An Aim company set for bumper profit growth

Pennant International (PEN:37p), an Aim-traded training supplier, has landed a raft of contracts. The largest award is a A$5.2mn (£2.7mn) contract on an Australian defence programme to supply software solutions and technical services over five years. It’s notable as it represents the first sale of Pennant's new GenS Integrated Product Support software, the successor product to OmegaPS – a Windows application deployable on laptops or tablets which enables the seamless management of equipment data across complex programmes. GenS will be fully launched to market in early 2024. Pennant has also landed a A$1.2mn upgrade on an existing Australian contract to provide specialist facilities and services over the next five years.

Although the £0.25mn perpetual software licence to a European defence department is far smaller, it is highly profitable. That’s because Pennant earns a gross margin in the range of 85 to 90 per cent, and the client typically pays a maintenance fee over later years.

The group has also been awarded a £0.13mn contract for delivery of technical railway mapping services in the UK this year. In late April, Pennant acquired a Bedfordshire provider of driver training, route mapping and route services to UK operating companies, engineering prime contractors and infrastructure firms. Revenue earned from subscription-based web portal and project-specific route-mapping services has increased Pennant’s repeat business and broadened its revenue stream, too.

The latest wins are well-aligned to management’s strategy of shifting the business mix towards higher-margin software and technical services, segments accounting for three-quarters of group revenue in 2022, up from 60 per cent in 2021. The commitment to delivering higher recurring subscription-based revenue also improves the visibility of earnings.

Following acquisition-driven upgrades seven weeks ago, analysts at WH Ireland are maintaining their current-year earnings per share forecasts, which point to a sevenfold increase to 3.5p, rising to 4.2p in 2024. However, the multiple contract wins de-risk the investment case, adding to the £13mn previously announced order backlog slated for delivery this year, which underpins WH Ireland’s £16.6mn revenue forecast. Rated on price/earnings (PE) ratios of 10.6 and 8.8 for 2023 and 2024, respectively, the shares rate a buy.

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