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NCC awaits for the secular growth story to kick in

Trading volumes at the escrow and cyber security group were constrained, as businesses put spending commitments on ice due to repeated disruptions in the economy
NCC awaits for the secular growth story to kick in

 

  • A major acquisition post period-end
  • Inflationary pressure an issue in FY 2022

Prior year profitability metrics for NCC (NCC) have altered markedly due to a change in accounting policy linked to the treatment of cloud configuration and customisation costs. So, it isn’t automatically clear the extent to which trading conditions have improved since the interims, when we concluded that corporate spending commitments on cyber security didn’t reflect the growing scale of the problem.

Even if businesses have become less risk-averse as the impact of the pandemic has moderated, the group admitted that spending on critical areas like cyber security only normalised towards the end of the year, as sales volumes were held in check due to widespread lockdowns and restrictions. However, it would be reasonable to assume that spending commitments have been delayed, rather than canned outright.

Under the re-jigged accounting treatment, gross profit was up by 5.9 per cent to £110.6m on a 1.3 percentage point increase in the underlying margin. Cash management remains a strong point, evidenced by a conversion rate of 88.2 per cent, though net debt is now equivalent to 28 per cent of shareholder funds following the £157m post period-end acquisition of Intellectual Property Management (IPM), the Software Resilience division of Iron Mountain (NYSE: IRM).

Management rightly points out that the growth of ransomware attacks means that “cyber resilience is no longer optional for any organisation”. NCC trades at 26 times FactSet’s adjusted consensus earnings for FY 2022, a relatively modest rating given prospects for the sector, but profitability could be constricted through inflationary pressures as well as “a resumption in travel and office usage”, along with an anticipated £2.5m in integration costs for IPM. The shares have momentum but we take a conservative view. Hold.

Last IC view: Hold, 265p, 04 Feb 2021

NCC (NCC)     
ORD PRICE:314pMARKET VALUE:£ 969m
TOUCH:313-315p12-MONTH HIGH:348pLOW: 169p
DIVIDEND YIELD:1.5%PE RATIO:87
NET ASSET VALUE:86p*NET CASH:£49m
Year to 31 MayTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2017215-44.8-17.04.65
201823311.74.404.65
201925117.84.904.65
2020 (restated)2649.602.304.65
202127114.83.604.65
% change+3+54+57-
Ex-div:14 Oct   
Payment:12 Nov   
*Includes intangible assets of £204m or 66p a share