MGAM's costly digital breach

In April, when we covered Morgan Advanced Materials’ (MGAM) delayed full-year statement, the financial impact of a January cyber-attack on the business was unclear. It transpires that the incident resulted in £11.2mn in costs linked to system recovery and specialist support, along with roughly £800,000 in impairments on leased and owned IT assets.

The maleficence certainly put a one-off dent in earnings, but it also constrained production volumes through the first quarter of 2023, which, combined with the cost of the remedial actions, led to an overall hit of £23mn. We can expect further outlays linked to enhanced digital security and accelerated enterprise resource planning. The incident and the group’s response in its aftermath also fed through to a £37.1mn free cash outflow through the period under review.

Shareholders can take some comfort in the knowledge that the supplier of ceramic, carbon and composite products recorded a 2.6 per cent increase in organic sales at constant currencies. Management reassured investors that the temporary working capital outflow of £45.2mn would be “substantially recovered by year end”. It also reiterated that the outlook for full-year revenue growth remains unchanged at 2-4 per cent.

Leaving aside the one-off cyber-attack burden, the group has had to contend with rising input and production costs. Chief executive Pete Raby said that while the group continues to experience inflationary effects, they have been “more than offset that through pricing measures”. That isn’t necessarily borne out in pre-amortisation operating costs, which stood at 90.97 per cent of revenues compared with 86.3 per cent in the first-half of 2022.

The cyber-attack is a sign of the times. But it’s to be hoped that the new digital security measures will significantly reduce the chances of a similar incident in the future. Nonetheless, in an admittedly narrow field, Morgan Advanced Materials still looks good value compared with peers at 10 times Peel Hunt’s forecast earnings, together with a forward dividend yield of 4.5 per cent. Buy

Last IC View: Buy, 300p, 28 Apr 2023