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NCC cash generation is standout in the cybersecurity world

Top-line growth has only been steady but the cash generation provides security
NCC cash generation is standout in the cybersecurity world
  • Improving gross margin shows pricing power
  • Sales issues undermine revenue for software resilience

NCC (NCC) has two parts to its business. Software resilience, which helps get clients’ software up and running if their provider fails, and Assurance, which is a cybersecurity consultancy service. In June, it made a $220m (£163m) acquisition of US software resilience business IPM, which will give it more exposure to financial clients across the Atlantic. 

Excluding the acquisition, overall revenue increased 7.2 per cent on a constant-currency basis. This was driven by 8.8 per cent growth in the Assurance business, which offset the 3.3 per cent shrinking of software resilience. Management has put the software resilience underperformance down to issues retaining “sufficient sales resource”. NCC has invested in marketing automation and is expecting performance in the second half to improve.

Staff retention has been a wider issue, not just in sales. The pandemic has led to a higher turnover of staff across all digital businesses and attrition at NCC has increased from 17 per cent to 21.6 per cent. This will lead to inflation in staff salaries. The improvement in gross margin of 2.3 percentage points is therefore a promising indication that it can pass some of these costs onto customers. Management is planning to raise prices as contracts come up for renewal.

The 99 per cent cash conversion is the standout aspect of the business. Broker Peel Hunt says that “no other cybersecurity beneficiary is yielding 11 per cent FY23 FCF”. Given this cash generative ability and exposure to a growing market, the consensus 12-month forward PE ratio of 17 looks affordable. Buy.

Last IC View: Hold, 314p, 15 Sep 2021

NCC GROUP (NCC)   
ORD PRICE:215pMARKET VALUE:£667m
TOUCH:215-216p12-MONTH HIGH:348pLOW: 208p
DIVIDEND YIELD:1.5%PE RATIO:69
NET ASSET VALUE:88p*NET DEBT:39%
Half-year to 30 NovTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2020 (restated)1369.702.401.50
20211508.401.901.50
% change+11-13-21 
Ex-div:17 Feb   
Payment:4 Mar   
*Includes intangible assets of £113m, or 37p a share