NCC flags job cuts as demand softens

Shares in NCC (NCC) pulled back sharply after the cyber security group said that its revenue is now expected to increase year on year by single digits. In what is likely to become an increasingly familiar refrain, management pointed to a “lengthening of the sales cycle”. Customers have been delaying purchase orders, a partial reflection of tightened credit markets and the general business cycle.

It’s worth remembering that investments in systems security cannot be put off indefinitely, so demand and utilisation rates will recover at some point. Unfortunately, the nature of NCC’s business and the evolving nature of cyber threats compel it to constantly update its escrow, software and cloud capabilities. Funding, therefore, becomes a more pressing issue when orders are being delayed, but the group was able to match the previous half-year’s net cash capital expenditure of £3.7mn.

However, with utilisation rates and the gross margin in decline, the group is “accelerating the implementation of [its global growth] strategy and reshaping the business, with a proposed reduction in headcount in the near term”. The implementation of the group’s strategic initiatives is expected to require additional investment in FY 2023 of c£5mn. NCC clearly can’t afford to stand still.

The sell-off on results day may seem unjustified given the 27.7 per cent increase in profits at the operating level, together with a 60 basis point increase in the underlying margin. But near-term expectations have been tempered in the knowledge that the general ‘tech’ complex is still suffering softening demand. Management is looking to limit the draw on working capital, hence the prospective job cuts, but it may be a while before end markets bounce back. A forward rating of 15 times forecast earnings is not extortionate given the accelerated rate of digital adoption in both the public and private sectors. Buy.

Last IC view: Buy, 191p, 6 Sep 2022