Cyber security firm's revenues still rose 36%
Companies: NCC Group
Cyber security specialist NCC Group (LSE: NCC) published a mixed Trading Update this morning highlighting growth but also operational setbacks and an erosion of margin. The update covers covering the first 4 months of its financial year from June to September.
Growth continues to look attractive across the Group with revenues rising 36% and organic revenues rising 21%. It's two divisions, Assurance and Escrow, grew at 25% and 4% respectively.
However the Assurances division has experienced contract cancellations and as a result looks to have suffered margin erosion:
"The Group however experienced a number of setbacks in the Assurance Division including three large unrelated contract cancellations, a large contract deferral and difficulties with some managed services contract renewals."
Management stress that it is taking remedial action and that the full year outlook "remains in line with the Board's expectations" but will now be "more biased towards the second half of the year". It sounds like the Group are leaving themselves with a lot to do in H2.
Margins are confirmed to be heavily affected by the setbacks:
"...the loss of three major contracts along with difficulties with contract renewals ... is causing a significant erosion of margin"
However on a positive note, the Assurance business is clearly high growth and CEO Rob Cotton concludes on an upbeat note, highlighting the healthy order book:
"We operate in a fast growing market and have forward order books and renewals of £108.8m, up from £71.9m this time last year. We continue to take the necessary action to mitigate this period's setbacks and remain on course to sustain our double digit organic revenue growth."
The shares opened down 35% in early trading and are now roughly flat over the year as the market digests the margin implications of today's setbacks.
Looking at valuation and based on current consensus forecasts the shares are trading on 17x 2016 earnings. However, we would clearly expect forecasts to drop off the back of this.
Dividends are c.5p per share which are covered more than 2x on the current consensus forecasts of 13p per share, but again this coverage level should now reduce as earnings forecasts take a sizeable haircut. Unfortunately there is not enough information in the release to quantify what forecasts might fall to.