When I advised buying Aim-traded shares in Pennant (PEN:114p), a supplier of training and support products and services that train and assist engineers in the defence and civilian sectors, it was predicated on the belief that the directors would deliver a step change in profitability for the 2018 financial year, and could build on this momentum as contracts in the pipeline are converted into firm orders.
They are certainly delivering as a pre-close trading update ahead of the release of annual results on Tuesday 12 March 2018 confirmed that last year’s underlying pre-tax profits will rise by 57 per cent to £3.3m on 16 per cent higher revenues of £21m. On this basis, expect fully diluted earnings per share (EPS) of 9.2p. The order book at the year-end was £37m, but this excludes a contingent contract (worth £25m to £30m and deliverable over 2019, 2020 and 2021) for the design, build and delivery of training equipment for which Pennant has been down-selected. The directors believe it will be confirmed in the first half of this year.
It’s not the only major contract win; in late 2018 the Canadian government awarded the company a consulting services contract for the use of Pennant’s OmegaPS suite of software that provides analytics around logistics support and asset life cycles. The initial value of the two-year agreement is C$11.9m (£7m), rising to C$30m (£17.7m) if extended for five years. Importantly, industry drivers are supportive of further contract wins as defence forces and other organisations move towards outsourcing training services. The use of 'real' equipment for training has safety implications, is expensive and often impractical, thus underpinning demand for Pennant’s training aids. Also, new capital equipment platforms for land, naval, air and rail are becoming ever more sophisticated, thus increasing the requirement for training.
Pennant ended 2018 with cash of £2m, and has just raised £1.8m in a placing of shares, at 110p to make a small strategic acquisition that adds around £200,000 to operating profit, and for product development purposes. It has also sensibly doubled its overdraft facility to £3m, and can extend it to £4m if need be, in order to meet the working capital requirements of funding its large contracts.
True, the shares have pulled back to just above my 109p recommended buy-in price, but the investment case is actually stronger now than it was six months ago when I initiated coverage ('Pennant International: Poised for a return to growth', 13 Aug 2018). Moreover, there is major upgrade potential. That’s because a contribution from the aforementioned contingent contract hasn’t been factored into analysts’ EPS estimates of 10p for the 2019 financial year. On a forward PE ratio of 11, Pennant's shares rate a very decent buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
