Cyber security specialist NCC hit by Big Tech slowdown

It has been a tough year for cyber security company NCC (NCC) and, while its difficulties have been flagged in multiple trading updates, its full-year results still don’t make for easy reading. 

Group revenue edged up only marginally at constant currency in the year to 31 May, while profitability collapsed. On an adjusted basis, operating profit fell by 40 per cent from £48.1mn to £28.8mn. Demand was a big part of the problem: the year was filled with buying decision delays and cancellations in the North American tech sector and, to a lesser extent, in the UK market. This coincided with fewer staff departures, meaning productivity came under serious pressure. People and training costs also rose due to inflation. 

NCC’s statutory operating profit was even worse, however, at just £1.9mn – 95 per cent lower than in 2022. The main reason for this was £14.7mn of “individually significant items” including a £9.8mn impairment in the North American assurance business and £4.2mn of reorganisation costs. 

The big question for investors is what happens next. Management said 2024 will be a “period of considerable change” for the group, which is targeting a “modest improvement” to its adjusted operating profit next year. The situation should be helped by rising cyber threats, but there is still uncertainty around how Big Tech budgets are evolving. 

NCC’s lack of defensiveness has come as an unpleasant surprise, and visibility is poor when it comes to its recovery. However, with a forward price/earnings multiple of 16.7, it is cheaper than it has been for a while, and Peel Hunt estimates it is trading at a 33 per cent discount to cyber and consulting peers. Meanwhile, there should be an abundance of structural growth opportunities in the medium term. A cautious buy.