BULL POINTS:
■ In the cyber-security sweet spot
■ Orders 25 per cent up this year
■ Highly cash generative
■ Unbroken earnings-growth record
BEAR POINTS:
■ IT budgets under pressure
■ Staff may be poached
If you want to play a big theme look no further than IT testing specialist NCC, because it sits smack bang at the heart of the 'cyber crime' sweet spot. Back in October, the UK government said that cyber crime is now one of the biggest risks to national security, so, in spite of spending cuts elsewhere, it has earmarked an extra £500m to safeguard computers in key defence, infrastructure and economic assets.
Manchester-based NCC provides high-end IT testing and assurance services to big organisations. In other words, its skilled techies do their best to hack computer systems and steal data right from under the nose of clients, just to see how feasible it is. Performing rugged checks on company websites and e-tailing systems - such as checking that they can handle the bursts of traffic that come in the Christmas run-up - is one example, but NCC also can help fight far greater threats from increasingly sophisticated hackers and cyber criminals.
IC TIP RATING | |
---|---|
Risk rating | Medium |
Timescale | Long-term |
What do these mean? Find out in our |
NCC has been rapidly building its testing arm both internally and via acquisition. Two deals - Meridian and SDLC - were completed last year and, in October, it paid £14.4m for iSEC, a US applications, networks and database-testing specialist. It was no secret that NCC wanted to add to its foothold in the US testing space and, while iSEC comes at what appears to be a pretty full price on around 14 times historic earnings, it has high growth potential. What's more, with offices in Seattle, San Francisco and New York, it gives NCC an instant US-wide presence and should help treble last year's £2m or so of US testing revenues instantly.
The other part of NCC's business is in escrow. It supplies a safety net to customer's IT systems by minding vital computer codes. This means crucial amendments can be made if an IT supplier goes to the wall, or simply stops providing support. NCC reckons the average large company uses around 20 software applications that are vital to its business. While the company is already the UK's biggest escrow supplier, with something like 90 per cent of the known market, market researcher Gartner has previously estimated the real UK market could be much bigger. Meanwhile, NCC reckons its global penetration is barely 10 per cent.
ORD PRICE: | 540p | MARKET VALUE: | £183m | |
TOUCH: | 530-540p | 12M HIGH / LOW: | 555p | 367p |
DIVIDEND YIELD: | 2.3% | PE RATIO: | 15 | |
NET ASSET VALUE: | 148p | NET DEBT: | 23% |
Year to 31 May | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
---|---|---|---|---|
2007 | 25.4 | 7.79 | 16.5 | 4.75 |
2008 | 35.7 | 8.69 | 18.9 | 7.00 |
2009 | 46.8 | 10.9 | 22.9 | 9.25 |
2010 | 53.7 | 13.2 | 27.9 | 10.75 |
2011* | 74.1 | 17.5 | 36.5 | 12.20 |
% change | +38 | – | – | +13 |
NMS: 700 MATCHED BARGAIN TRADING BETA: 0.1 *Altium Securities estimates (Profits and earnings not comparable with historic figures) |
NCC has shown itself to be a robust business, growing revenue, pre-tax profit and EPS every year since its shares were floated in 2004, while its dividend has risen from 2.5p to 10.75p. It has done this despite having to fight to recruit and retain top quality staff, which helps explains why its profit margins have been dipping. Still, NCC's latest comments suggest staff attrition is in decline, possibly thanks to its increasing size, which makes more career opportunities available within the firm.
...and you might want to consider... |
---|
Price: 1,939p ■ Leader in niche engineering markets ■ Does not rely on big capital spending projects |
Price: 859p ■ Sausage maker continues to produce storming results ■ Input costs set to stay steady |
Business between June and mid-October saw assurance revenues jump 51 per cent year on year, and rise 8 per cent on the escrow side; no mean feat given how hard it is to persuade finance directors to sign off on new IT spending. Orders are up 26 per cent and 13 per cent respectively at £17.7m and £2.5m, although this includes the effect acquisitions.