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NCC: Quick fix or long-term growth?

Recovery at the cyber security services business is in full swing, but questions remain regarding the long-term growth
July 17, 2018

There’s no denying the progress made by NCC (NCC) in the year to June. Margin recovery helped adjusted cash profits move up at a faster rate than revenue growth, while the absence of a £49m impairment on goodwill ensured the cyber security group swung back into a pre-tax profit position. But considering the woeful performance of the previous two years, and the group’s forward price/earnings ratio of 23 times, we wouldn’t have expected anything less. Investors now face a difficult question: is NCC’s recovery being flattered by poor comparators, or is there the potential for long-term growth?

IC TIP: Hold at 221p

Compound annual revenue growth of 25 per cent through 2014-18, combined with the fact that the cyber security market is showing no signs of slowing, are certainly grounds for optimism. With the gross margin now at 41 per cent – a level not seen since 2012 – profit growth is now more reflective of the strong demand. Broker Jefferies has therefore forecast adjusted pre-tax profit of £33.9m in the year to June 2019, giving EPS of 9.5p (from £29.5m and 8.2p in FY2018).

Margins aside, a lack of revenue visibility makes us err on the side of caution. NCC has no long-term contracts and is therefore overly dependent on one-off assignments, so the ability of its staff to forge client relationships is critical, lest custom is lost to smaller competitors. Staff are therefore the group’s most valuable asset.

NCC (NCC)    
ORD PRICE:221pMARKET VALUE:£614m
TOUCH:221-222p12-MONTH HIGH:239pLOW: 165p
DIVIDEND YIELD:2.1%PE RATIO:49
NET ASSET VALUE:75p*NET DEBT:13%
Year to 31 MayTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201411123.28.73.50
201513421.48.03.98
20162099.42.54.65
2017215-44.8-17.04.65
201823311.94.54.65
% change+8---
Ex-div:6 Sep   
Payment:5 Oct   
*Includes intangible assets of £240m, or 86p a share