- First half adjusted operating profit up sevenfold to £0.5mn
- Net debt halves to £1.9mn
- High margin software contract wins since period end
Pennant International (PEN:36p), a software provider, has delivered its fourth consecutive half year of profit and earned a record profit margin, too. Pennant’s software offers tangible financial benefits to its prestigious customers, including aerospace manufacturers Boeing, Thales and Airbus Helicopters. Specifically, its Oracle-based software product reduces the support cost of maintaining major assets such as trains, tanks or aeroplanes.
In the first six months of 2023, gross profit increased 18 per cent to £3.3mn on modestly higher revenue of £7mn. The 6 per cent hike in gross margin to 47 per cent was driven by an improved business mix and the exit from an underperforming legacy contract. Management’s focus has been on increasing recurring revenue (56 per cent of the total) and the proportion of high margin software sales (46 per cent) across its core defence, rail, commercial aerospace, space and shipping markets.
Indeed, £1.5mn of new orders for software and services have been received across July and August, taking the order intake to £8.1mn since the start of the year. It adds to a three-year order book of £25mn at the end of the first half and provides full cover for house broker WH Ireland’s second half revenue forecasts of £8.4mn. It also covers more than half of analysts’ 2024 revenue estimate of £16.1mn, too.
The strength of the order book, and the improved margin performance, can explain why analyst Nick Spoliar at WH Ireland forecasts an eightfold rise in full-year pre-tax profit to £1.3mn to deliver earnings per share (EPS) of 3.5p. Having halved net debt to £1.9mn, Spoliar expects a small net cash position at the year-end.
On track for further growth in 2024
Earnings growth is also being driven by April’s earnings accretive acquisition of Track Access Productions (Tap), a provider of driver training, route mapping and familiarisation services to UK train and freight companies. Revenues are generated through a subscription-based web portal and project-specific route-mapping services. The directors expect Tap to deliver full-year operating profit of £0.4mn, a healthy return on the £1mn acquisition price.
A full-year contribution from Tap in 2024 supports WH Ireland’s forecasts for 20 per cent plus growth in next year’s pre-tax profit and EPS to £1.6mn and 4.2p, respectively. On this basis, the shares are rated on a 2024 prospective price/earnings (PE) ratio of 8.5.
That’s a modest rating given that net cash is expected to build to £1.8mn (5p) next year after factoring in the release of cash milestones on two commercial aerospace projects in North America and the completion of its Boeing contract for the UK Apache helicopter upgrade programme.
Pennant’s shares are trading around the price of my last article when I highlighted the contract momentum in the business (‘An Aim company set for bumper profit growth’, 14 June 2023) and offer 80 per cent upside to WH Ireland’s maintained 65p fair valuation. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
