the last couple of years, they've really spent a lot of a lot of money growing the marketing side of their business in those parts of the world.

Now, they recently had an Investor Day. They provided a lot of colour on their growth strategy. As I mentioned, they really want to grow the EMEA side of their business. And in the developing markets, they really want to increase margins and we are expecting them over the next couple of years to increase margins from 14% in the most recent quarter to their target of 17%. And they want to deleverage the balance sheet and all of those things will really help the stock price.

Now, getting back to the industry weights, consumer discretionary makes up about 35% of the fund. Aritzia is around 3.8%, Martinrea is around 4.7%. Pet Valu and BRP, which is Bombardier recreational products, both come in at about 2.5%.

Now the other notable weight is materials at 21%. Here, our biggest position not just in this sector but in the portfolio is a company called Major Drilling. I've talked about this in the past, but they're a leading provider of specialized drilling services to the mining industry. They have about 600 rigs. Now, in my opinion, they're really well positioned to participate in what I'm going to call a multi-year drilling upcycle.

If you think about the products they drill for, one is gold, the other is copper. And there's a third growing sector is rare earth metals that are used in electrification of everything, particularly vehicles. So they may just become the drilling contractor of choice. They've kept a pristine balance sheet through the down cycle. We're coming into the upcycle here.

76% of their customers are seniors and intermediates. Now what we've seen amongst these seniors and intermediates is we've seen their reserves drop by about 35% over the past decade. And that's obviously a big, big issue for them. And if you think about it in an industrial company analogy, it's like losing 35% of your manufacturing capacity or 35% of your manufacturing plants. Obviously, a big issue for companies, some of which are extremely profitable. So there's a focus on growing and making up for some of these deficits that we've seen over the last little while.

From a copper perspective, we have the same issue. And in order to make up some of the copper supply deficits going out the next decade to 2030, we need eight new mines the size of BHP’s Escondida mine. Now, that might not mean a lot to a lot of people out there, but Escondida is the world's largest copper mine and we need eight of them. And so I think I think Major Drilling is very well positioned.

Let’s transition a little bit and talk about some of the metrics of the fund. As I mentioned the metrics are as of the end of January. The fund’s trailing price earnings ratio is 13.1 times and ten times on 2023 numbers. Very, very strong and attractive valuation metrics. The price to cash flow is 4.9 times. The expected return on equity is 18.4% and the return on invested capital is 15.8%. All much better than the benchmark.

Earnings surprise is a positive two and a half percent, and our earnings momentum, what we call our quarterly earnings momentum, is 8.3%. Again, all significantly better than the benchmark. And one of my favorite metrics, as you guys know, is free cash flow yield at 7.6% and the benchmark is 3.6%. Why don’t I just leave it there.

If you have any other questions on the NCM Small Companies fund, please reach out to your local NCM salesperson at sales@ncminvestments.com.

Disclaimer:

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.