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Pennant’s recovery on track

A small-cap company has won a valuable contract to supply simulated training systems for the British Army’s new Apache AH-64E helicopter fleet
Pennant’s recovery on track
  • Named key supplier by Boeing in connection with the “Major Programme” 
  • Contract worth £9m in revenue across three years

Pennant (PEN:35p), an Aim-traded supplier of products and services that train and assist engineers in the defence and civilian sectors, has been named as a key supplier by Boeing in connection with the “Major Programme” the UK company had highlighted in early December.

Analysts at brokerage WH Ireland expect that the £9m contract will be spread over three years. Pennant will supply simulated training systems for the British Army’s new 50 Apache AH-64E helicopter fleet as part of Boeing’s contract with the UK’s Ministry of Defence. 

In a pre-close trading update the previous day, Pennant had revealed that £10m of its £22m contracted order book is scheduled for delivery in 2022, so the additional Boeing contract increases revenue visibility materially – WH Ireland forecast annual revenue of £17m and pre-tax profit of £0.6m in 2022, reversing a £0.6m expected loss in 2021. In addition, a software and analytical services contract with a new customer in the commercial aviation sector has now been signed off and will contribute to the 2022 result. It will contribute revenue of US$1.1m (£0.8m) in its first year. The group’s software division accounted for well over a third of Pennant’s revenue last year and is reaping the benefits of cross-selling opportunities across an enlarged client base.

The shares have started to make headway from the 30p level when I highlighted the potential for an earnings recovery (‘An undervalued micro-cap on the road to recovery’, 22 September 2021). If the contract momentum continues to build, as I expect it will, then expect earnings upgrades to follow.

Importantly, unrealised tax losses of £4.5m carried forward will benefit future taxable profits to accelerate the earnings recovery for the £12.5m market capitalisation company, while net debt of £3.6m is set to be slashed when a £2m cash milestone on a legacy contract is invoiced in the first half of this year. Buy.

 

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