A year ago, the future did not look bright for NCC (NCC). Revenue growth had slowed, margins had contracted and the shares tumbled on a series of profit warnings – leading us ultimately to advise selling them in March 2017. With all this in mind, the cyber-security company’s first-half results offer a glimmer of hope. Sales growth came with a gross margin improvement of 2.6 percentage points to 39.4 per cent. Meanwhile, better working capital management paid off, with net cash flow from operations rising from £12.2m to £14.7m.
Profits haven’t fully recovered, though. Higher overhead costs, which had largely been committed during the prior year, were partly to blame for a 10.8 per cent reduction in operating profit from £7.4m to £6.6m. However, management says these expenses – including salaries, rent and higher professional fees – should start to stabilise in the second half.
NCC’s ‘assurance’ business, which contributes the vast majority of revenue, has shifted away from reselling third-party products. This helped to drive a 2.7 percentage point rise in the segment’s gross margin to 32.3 per cent, although this shift also contributed to a 62 per cent fall in product sales for Managed Security Services (MSS) in the UK – in turn rendering assurance’s organic growth rate relatively muted at 3.9 per cent. Excluding the impact of MSS – where sales are not expected to fall much further – organic growth would have been 14.3 per cent.
Escrow, NCC’s smaller business, returned to growth with revenues up 1.6 per cent at £19m. Regionally, escrow’s UK and 'rest of world' operations lifted sales by 3.9 per cent to £13.3m. However, the story was different in the US, where revenues fell by 5 per cent to £3.8m, due in part to changes in the local management team. A new team is now in place, including three UK salespeople.
Analysts at Peel Hunt forecast adjusted pre-tax profit of £28.5m for the year to May 2018 with EPS of 7.2p, up from £26.1m and 6.6p in 2017.
| NCC (NCC) | ||||
| ORD PRICE: | 217p | MARKET VALUE: | £601m | |
| TOUCH: | 216-217p | 12-MONTH HIGH: | 239p | LOW: 88p |
| DIVIDEND YIELD: | 2.1% | PE RATIO: | na | |
| NET ASSET VALUE: | 75p* | NET DEBT: | 21% | |
| Half-year to 30 Nov | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2016 | 110 | 6.5 | 2.0 | 1.5 |
| 2017 | 118 | 5.7 | 1.4 | 1.5 |
| % change | +7 | -12 | -30 | - |
| Ex-div: | 25 Jan | |||
| Payment: | 23 Feb | |||
| *Includes intangible assets of £248m, or 89p a share | ||||
