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NCC Group^ (NCC, Buy at 147p) - Balancing challenge and opportunity
NCC Group plc
In H1 FY25, the company experienced cyclical weakness in high-volume, low-value testing Cyber Security engagements. However, the company is pivoting towards higher-value advanced testing and strategic engagements, involving multiple Cyber Security services. NCC is therefore keeping its guidance for FY25 Adjusted EBITDA unchanged. We lower FY26 Adjusted EBITDA by 7.6% due to lower expected revenues and a conservative assumption of flat margins. We believe management has significantly improved NCC’s strategic focus, pricing, global resourcing and efficiency, and has further opportunities to raise Cyber Security growth and margins. At the same time, the company could imminently dispose of its strongly performing Escode business and return significant capital to shareholders. We value NCC at 176p based on sum-of-the-parts and peer multiples analysis. Buy.
NCC remains in transition. The Board are in discussions with interested parties on Escode, which performed well in 1H and for which we view a good price as being >=£300m, 10x EBITDA before central costs. We are less sure about whether Cyber is ready to stand alone, as the lower end of Assurance becomes more commoditised and automated. Management point to pipeline growth in higher value areas of focus, such as Consulting, and expect a return to mid-single digit growth in FY26E. Dovetailing the Cyber turn-around with the Escode exit would be a good result, but this has to be taken on trust for now. Given the share price reaction to the results, we maintain our Buy rating whilst lowering our target price to 175p on reduced FY25-27E estimates.
NCC Group^ (NCC, Buy at 165p) - FY25F EBITDA guidance steady, Escode sale talks under way
Numbers. 1H revenue of £156.8m fell 6% cc, with Cyber down 7.8% and Escode up 1.2%. Gross margins were well managed, largely flat in Cyber at c36% and up c2% in Escode to 70%. EBITDA was £21.5m (H124 £25.5m) due to the revenue decline. Net cash £0.3m (£53.5m) with cash conversion 62.3% due to the bonus stub period and W/C outflow, seen to reverse in H2. We make mix tweaks with group EBITDA unchanged but reduce FY26E EBITDA 6% factoring in the rolling impact of the revenue backdrop. See overleaf. Cyber Security. EBITDA £11m (H124 £15.7m) due to the revenue decline, with 36% gross margin well managed, broadly flat on H124. TAS revenue fell c13% and declined sequentially, similar to other IT Services plays seeing encouraging starts to CY25 quashed by rising macro uncertainties. NCC also pivoted to higher-value and faster-growing areas impacting TAS growth rates, with the upside to come with the more strategic areas having longer sales cycles. Managed Services +3% (c30% group) is disappointing vs last year’s high growth, due to churn in old contracts in a competitive market. Despite many new wins, this dynamic will mute reported growth into H225 and FY26 as these contracts fall out. Consulting declined 3% but is set to grow materiality in H225 on the back of the structural progress made. Escode. Revenue +1.8% driven by UK Verifications, with gross margins up at 70% (H124 68%) and EBITDA at £14.8m (H124 £13.6m), all aided by increased prices and operating efficiencies. As previously announced, discussions with a number of parties has recently started with regard to a potential sale of the division, although it is early stages in such a process. View. Macro is holding back the full benefits of the operational and strategic changes made, but material value remains with our 190p SoTP a base case.
From Capgemini, Rapid7, Qualys, to now NCC, it is clear that Cyber budgets remain under pressure, with competition intensifying and sales cycles lengthening. We think management is controlling what it can. With valuation remaining supportive, we reiterate our Buy rating and 200p TP.
NCC Group^ (NCC, Buy at 158p) - Interim results preview
This month we identify stocks that might now be oversold. We filter for the worst performing stocks, but also for those with the lowest PEs and highest FCF yields. Two companies that possess all three oversold characteristics are Team Internet and iomart. Sector statistics: The median price in the Zeus UK smallcap technology index fell 7% over the last month, median sector valuation multiples were 9.2x EBITDA, 13.8x EBIT and 19.7x EPS 2025, and median revenue, EBITDA, EBIT and EPS growth rates were 8.3%, 10.2%, 8.4% and 11.0% for 2025.
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Three high profile cases in a week highlight NCC’s sweet spot position NCC hosted an investor event yesterday, focusing on the Cyber threat landscape, with an immersive roleplay exercise simulating a cyber-attack and how an organisation’s leadership team should react to such an event. Critical crisis management incidence response is NCC’s daily activity in this part of the business, highlighting its extremely high-level strategic advisory, threat detection and technical capabilities to assist clients to manage such mission-critical events, from a technical and operational point of view, but also advising on the public-facing strategic response. This event comes during a week when M&S, Co-Op and now Harrods have been victims of large-scale cyber-attacks, impacting their operations. This division of NCC is clearly positioned in the sweet spot of the Cyber Threat landscape. Full life-cycle capability The event highlighted the broad scope of expertise that is needed to manage Cyber attacks and how NCC has capabilities across the spectrum to assist its clients in mission-critical situations. Ideally, clients are pro-active and work with NCC putting in place Threat Intelligence Detection, Data Security Management and other preventative initiatives. In the event of an attack, NCC will aim to solve the technical impacts of a breach (locate the breach, stop the attack, attempt to identify the bad actors, advise on IT system response) as well as advise the C-Suite with best practice strategy and communication to stakeholders (internal and external), regulators, government bodies and specialist police operations if required, especially in the case of Ransomware. Of interest is that insurance companies are becoming an important revenue channel, with corporates increasingly taking out Cyber Attack insurance. NCC is a trusted supplier for a range of insurance companies and is increasingly referred business in this way. While this would typically replace the direct ‘retainer’ model with the end client, it could further open up the revenue opportunity for NCC. The event displayed NCC’s wealth of experience, drawing from its deep domain expertise across the NCC Cyber business. View – materially undervalued We continue to see NCC materially undervalued on a SoTP, as we commented on in our ‘Escode back in spotlight’ note this week. This event showcased the value of this part of NCC’s Cyber operations, further highlighting the implied <8x FY25E EBITA valuation for Cyber as materially mispriced in our view, assuming a c£300m value for Escode.
Strategic options – SoTP cornerstone of our investment case The cornerstone of our investment case is the SoTP argument – that the shares materially undervalue Cyber Security, assuming >£300m for Escode which, at the current share price, implies Cyber is only c7x FY26E EBITDA, or c10x FY25E EBITDA, off below-trend margins. Yesterday, Sky News reported that a number of private equity firms, including Montague and BridgePoint, were looking at potential bids for NCC’s Escode business, with mooted valuations of £300m-£400m. It is not the first time that reports of a possible bid have appeared in the press. NCC responded before market close confirming that it is investigating a number of options for its Escode business, including a potential sale, the process is at a very early stage, no proposals have been received, and no decision has been made on whether to proceed with any transaction. Valuing the Escode business - >£350m feasible Over the last couple of years, the company has succeeded in sustainably growing Escode revenues by a low to mid-single digit amount while delivering EBITDA margins in the mid-forties, supported by high cash flow generation. It has been aided by a revised operational management team moving Escode ‘up the value chain’ into high value, more strategic enterprise deals as regulatory pressures on certain industries (e.g. financial services) are increasingly mandating Escode being part of a business resilience strategy. With NCC the clear global leader in this industry, this outlook should readily support a low double-digit EBITDA multiple, in our view, with our £300m ‘low end’ base case SoTP implying an 11x FY25E EBITDA multiple. Sustained financial and operational delivery would support a low-teens multiple for FY26E, implying >£350m is feasible in our view. As confidence continues to build in the business, we suspect that valuation levels will move up. SoTP valuation: 190p base case, with >250p mid-term potential Our base case 190p TP assumes 11x FY26E EBITDA for Escode (c£300m) and 13x FY26E EBITDA for Cyber, both conservative multiples in our view. Assuming more ‘normalised’ medium-term Cyber margins of c13% vs our c8% for FY26E, together with £350m for Escode, this would give a potential valuation of 250p. We expect the company is aiming for higher than 13% Cyber margins mid-term; if achieved this could suggest >250p is realistic, especially as this margin level would likely command a higher rating. It’s too early to focus on this now, but it does highlight the material value potential in NCC, assuming steady mid-term financial improvement in Cyber, executing on its business transformation strategy, along with a valuation for Escode reflecting sustained future financial delivery. We retain our Buy.
Changes to numbers – While operational numbers remain unchanged, we reduce our net cash numbers for FY25/26/27E by £10.7m each year to £11.4/16.9/23.6m. We maintain our TP of 200p and Buy rating.
Cybersecurity tailwinds are clear to us (see Softcat commentary). NCC is taking steps to take advantage of this while navigating a business transformation and tepid corporate spending. We believe the current FCF yield is unwarranted given both the business improvements and the structural opportunity. We maintain our forecasts, and reiterate our TP of 200p and Buy recommendation.
High profile win NCC has signed a three-year deal with TikTok as part of TikTok’s European enhanced data security programme for its 175 million users throughout the EEA, Switzerland and the UK. This follows on from NCC’s work with TikTok on Project Clover, its data security programme, with this deal expanding and enhancing NCC’s role as an independent security provider to the programme. The concept its effectively becoming the ‘gold standard’ for data security, delivering beyond the regulatory requirements set by governing bodies. NCC will continue to assure, monitor and enhance the privacy and security of TikTok’s European user data. Strong validation supports the investment case This is a significant validation for NCC, cementing the initial relationship with this high-profile client and acting as a strong validation of the strength of NCC’s cyber security capabilities to deliver on such an industry-leading programme. This will not only contribute to the financial delivery of the business, contained within the context of our current forecasts, but should also help spur further deal flow as the group’s profile continues to rise, based in its market repositioning to a full cyber security life-cycle vendor; this latest validation attests to NCC’s capabilities on this journey. We see material value in the SoTP with our 190p assuming c£300m for Escode and c13x FY26E EBITDA for Cyber on low end margins, offering material value beyond our TP as the plan executes. The current price implies <8x for Cyber (assuming £300m for Escode), suggesting the stock is mispriced, in our view. Buy.
The shares rightly pulled back on guidance at last week’s results but remain worthy of consideration for the turnaround and potential unlocking of value from corporate action. Our main takeaways are: 1) management are doing the right things but some of that was lost in the noise of numbers, 2) annualisation of Managed Services wins exposes that Assurance still needs work for Cyber to become a more consistent, higher growth/return business, 3) the cost base still looks too high to us - expect more restructuring and shift to global working in FY25E, 4) guidance was cautious and we downgrade underlying EBITDA by 6%, half of which relates to higher historic profit at Fox (to complete in Q1) and 5) management showed no inclination to start a process on Escode, which we value at £260-290m. Our updated estimates include SBP.
NCC Group^ (NCC, Buy at 141p) - Stronger foundations in place
NCC Group delivered strong results in the 4-month stub period ending September 2024. However, in the autumn the company saw sales cycles lengthen, leading us to issue FYE September 2025 Adjusted EBITDA excluding SBP and disposals that is 9% below our original FYE May 2025 estimate. We believe the shares’ relatively large 19% decline on Tuesday to be an overreaction. NCC Group continues to expand its pipeline, product offering and geographic coverage and improve pricing and resourcing, giving the company strong confidence in its unchanged medium-term outlook. As a result, the company continues to offer stronger EBITDA growth (FY26: 19%) than its peers, while its multiples are now at substantial discounts. We expect NCC’s earnings multiples to recover as the company returns to its track record of strong earnings performance.
Results broadly in line with expectations NCC group updated the market on the 16-month period to end of September due to a change in accounting period-end to September 30th from May 30th. The results showed increasing momentum in terms of the cyber business with respect to gross margin and utilisation. It also shows increased momentum on the revenue side with cyber revenues growing at 7.6% in constant currency terms in the 4 months to the end of September. Group adjusted EBITDA margin is therefore stronger now at 9.0% having increased by 7.1% in the four months to September 2024. The Escode business continues to grow (+0.5%) in the 4 months, whilst gross margins in this business are c.3% lower due to investment in sales for future growth opportunities. This is in relation to targeting new enterprise opportunities particularly in the US and Australia. Sales cycle is lengthening Like other consulting-led business models, the outlook is more challenging than the near-term performance with the group highlighting a lengthening sales cycle. This implies revenue growth of low single digit and marginal adjusted EBITDA growth. We will reflect this in our forecasts and likely to tweak down our Adjusted EBITDA estimate. NCC remains a HOLD The group has shown strong improvement in fundamentals and delivery against its strategic plan. We value the group at the median of the IT Services peer mix. The latest update is more challenging in terms of outlook but symptomatic of the overall environment that professional services businesses, particularly on the consulting side, are finding. Therefore our recommendation remains on HOLD and our medium term forecasts remain a little more conservative than group expectations.
NCC Group^ (NCC, Buy at 162p) - Positive FY24A results, mixed outlook
Cybersecurity is not immune to the longer sales cycles we have flagged for months. Management deserves credit for structural improvements that are helping it navigate to better profits by FY26E. With a third-quartile CY25E EV/EBITDA rating, we reiterate Buy and our 200p TP.
Seeing through moving parts. A raft of numbers give full disclosure on the year end change. We roll our estimates to September, so changes to forecasts are not like for like. They also include the profit impact of disposals and us aligning with NCC to include amortisation of intangibles, which together make more than -£15m of profit impact. Underlying business trends are mostly positive, with some market headwinds still around in TAS especially. Cash flow has been strong to Sept 24 at 96.6%, with net debt down £4.3m to £45.3m. The future Crypto disposal will move the group into a comfortable net cash position. Cyber Security. In four months to Sept 24, revenues grew 7.6%, up from 6% in H2 to May 24, driven by Managed Services, up 45% from prior year sales efforts. We expect it to moderate going forward. TAS fell 3.6% reflecting market headwinds in the lower end areas of the market, with NCC gradually shifting the focus to ‘higher value’ TAS areas. C&I was down 4.6%, reflecting time for the new team to convert pipeline to orders, with the outlook from here being growth, and this will also help fuel leads for MS. The UK was up 16% with MS offsetting TAS weakness, while NA saw the full TAS impact, declining 5.7%. It all sets a base to drive growth, but conscious of the macro we limit underlying growth to c2-3%. We discuss profit forecast overleaf. Escode. Growth was an impressive 8.2% in the four months to Sept, driven by Verifications and shift in emphasis to larger enterprise accounts. This sets a comfortable continued low- to mid-single digit growth outlook and margins expanding as past investment delivers, with our SoTP seeing £300m value. View. This is another step forward of the rebuild, with material value still to come as margins and growth expand into the medium term, as the changes take hold. 13x FY26E Cyber EBITDA & £300m Escode gives our 190p SoTP.
NCC continues to deliver ahead of internal and market expectations. The four months to September period end indicate adj. EBIT of £6.0m, almost double the prior guidance (£3.5m) and a £7.0m swing from this time last year (-£1.0m). The summer months are typically a quieter period for NCC, but today’s announcement highlights the impressive execution by management on its turnaround plan. Cyber Security performed ahead of expectations, and whilst today’s announcement doesn’t provide any further detail, we expect some of this outperformance has come from its largest division, TAS, which experienced sequential HoH improvement in FY24. Margin improvement yoy was helped through aligning its global delivery and operational headcount, and we anticipate management remain focused on utilisation to drive further margin expansion, a key KPI for Cyber. We continue to argue consensus expectations neglect the full turnaround potential of NCC. Whilst our base case valuation implies a fair value of 167p, today’s announcement provides us with further confidence in our upside valuation of 245p. The latter is based on a 30% outperformance to EBITDA by FY26E, set out in our May initiation.
NCC Group^ (NCC, Buy at 152p) - Positive trading update
Results for the 16M ending September are to be reported on 10 December, with NCC moving to the new September Y/E. The stock trades on 10x CY25E cons EV/EBITDA, while broader peers are on 12.5-19.6x between third and first quartile. This discount, we think, is not warranted given the progress with the strategic plan. We reiterate Buy, TP 200p.
Positive headlines – trading ahead NCC has updated on the four months to September due to the changing of its year end to September from May. Prior guidance was c.£100m revenue and c.£3.5m operating profit vs £1m operating loss in the same period last year. Trading has been ahead of this expectation, with revenue now seen as in the region of £104m, up c.4%, and profits of approximately £6m. The strength has come particularly from the Cyber Security division during what is typically a quieter period for the business. Readthrough – stabilisation and recovery traction This suggests the encouraging exit recovery run rates seen in H224 have continued through summer, which we see as implying mid-single digit growth in UK / Europe Cyber Security and low single digit declines in North America, in turn suggesting stabilisation has been reached in this business. Clearly, the operational progress has enabled profits to track ahead of plan. While this period is the smallest profit generator for the group, the fact that it’s tracking ahead does give initial support to the numbers as we head into what will be the new fiscal year for the group starting 1 October 2025. There is still material progress to be delivered to reach the medium term business model and financial aspirations, but this is another confidence building step to these longer term goals and recovery of the overall business View – still very much undervalued We retain our 190p SoTP which assumes 13x FY25E EBITDA for the Cyber business and 10x for Escode. This leaves material headroom beyond our 190p TP considering our Cyber Security forecasts are predicated on <10% EBITDA margins and low growth, with the medium-term potential for high single digit growth and c15% EBITDA margins. To achieve this longer term potential, further operational delivery and strategic progress to the ‘full life-cycle’ vendor aspiration will need to be made. However our 190p TP does not build any of this in, but ‘just’ sustained run rate recovery, for which today’s update gives further support.
NCC’s final results were long on detail but relatively short on guidance, which partly reflects the shift to September year end and a budget process which will lead into 16M results in December. Our take-aways include 1) the Executive team are no longer firefighting 2) North America is skewed to Assurance and still a tough market 3) Cyber 2H gross margin of 38% is the best transformation proof point to date, albeit helped by missing the summer lull 4) the profit recovery in 2H suggests that FY25E is under-pinned and 5) the Fox disposal (16.5x EBITDA) demonstrates the potential value, subject to improving Cyber margins. The big strategic question remains the future of Escode, which we value at between £250m to £300m. We raise our TP from 170p to 190p, on rolling forward, and remain Buy.
PHe net debt of c.£30m/c.£13m in FY25/26E turns into PHe net cash of c.£32m and c.£49m, respectively. At 148p, effective CY25E EV/EBITDA drops from c.7.9x to 7.3x and in our view leaves ample firepower for NCC, for example, to strengthen its managed services.
FY24 Adjusted EBITDA was slightly ahead of consensus estimates, while revenue and net cash were in line. We leave our above consensus FY25 and FY26 estimates unchanged and see room for outperformance. We believe Cyber Security market growth and the trend towards managed services remains strong, while the Technical Assurance Services (TAS) unit’s drag on group growth should reduce significantly in FY25. We continue to see multiple opportunities for improvement remaining in the company’s turnaround plans and believe current market expectations underestimate the growth and margin potential for NCC, particularly within Cyber Security. We reiterate our base case scenario of 167p per share and 245p per share in an upside scenario, set out in our May initiation note.
Terms. CR Group Nordic AB will pay NCC c€77m (c£66m) cash with deal completion expected in October 2024. Net proceeds are expected to be c€74m (£62m). The asset contributed revenue and EBITDA of £18m and £4m in the 12 months to May 2024, implying a 16.5x EBITDA multiple. The business had been operating as a standalone entity and as such its disposal will not require any complex carve-outs or impact the capabilities of NCC. Strategic plans enacted. Simplification is a core plank of the transformation plan. This disposal will allow a more focused Cyber business, aligned across the group’s territories. Having been a standalone entity, it will allow further integration and alignment of the group’s European Cyber business. This alone should prompt value creation in addition to what we see as a highly attractive price. The cash will put NCC’s balance sheet into a material net cash position, leaving it well placed to embark on its future growth plans. Forecasts. We remove a full year run-rate of Fox Crypto in FY25E and expect £4m reduced interest payments, of which we assume £3m in FY25E. We now have FY25E net cash of £35.3m (pre finance leases) versus our prior £22.6m net debt. FY25E revenue £320.6m (£338.6m) -5%, PBT £33.5m (£34.3m) -2%, EPS 8.3p (8.5p). FY26E revenue £337.1m (£356.2m) -5%, PBT £41.2m (£41.5m) -1%, EPS 10.2p (10.3p) -1%. View. This is another sign the strategy is working. Yesterday we had organic evidence from the H224 financial run-rate, and now this value crystallisation shows the inorganic value creation plan is also working. We expect further steady incremental positive delivery as the strategy takes hold, supporting our 190p SoTP TP which only factors in c10% FY25E EBITDA margins vs. the c15% aspiration. We use 15x EBITDA for Cyber & 10x for Escode.
Greater recurring revenue, and better gross margins are signs of structural improvements in the business. TAS, down 29%, 15% and single-digits in 1H, 2H and 4Q points to stabilisation, giving comfort in our £100m rev and -£1m adj EBIT estimate to end-Sept when NCC will report on its new YE.
Numbers. Revenue of £324.4m, up 0.8% cc, is in-line with the key being Cyber Security H2 yoy & sequential trends showing significant growth (e.g. Managed Services) or declines slowing markedly (e.g. TAS). Escode delivered healthy 5.4% yoy growth. The Cyber Security H224 gross profit & EBITDA upswing, combined with Escode performing well, delivered group EBITDA of £42.1m (inc. SBP). Cash conversion is as expected at 91% with a good net debt outturn of £38.5m (ex £31m finance leases). H2 dividend held at 3.15p. We make small mix tweaks driving a 3% FY25E PBT upgrade shown overleaf. Cyber Security. While FY24 revenue was down c2% yoy, H2 was up 6% driven by UK, APAC & Europe. NA declines lessened, falling 20% H224 yoy and less still sequentially. TAS in NA is still underperforming, but much improved elsewhere. The highlight is Managed Services, up 36% yoy with a strong H224. This all points to a Cyber Security business capable of mid-single digit growth near-term, and more mid-term as TAS improvements are felt across all geographies, Managed Services delivers mid / high teens (now c30% of division) and Consulting gains traction post the strategic push. H224 38% gross margins is a record, a feature of strong operational improvements and utilisation. Within this NA was weak so there should be further to go longer term and we also expect more focus on pricing going forward. Escode. Revenue growth of 5% was impressive, delivered through Contracts (+4%) and Verification (+8%). Profits were broadly flat in H224 vs H124, with incremental investment feeding through and some FX impact. We expect sustained revenue delivery as outlined at the recent CMD. View. We see material value as the plan continues to take shape. Profit tweaks, better net debt and modest multiple uplifts take our TP to 190p.
We recently hosted a cybersecurity fireside chat with NCC and EasyJet. You can watch a replay here. Key takeaways were: 1) the incidence and sophistication of cyber-attacks is still increasing, 2) quality matters – ‘our assurance provider needs to be smarter than the attackers’, 3) EasyJet likes that NCC has scale and depth of technical expertise, 4) the fire-fighting at NCC is done and the emphasis is shifting to growth (and Escode – not discussed), and 5) the discussion was supportive of NCC’s competitive position and gross margin outlook. Final results are due on 1 August, which will include a doubling of profit in 2H v 1H. We think this underpins FY25E consensus. Re-iterate Buy rating.
The companies in the Zeus smallcap technology universe with the highest earnings growth potential are Seeing Machines, ZOO Digital, CyanConnode and Ensilica. Their surprisingly low earnings multiples indicate to us that investors are sceptical of their anticipated growth. The companies that are well positioned to meet earnings expectations may offer potential price upside. We review their growth prospects below and highlight CyanConnode. The median stock in the Zeus UK smallcap technology index fell 1% over the month.
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The company delivered FYE May 24 Adjusted Operating Profit and Net debt ahead of consensus averages. We believe the company remains on track to outperform FY25 and FY26 consensus estimates and we leave above consensus Adjusted EBITDA forecasts unchanged. We believe the market is underestimating the growth and margin potential of NCC as it continues its turnaround. We value NCC Group at 167p per share in the base case and 245p per share in an upside scenario.
Managed Security Services CMD – high energy and optimistic Managed Services is the star of NCC, growing 36% in FY24 to c£67m, with c£75-£80m expected in FY25 (+c15%). The event showcased a new divisional team, a little over a year into their roles, already seeing benefits of material organisational change. There was energy in the team, coming across as optimistic on the division’s future, based on the market and operational progress, with scope for revenue and margin acceleration. There is still much to be done, but early indications are encouraging. May, the last month of the fiscal year, had 60% more ARR than last year. The market is ‘hot’, with clients seeking benefits from using partners to manage their cyber risks. This creates a fertile, but also competitive backdrop – a reason why the changes have been so essential. Playing to the team For us, a key message running through the event was the importance of both the cross-sell within the division, now its Unified Cyber Platform is operational, but also equally important is playing to the merits of the other divisions, using them as routes to market. NCC is now capable of an end-to-end Cyber Security offering, from Consulting and Implementation, Technical Assurance through to Threat Intelligence and Incident Response, with these customers potentially prospective Managed Service clients. Easy to say, harder to deliver, but with changes ongoing in the other divisions, there is potential to deepen account penetration. Unified Cyber Platform – crucial to driving financial performance Capabilities have been deepened and unified across NCC’s global Security Operation Centres, with its Unified Cyber Platform going live in February. It integrates leading third-party cyber security technologies, builds in NCC’s own IP (responsible for c40% of threat detections) delivering a Managed Service suite from finding sensitive data, adding protections, recommending actions, monitoring, addressing and remediating attacks. Alongside these technological capabilities, emphasis has been placed on dedicated service delivery and technology account management teams to foster client stickiness, as well as drive new wins. While recurring revenue is c88%, NRR is only 77% with too many renewals lost. Pushing NRR to a ‘respectable’ c90% would add c£5m revenue alone. The platform should also enable the business to better scale with new capabilities (organic or M&A) easily added. All to play for The financials suggest the division could alone already account for much of the current Cyber Security valuation, which gives material support to the SoTP. It’s still early days in delivering the strategic plan with a lot of delivery and execution to come, but progress thus far has been encouraging overall and we feel the days of own goals and underperformance are behind us. Buy.
NCC Group^ (NCC, Hold at 144p) - Solid FY24A trading update
NCC Group plc UIL Limited
Leverage at 1x adj EBITDA implies c.100% cash conversion, suggesting that the group, helped by Escode firing on all cylinders (see “a hidden cash-cow”), is now in a healthier place with improving earnings quality (Escode + MS becoming a larger portion of the group). Reiterate Buy, TP 200p.
Ahead of the planned CMD for the Cybersecurity arm of NCC group, we revisit key takeaways from Escode’s CMD several weeks ago. In particular, we expect regulation and better risk management around software supply chains to be tailwinds, helping Escode build on its strong base. We reiterate our Buy rating and 200p TP.
We initiate coverage of NCC Group, a well-respected provider of cyber security and software escrow solutions. In FY23, the company experienced a significant market pullback that revealed operational deficiencies. The company appointed a new CEO, who introduced a turnaround strategy in January 2023. We believe the ongoing improvements are transformational and consensus expectations underestimate NCC’s revenue growth and margin potential. In addition, shares trade below historic multiples and those of IT services and IT security peers. Our SoTP analysis for NCC arrives at a fair value estimate of 165p (£517m market cap) in a Base Case and 246p (£770m market cap) in our Upside Scenario.
NCC Group^ (NCC, Hold at 128p) - Takeaways from Escode event
There is a lot going on at NCC. The turnaround appears to be gathering pace. We took a number of positives from 1H results: 1) Cyber utilisation and gross margin are improving, 2) the global scheduling of work and Manila offshore capability is live, 3) Managed Services has strong momentum, 4) costs are being tightly controlled and 5) NCC is getting a little bit easier to understand. The combination of these factors should allow NCC to double profit sequentially in 2H which, if the case, suggests that consensus for FY25E should be achievable and potentially a little low. Having risen by ~30% since last summer, the shares may mark time in the short term but we expect further performance to come as evidence of profit recovery builds. We have raised our TP to 160p.
NCC Group^ (NCC, Hold at 125p) - Better times ahead?
NCC's interims were as expected. Escode's continued growth is welcome whilst additional colour on Q2 improvements in Cyber vs. Q1 paint a more encouraging picture. We make little changes to overall forecasts which assume c.£20m adj. EBIT in H2 vs. the £10m delivered in H1. Delivery of this will sig
Business model improvement. The ambition is to create a Cyber Security full life-cycle suite, taking NCC up the value chain from its mainstay pen test base. New reporting lines were given: the core Technical Assurance business, its high-growth Managed Service operations, a Consulting and Implementation practice, and an Incident Response division. Crucially, these are being verticalized and delivered from a global resourcing model, including the recent team in Manila, which will enable a more efficient and profit driven operation. Most divisional lead hires have been made, giving a capability step-up to the business. Ultimately, the ambition is to become a trusted client advisor, thereby expanding the addressable market and increasing project lengths, repeatability, pricing power and thus visibility and margin. Escode. While the ‘strategic review’ sale process has not re-started, but the inference is still very much when, not if. With 6% growth (price rises and verification upsells) the business has good momentum and our judgement is the company is picking its time to extract the best value. A suitable valuation exit at some stage is required to support the investment case. Numbers. Restating with SBP (fine) and amortisation of intangibles (unusual) above the line means adj. EBITA & EPS fall so the focus shifts to EBITDA. On our re-cut numbers, the investment case still holds with little material underlying change. Cost reductions (>£10m), utilisation improvement (75% Q2 exit rate vs 60% Q1) and cost effective global resourcing all support our forecasts. View. Assuming £280m for Escode (10x EBITDA), the price implies Cyber is 7x FY25E EBITDA based on a low 10% EBTIDA margin. Accepting this Escode valuation, the Cyber margin and multiple look wrong. Our 175p TP assumes 13x EBITA with low-end margins. A ‘normalised’ margin suggests >200p. Buy.
NCC shares have had a decent run into these results, and while in line with management expectations, they have not been enough to push the shares on today. New management led by Mike Maddison has done much to improve the quality of the business, and the team has been materially upgraded in the last 12 months. Within the Cyber Assurance business, TAS has seen utilisation improve to 76% from 60%, a significant driver of improving underlying gross margins. Managed Services is expected to grow materially in H2 YoY, having been strong in the period. We were top of range for FY24 revenues and reduce our forecasts a touch. We continue to argue for the disposal of Escode, and we retain our 146p target price and Buy rating. NCC Group reported a 6.7% decline in revenues at constant currencies and a 9.9% decline in reported revenues. This was primarily due to challenges in its Cyber Security business that started during Q3 FY23. Specifically, the Cyber Security business experienced a 9.6% revenue decline at constant currencies. The North American and UK and APAC businesses saw significant declines of 31.9% and 0.5% in constant currencies. Conversely, the EU saw an 18.8% increase. Managed Services (MS) was up 17.3% YoY, while Digital Forensics and Incident Response (DFIR) was up 32.8% YoY. During the period, the DetACT business was sold for approximately cE9m gross in December 2023. The Escode division saw a 6.2% revenue increase. Both contract and verification revenues contributed to this growth, totalling approximately 6% at constant currency rates. While the H1 results were slightly lower than we expected, we feel that the stabilisation of TAS and the building momentum in MS means that management’s reiteration of FY24 guidance is credible. Within the Cyber Assurance business, TAS has seen utilisation improve to 76% from 60%, a big driver of improving underlying gross margins. There is a seasonally strong quarter ahead for TAS. Managed Services is expected to grow materially in H2 YoY. We bring our top of the range revenue forecasts down £5m but leave our other forecasts largely unchanged. Mike Maddison, the new CEO, continues to do the right things, and we also like the new CFO, Guy Ellis. To underpin this, there are significant new hires with high quality CVs. Global Chief Operating Officer, Kevin Brown brings experience from BT Security and Insight Partners, focusing on cybersecurity. Siân John, the Global Chief Technology Officer, is a former Microsoft executive known for her leadership in cybersecurity and involvement in shaping UK policies and research. There is a significant upgrade in management across NCC. We continue to argue for a disposal of Escode and a capital return to shareholders. Assuming a £240m valuation for Escode leaves Assurance on 0.8x Sales, after the recent run in the shares. As we gain increased confidence in management's delivery capability, there will potentially be upside to our valuation target for Assurance, as a low teens EBITA margin business growing double digit c1.5x sales fair value. We retain our breakup value-based TP of 146p.
H1 largely as expected following trading update NCC group delivered H1 Revenue of £159.2m (-9.9% y/y), a gross margin of 37.9%, Adjusted EBITDA of £15.6m (-35% y/y), Adjusted EPS of 0.5p and strong cash conversion of 89.1%. Post the trading update at the AGM, the group is in line with expectations. On outlook, reflecting exit rates and continued momentum, the group remains comfortable with current consensus levels and guidance range aided by strong momentum in managed services. Escode revenue and profit grow with retention stable. As expected, escode delivered two quarters of consistent profit and revenue growth with revenue up 6.6% y/y in constant currency terms aided by pricing increases and increased verification revenues and an easier comp. The client retention at 93% is stable. Cost efficiencies realised and signs of progress in Philippines The group delivered cost savings of £5m within gross margin as notified in September 2023 and has now added over 60 revenue generating professionals to its Manilla office as part of these plans.
Key messages NCC has been a key recovery pick for us. This statement gives confidence in the continued re-build of the group and the investment view. H124 results are in line with expectations and the full year outlook maintained. There have been some accounting changes, taking SBP and amortisation of acquired intangibles to the EBITA line, which is unusual in the sector, so this will create an optical downgrade at the EBITA and EPS line, but like-for-like we would expect no material change to consensus, with the company still expecting modest profit growth, versus our flat forecasts, as per previous guidance. The H124 performance supports this outlook in our view. Overall revenue was down 6.7% cc with EBITDA of £15.6m and operating profit of £4.8m, with the latter being £10.2m on the previous measure, in line with guidance. Escode grew 6.2%, ahead of guidance, partly aided by the comp, and driven by price rises and verification. Cost savings are on track, and the group has seen improvement in utilisation and gross margins. Technical Assurance remains lower visibility (shorter project life cycles) but Q2 exit run rates gives the group confidence in the outlook along with the growth in Managed Services. The company will be looking to change the year end to September. Key focus areas For us, key focus areas were utilisation improvements in Technical Assurance (we understand that Q224 utilisation in TAS moved up to 76% from 60% in Q1), overall costs savings on track, reasonable revenue visibility into H2, new senior hires bedding down well and prospects of a valuation catalyst in Escode while keeping its trading momentum. This statement gives ticks in all these boxes. Arguably, from a valuation catalyst perspective, it would have been even better to hear of a re-start of the ‘sale’ process of Escode, with the statement saying this is still on hold ‘at this juncture’, leaving room for this carrot still to dangle. However, the trading momentum in the division suggests a better price could be realised in due course. The accounting changes, some of which we struggle to understand, such as taking amortisation of intangibles to the adjusted profit line, make the numbers more complicated, but we believe underlying trends are heading in the right direction. View We retain our Buy and SoTP-based 175p TP; with the current price in our view assuming the Escode valuation is realised at some stage, the market is factoring in paltry margins on an on-going basis in Cyber which we see as unlikely.
Management’s “Well placed [for] full year expectations” reflects confidence across managed services, consulting, Escrow, Manila, go-to-market and new segment leaders, all while taking into account limited TAS visibility. As detailed in our recent note, NCC has turned a corner and will start to feel the secular tailwinds. We reiterate our Buy rating and 200p TP, given that NCC trades at a 25% discount to peers on CY24E EV/EBITDA.
NCC Group^ (NCC, Hold at 128p) - Interims preview
Under its new CEO, NCC has been laying the foundations for better verticalization, a better go-to-market strategy (e.g. the new CCO) and better operational efficiencies (e.g. new COO). We believe it is finally set to align its “business” DNA with its already strong “technical” DNA. This upside can be bought at a c.25% discount to the broader peer group. We reiterate our Buy rating and 200p TP.
NCC is due to report interims soon, and we are very confident of our FY24E adjusted EBIT forecasts. While we reduce revenue for the disposal, we see no reason to change our EBIT forecast, despite the loss of €0.8m adjusted EBIT from DetACT. Given the upside to both margin and growth, we remain bullish for 2024. We reiterate our Buy and 200p TP.
Directionally positive trends Trading is in line with management expectations for H124 and the FY24 outlook is unchanged. In the Cyber business, Managed Services has continued to see strong growth, with Technical Assurance stable at the lower H223 run rate. We see this as a positive that the business has reached stabilisation. Combined with improvement in utilisation from management of the resource base, this has supported an increase in gross margins. In Escode (formerly Escrow) there has been another two quarters of yoy growth helped by verification sales and price increases. The £5m of cost savings targeted across the business is ahead of schedule and net debt is in line. Formation of the new exec leadership team is now complete. Interim results have been bought forward to Jan 25th from early Feb. Another dollop of reassurance The business is undergoing material change with a huge amount to do but the turnaround, financial and strategic, is directionally positive. The FY23 results suggested that the bottom had been reached, in our view, in terms of trading, and strategically all the right steps were being put in place. This update reassures that the measures taken are working and that the business stabilisation is allowing the strategic change measures to be rolled through the business. We expect a new segmentation of the business at H124, along with the go-forward KPIs and detailed profit assumptions. We would hope this will give confidence that the business is capable of returning to a ‘normalised’ level of profitability in due course, which we do not see priced into the shares View Assuming 10x FY24E EBITDA for Escode (£270m) the current share price assumes little improvement off a 5% Cyber Security margin, based on a 12x profit multiple. We see this as too pessimistic, with our 130p TP assuming 12x on a 7% margin. However, we would see this as the first step of recovery, with material upside beyond this on the basis the group returns to growth and normalised 10% plus margins as the strategic changes take hold. Buy
NCC Group^ (NCC, Hold at 120p) - In line H1 update
We recently visited NCC’s HQ to spend time with senior execs. There was visible excitement around potential upside. Much of this is on the back of better customer centricity and go-to-market motions. It was our first time talking to the new COO, and we were impressed. NCC’s 27% discount to the broader peer group on 12.3x CY24 EV/EBITDA is unwarranted in our view. We reiterate our Buy rating and 200p TP.
In our view, Mike Maddison, the new CEO is doing the right things, and we also like the new CFO, Guy Ellis. To underpin this, there are significant new hires with high-quality CVs. We continue to argue for a disposal of Software Resilience (renamed Escode) and a capital return to shareholders. Assuming a £240m valuation for Escode leaves Assurance on 0.5x Sales, which is too low. As we gain increased confidence in management's delivery capability, there will be upside to our valuation target for Assurance. We retain our breakup value-based TP of 146p.
NCC Group^ (NCC, Hold at 112p) - In a holdingpattern…
The group's interims are in line with expectations/trading update and the outlook for the year is unchanged. The group is executing on many fronts as it rationalises the cost base, rebalances the skill sets and global delivery capability of the group whilst trying to drive sales momentum. There is
Turnarounds aren’t easy – I’ve seen a few in my career and had the learning experience of working for one of them. We believe that the new Exec of NCC has made a decent start, putting in place the leadership team, aligning sales with client verticals and taking action to recover gross margin (heads, global scheduling and delivery), with the benefit of cost actions to come. As a consequence, we expect margin to rise from 9% in FY24E, when profits will be 67% weighted to 2HE, to 12% in FY25E. We believe that the shares trade on too low a multiple of partially recovered margin and re-iterate our Buy rating and 150p TP.
Headline numbers Overall statement is in line, the first time in a while we have had an update without any negative surprises, which we read as signs the business is stabilising. It is still to be expected that there may be some modest risk around the numbers considering the change going through the business, with our flat profit forecasts below the modest profit growth targets, but we see this more than reflected in the valuation and read this as a largely positive update. Revenue and profit of £355.1m and £28.8m compares to our £332m and £28.5m, respectively. Assurance declined -10% in H2 with FY at £270m versus our £270m. Profits were £6.9m versus our £10m implying a loss making H2. In Software Resilience, growth was down -0.5% to £64.3m vs our £62m, but it saw H2 growth of 0.6% with profits of £30.6m versus our £28.5m. Cash flow conversion was strong at 101.9%. Assurance commentary They are seeing stabilisation in Assurance (Cyber) orders, which gives some confidence around holding current revenue run rates, with cost efficiencies and utilisation improvements. Clearly it will take time to claw back from the -£3.6m loss making position in H223 and we would expect a breakeven performance. However, efficiency improvements and improved utilisation are to help push the business back to improving margins in H2, with our current estimates assuming H224 5% margins, on the assumption revenues maintain steady. Software Resilience commentary Growth improved in H223 and we understand pricing and renewal trends were positive in H124, which should support gradual profit growth into FY24. There was no mention of an update on the thoughts behind a potential sale process for the business, but we would expect this to happen in due course. View We maintain our view, the market is implying the longer term Assurance division remains materially under pressure from a margin perspective, assuming a >£250m valuation can be achieved for Resilience, which we see as too bearish and see longer term value potential from these sold off levels.
NCC Group^ (NCC, Hold at 100p) - FY23A Results
Given 1Q revenue trends, and assuming a 1:2 weighting for 1H:2H adjusted EBIT, we think the company is on track to hit consensus FY24-25, and achieve guidance for double-digit growth with mid-teens EBIT beyond FY26E. The risk/reward is attractive given a CY24E EV/EBITDA of 8.5x, a 33% discount to cyber and consulting peers. Buy, TP 200p.
NCC Group^ (NCC, Hold at 97p) - Trading update in line
Confirmed turnaround in Industry. Estimates up by 7% for '23 and ~3% for '24-'25. Share up ~13% YTD, valuation still historically low - BUY.
NCC NCCB NBWP NJCC
EBIT set to decline 15% y-o-y in Q2'23. One-off from divestment boosts earnings in H2'23. '23e-'24e growth with a historically low valuation. BUY.
NCC Group^ (NCC, Hold at 90p) - FY23A Model update
NCC is a turn-around stock suitable for value investors, with the catalysts of new management taking action to improve performance, recover gross margin and reduce cost and a potential break-up further out. The FY23 trading update was in-line with reduced expectations (post March’s warning) with a deferral of the Resilience strategic review, which we argued in our initiation would be better sold when NCC is in a stronger position. The shares trade on 6.6x EBITDA and 9% FCF yield to CY24E, using a partially recovered EBIT margin of 12.5%. Re-iterate Buy rating and 150p target price.
Cyber Security. H223 revenues -10% (+11% H123) due to previously flagged weakness from the large US West Coast tech vendors. Clients have not been lost, or gone elsewhere; work has been ‘paused’ and a resumption is not assumed in FY24. Managed Services grew 14%. Key senior hires have been made, with initial positive results, some of which we may hear through mini-teach-ins. Essentially the business is not in free fall, trading is stabilising (at lower levels) and there is a sensible strategy to get the business through its challenges and position itself for a market that still has growth to be accessed. Software Resilience. H2 revenue up 0.6% suggests the business has regained a bit of momentum, with price rises and leadership changes taking effect. The ‘disposal process’ has been officially paused until post the Sept results. We hope for action here, sooner rather than later, to maximise value while trading is progressing well and to act as a suitable value creation catalyst. Forecasts. Illustrated overleaf we downgrade FY24E & FY25E EBITA by 20% & 16%, moving slightly below management targets for modest profit growth, seeing a more protracted route to a Cyber Assurance margin snap back. However, the key point is these are depressed levels of margins and, ultimately, with the action the business is taking and the end market growth dynamics, we see the business moving back to more reasonable levels of profitability over the medium term, which the current share price is not implying. View. We struggle to see how value cannot be achieved from current share price levels. Over the medium term it will take some doing not to achieve Cyber Security margin of c10% (or greater) and a value creation event for Software Resilience. Assuming £250m for Software Resilience (below mgmt. mooted >£300m base value), the current price suggests <8x FY25E Cyber Security EBITA driven off a 6% margin, a ‘trough’ depressed margin level. This is an unsustainable situation in our view, with our 130p TP based on 16x EBITA. A ‘normalised’ margin would drive significant upside beyond this.
Hostelworld - Initiation, Strategy - UK inflation, Commodity snapSHOT, THG Holdings, Halfords Group, Gemfields, Futura Medical, AEW UK REIT, Chariot, Speedy Hire, Mining LOWdown, SMID Market Highlights
NCC AEWU CHAR ERGO FUM GEM HFD HSW SRC SDY SSPG THG
Hostelworld - Initiation, Strategy - UK inflation, Commodity snapSHOT, THG Holdings, Halfords Group, Gemfields, Futura Medical, AEW UK REIT, Chariot, Speedy Hire, Mining LOWdown, Market Highlights
NCC AEWU CHAR ERGO FUM GEM HFD HSW SRC SDY SSPG THG WTB
FY23 in-line with the lowered targets FY23 EBITA seen as £28.5m, in line with the £28m-£32m guidance range at the last profit warning. We are at £28.7m and FactSet consensus is £28.6m. Net debt of c£50m ex finance leases is in line with our forecast. Overall Cyber Security FY23 revenue was in line with FY22, with 10% H223 decline vs H123 11% growth cc, mainly due to the declines from the US client base as previously alluded to. Global Professional Services declined 16% in H2 with Managed Services seeing 14% growth. In Software Resilience growth of 0.6% cc in H223 was up from the -1.6% H1 decline, with quarterly progression and price rises coming through. Of the £5m strategic investment planned for FY23, £2.5m was realised and the remainder deferred into FY24. Outlook for modest profit growth should be taken well versus where the share price is While trading is clearly challenging, and there is a lot of change required and being pushed through the business, an overall ambition for profit growth in FY24 should be taken well, even if not fully achieved. We suspect it may be a little over ambitious, considering the weak H223 exit rates in Cyber Security and the dynamics / timescales of recovering profit levels in an IT Services business operating in challenging market conditions. However, with a number of new senior leadership hires now in place, the company sees £10m of cost efficiency in Cyber Security, of which £5m should be in FY24, to help offset the £6m of strategic investment planned; with a strong strategic focus now on the business, this sets an overall encouraging tone versus what the share price is implying, in our view. In Software Resilience it is encouraging that low single digit growth is being targeted and the business is regaining some momentum. While the sale process has been paused for now, if traction continues this should preserve value and act as a valuation catalyst in due course. View – difficult to see how value cannot be realised from current level While the business is in a challenging position, we see the share price factoring in worse, and struggle to see how value cannot be realised ahead, as conditions stabilise. Assuming an eventual £250m price tag for Software Resilience, this implies c10x EBTIA for Cyber Security on depressed earnings levels which we see as too pessimistic. We place our forecasts and TP U/R.
NCC Group^ (NCC, Hold at 87p) - FY23A Trading update
The difference in the outlook vs a year ago, without customer attrition, validates the need for the strategic changes. Strong cash (net debt of £50m vs PHe £62m) reminds us why we like NCC on >8% FCF yield (excluding exceptionals). The valuation de-risks the CEO’s transformation, specially when one considers Escrow (18% of revenue) EBIT vs the market cap.
Assuming £250m EV for Software Resilience, implies a 0.56x EV/Sales valuation for Assurance. This is cheap for an IT services business, let alone one focused on cyber. However, Assurance will be loss-making in H2, is going through restructuring (layoffs + building offshore capability) and repurposi
NCC, having made cautious comments at the interims in February, announced a significant profit warning on the Cyber services business Assurance on the 31st March. NCC now expects adjusted operating profit to be within a range of £28m to £32m vs £47m previously. This is driven by sharp decline in performance at Assurance. Assurance will now only grow low single digits, which after a strong H1 means H2 will be down YoY. Software Resilience is performing in line. We believe Software Resilience is non-core and will be sold, with today’s news putting pressure on management to deliver a decent exit for this business.
Reasons. Over 80% of the shortfall was blamed on the US, with around half geared into US tech majors that have accelerated spend reductions, leading to delays, cancellations, and more business going to lower priced offshore vendors. The latter is a key point. If the market is shifting East overnight, then NCC has a material structural problem. Our take is this is a continuation of market trends, not a new phenomenon, and that there remains a market for NCC; but it needs to accelerate its global delivery model and move up the value chain, which the strategic review prioritised, as highlighted at the results. Numbers. The profit impact is material due to the negative operational gearing of under-utilised staff. There will be staff reductions to preserve future profitability, but this has taken NCC by surprise and the cost outs seem reactionary and firefighting, which does not reassure. The company expects growth in FY24, but we can’t see how this will be possible on H223 exit run rates so factor in 5% decline. H223 is likely to be near breakeven, but should pick up going forward as cost reductions feed through. More details overleaf. Software Resilience. We have not changed our forecasts. The company indicated that the potential sale of the asset may be paused while the Assurance issues are being worked through. This was a potential value enhancing catalyst, so this also impacts the near term investment case. Valuation. Our 130p TP is 15x Assurance FY24E EBITA (£202m) and 11x Escrow (£245m), which should be a low end case. We hope for revenue stabilisation in FY25E, and medium term margins should move beyond 7%, which would pitch Assurance at materially higher valuation levels. View. We were, in hindsight, wrong to have been buyers, but feel that changing direction now risks capitulating at the bottom. It is going to be a challenging period, but there should be value beyond the current price, either reflected by the market in due course, and if not, potentially by an outside bidder.
IT spend in key areas like Big Tech (lay-offs creating procurement uncertainty) and now Financial Services (“SVB-effect” pausing spend), continues to weaken. Given this is transient, we expect NCC to implement strategic actions. We revise our price target from 255p to 200p.
In this note, we explain what the key innovations are (large language models powered by transformers), and discuss both potential applications and the limitations of the current technologies. From Craneware# to NCC#, we believe the use of these technologies can be margin accretive.
NCC Group plc Craneware plc
We believe NCC’s cybersecurity division will continue to grow faster than the market, while our market growth expectations are tapered. The result is a 3.5% cut to CY23 adjusted EBITDA. We reduce our target price from 363p to 255p, reflecting the current peer valuations and discount rates.
We think the ongoing strategic review at NCC should lead to the disposal of the Software Resilience business and the focus will switch fully to the Cyber security services business Assurance. The new CEO, Mike Madison, has clearly identified that there are no synergies between the two and a strategic review has begun. Our view is that the accelerated investment in the high growth Cyber security services business makes sense, with a disposal of Resilience the most likely result of the review. We update our forecasts for the recent adjusted guidance, which reflect some macro headwinds and accelerated investment in Assurance. Given its high margins, a sensible price for Software Resilience in our view would be c£240m, which is c4x sales. We run some scenarios around this in this note. We retain a Buy and leave our target price unchanged. On our base case the Assurance Cyber services business trades on 1.07x EV/Sales.
NCC's interims became the showcase for the new CEO's strategy, which we view as sensible and a step in the right direction. However, trading conditions have worsened and successful execution is not guaranteed. Our forecasts are below guidance; we move our rating to Hold from Buy as we believe curre
Assurance strategic investment. The £5m of investment (c£8m full year run rate) into H223 will focus on building deep vertical teams and route to market (partnerships), increasing capabilities in Consulting and Managed Services (higher growth and margin areas underserved by NCC), creating an offshore global delivery platform, and brand improvement. This is expected to deliver overall mid-teens growth and margins for the business. Assurance Headwinds. H1 grew 10.8% cc, accelerating in Q2. However, the market quickly slowed in Dec (NA) & Jan (UK). The refined strategy is being implemented against these headwinds, with headcount being cut c7%. H123 utilisation was low at 65.7% and with attrition falling cost action is being taken. Modest FY24 yoy headcount growth and higher utilisation is assumed to deliver high single digit growth, which carries risk, in our view. An additional 23% of growth is seen from the strategic initiatives, which seems ambitious in the short time frame. Margins should accelerate (ex-strategic investment) due to improved utilisation and service type / delivery mix (managed services, XDR, offshore) but we opt for less aggressive targets than current guidance. Software Resilience. Shareholder value creation is now the priority, and it is being run under strategic review, which we judge should ultimately lead to a positive valuation catalyst through a sale and recycle of cash back into Assurance. Revenues decline 1-6% but Q2 saw improvement. A key priority will be to stabilise the business to support effective value realisation. Forecast. We cut FY23E EBITA by 19% (-10% pre strategic investment) and FY24E by 9%, taking us 10% below guidance, as we discuss overleaf. View. At a low 10x FY24E EBITA for Software Resilience the current price implies 11x for Assurance, signalling little belief in the strategy or underlying asset value. We are more optimistic and see value ahead as numbers are bottomed. Retain Buy with a 235p TP (SoTP, 11x Resilience, 15x Assurance).
Numbers Group H1 revenues were up 10.2% cc to £176.6m, with EBITA of £20.5m vs £20.2m H122. In H123 Assurance revenue grew 10.8% with NA up 16%, UK and APCA up 12%, but Europe down 3%. EBITDA was £14.3m, down on the £17.6m H122. Software Resilience revenue was down 1.6%, with Q1 down 4.5% but Q2 up 1.2%, as new sales team changes are taking effect. EBITDA was £14.3m, vs £9.4m H122 which was impacted by the deferred revenue haircut. Cash conversion was 91% vs 75% H122. H2 was always going to be an ask, but is compounded by weakening backdrop The forecasts had required a material profit improvement in H2, leaving scope for some modest downside risk. The reversal of the Assurance H123 conference impact, and benefit from the new sales hires and cost saving in Software Resilience, were reasons given to support the H223 profit jump. However, this has been compounded by longer sales cycles in NA and UK with lower attrition (Darktrace, Cyber Security software vendor also recently commented on similar backdrop). While growth is still expected in H223 (Assurance high single digit) the group is planning on reducing headcount by 7%. FY23 operating profit is expected to be c£52m vs our £56.1m and consensus around c£54m. There will be an additional £5m strategic investment, which was previously flagged although not quantified, taking the adjusted outlook down to c£47m. New strategy The group is keeping FY24 profit expectations intact on the back of benefits from the cost savings and refined strategy, but this will require a big ask and it will be seen to what degree the market has faith in this confidence. The refined strategy is expected to drive low- to mid-teens Assurance growth, with a focus on enhancing the global delivery model and creating an offshore delivery centre. View The softening backdrop will be a headwind to the investment case, which we saw as positive based on the new strategy push around both business units vs the valuation. We still see material value and retain our Buy recommendation, but the forecasts will need to bottom first, to then provide a base to form the investment case around.
In economic downturns, great companies seek to gain market share through an acceleration in relative growth rates. From focus sectors, broader capabilities, global delivery to better branding, we cannot fault the steps NCC is planning to take. With top peers on 14x CY23E EV/EBITDA, any share price weakness is a great opportunity in our view.
Valuation disconnect. At c12x FY23E EBITA, Software Resilience is an implied £230m, the very low end of any mooted potential value realisation. Today, this puts Assurance on c11x EBITA, a valuation disconnect for a double digit growth Cyber Security services business, albeit one that strategically can advance further. Our 250p SoTP implies15x EBITA, a rating to be earned in this market backdrop, but not out of kilter if the group can deliver on sustained double digit organic growth, while also increasing the earnings quality as the strategy moves the business further up the value chain, expanding its addressable market and also its margin sustainability. Assurance potential. The AGM update flagged double digit H123 growth, which will accelerate further into H223 with business momentum building. We expect Mike Maddison, the new CEO to outline a strategy that further strengthens NCC’s core Technical Delivery and Testing heartland, but also aims to increase its addressable market and margin sustainability by further extending its Managed Service practice globally and forming a presence in high growth Consulting and Implementation Services practice areas (e.g., Digital Identify, Access Mgmt). We expect it will come with initial investment modestly impacting profits, but the returns on this investment will be visible. Software Resilience. The new head of US sales aligned IPM and NCC go-to-market to territory-based sales, which caused some disruption in IPM accounts. This has now settled, and we understand that revenue improvements have already come through recently. A period of boring-but-stable delivery will be key to ensure value is seen in this part of the business. View. We tweak up Assurance EBITA matched by a Software Resilience reduction, which ups our SoTP to 250p. While profits will be H2 weighted (global conference impacted H1 profits by c£4m from costs and lost billable days, Software Resilience H2 pick up) and we expect a modest strategic P&L investment, we see a valuation disconnect as delivery comes through. Buy.
Technology and Software Services - Trading Comment - NCC NCC Group^ (NCC, Buy at 205p) - H1 trading update and AGM, weaker escrow
AGM trading update – cybersecurity outlook strengthens Issuing a trading update today, NCC states that the double-digit CER growth it saw in 2H22 for Assurance has continued into the current year, and more importantly it is “accelerating as the year progresses”. Resilience, given the sales re-org, has started the year with a low-single digit CER decline, which has now stabilised and is starting to improve. Adj. EBIT is said to be tracking slightly ahead YoY for 1H23E ending 30 Nov. While management expectations for FY23E are unchanged, we think the top line for the core cybersecurity consulting business looks incrementally better. We reiterate our Buy rating. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com 2-page note
FY22A results from the cyber assurance and software resilience specialist (posted 6 Sept) were in-line with our expectations, offering reassurance that the business is performing to plan and that trading is rapidly normalising post pandemic with a visible return to secular growth trends. We now look forward to the new CEO’s strategic review and growth strategy expected in January. Ahead of this, here we cautiously assess medium to long-term prospects on the current structure of the Group and reset forecasts accordingly. We retain a BUY stance.
NCC reported its full-year results on 6th September. A strong H2 performance delivered revenues up 16.4% to £314.8m vs consensus £315.5m. Adj. op profit was £48.1m vs consensus £46.5m. Net debt was £52.4m vs consensus £62m. The momentum from H2 has continued into the current year, and management is confident in meeting its expectations for the year. The new CEO will set out his strategy at the interim results and the implications for NCC's market share, and our analysis of this will be critical. We have modelled our target price using the Panmure Gordon Software Valuation Model, giving us a revised price of 245p. If Darktrace is acquired, it will be the only UK play on the cyber thematic.
Assurance delivering. FY22 Assurance gross margins saw a decline, as expected, but strong H2 revenue and opex control meant EBITA was slightly ahead of our forecast. NCC is planning a c.8% rate increase, and coupled with its move to a global delivery model to help mitigate wage inflation hot spots, this should alleviate further gross margin pressure. Debate moves on. The arrival of the new CEO creates the opportunity for a clear strategic route forward for NCC. Assurance has been through the business improvement ‘phase’ over the last few years, and is addressing the near term headwinds of wage inflation through its global delivery model, increasing billable rates and stabilising attrition. This now creates the platform for a standalone business to support incremental growth avenues. For the taking. Moving up the value chain has been attempted before, but sustainable growth was a challenge whilst NCC moved through its ‘fixing’ phase. With a stronger platform now, a buoyant market and incremental growth the primary focus, Assurance could offer attractive prospects. It will take time to yield organic results, may require some P&L investment, and M&A could feature, so the process is not risk free, but it does appear that sharpened value realisation is on the agenda. Software resilience. While H2 saw moderate growth, the core UK business declined, with the £5m investment to address its challenges being worked through. Our take is that once it is stabilised and IPM is integrated, value realisation may be sought to support Assurance’s longer term growth. Valuation. We up FY23E EBITA by 7% driven by Assurance growth. Our 235p SoTP assumes 11x FY23E EBITA for Software Resilience and 16x for Assurance. The 11x multiple is similar to the IPM deal and, while the combined business is larger, it also comes with challenges that are being working though. The Assurance multiple reflects its growth but also the constrained valuation backdrop. We are conscious of the ‘risk-off’ environment, but we sense the value realisation debate is coming into focus, supporting our move to Buy.
This is a good set of FY results, with 10% organic, constant fx growth, a small beat on adj. EBIT and strong cash generation. Importantly, acceleration in both divisions in H2 and a robust outlook should drive confidence that NCC can fully exploit its structurally growing market. New CEO Mike Addis
Numbers heading in the right direction Headline FY22 revenues of £314.8m were up 10.3% organic (cc) vs our £312.6m, with EBITA of £48.1m vs our £45.8m. Within this, Assurance revenue was £258.5m (versus our £255.4m) with NA up 14.6%, UK +16% and Europe +8%. EBITA was £31.9m vs our £30.4m. Software resilience revenue was £56.3m versus our £57.2m, with profit of £22m vs our £21.8m. Excluding the IPM acquisition, revenue declined 1.4%, but was up 2.2% in H2 with EaaS sales orders of £3.4m, up 64% yoy. Cash conversion was 101.9% with net debt of £85m (£52.4m ex finance leases). The new CEO will give a strategy update at the H123 results, but the group is confident in meeting expectations for the full year. Assurance H2 trends encouraging Within both Assurance and Software Resilience, H2 showed good momentum. Assurance saw NA growth 20% cc, UK/APAC 16% cc, with only Europe seeing an H2 moderation at c5%. Day rates were up 3.5% in H2 vs 2.1% for the year as a whole and attrition was stable at c21%, a high but manageable level. As expected, gross margins declined slightly to 35.7%, mainly driven by investment into the NA business with overall gross profits in line with our forecasts. Software resilience better, but work still to be done Key for us was the pick-up in the business ex IPM during H222 to c2% growth following the unexpected decline in H122, with revenue of £36.1m in line with our forecast. However, this was largely driven by NA and Europe, with the UK, the largest division, down 2.8% for the year. IPM was c3% and 4% behind internal revenue and profit targets respectively, with increased focus on the division. Gross profit of £40.3m was slightly below our £42.4m, although opex control mean EBITA of £22m was in line with our estimates. View Overall, we see the results as reassuring, with gross margins in Assurance well managed and decent revenue trends. Software Resilience remains somewhat challenged and we look for more details on strategic plans. We will tweak forecasts post the meeting and place them under review.
FY22 results – momentum accelerates into 2H Nullifying market worries, NCC delivered 15.1% CER growth in Assurance and 2.2% in Escrow for 2H22. Technical headcount growth of 24% dampened attrition worries, while continued price increases in 2H moderated inflationary worries. We feel vindicated that our bullish stance on NCC is now evident. Despite unchanged guidance, 2H momentum and forex provide increased confidence around unchanged forecasts. The new CEO brings decades of cybersecurity leadership experience that should help NCC navigate the macro-volatility that is already discounted by the >9% FCF yield. Reiterate Buy. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com
Highlights from the TMT conference Last week we hosted our annual TMT conference in London. Seventeen companies participated in seven panel discussions covering a range of topics, which we felt were important for 2022 and beyond. In this note we discuss the highlights and key learnings from the event. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Gautam.Pillai@peelhunt.com, Oyvind.Bjerke@peelhunt.com, Jessica.Pok@peelhunt.com, Please click below to watch our video 9-page note
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NCC announced a new CEO arriving in August with strong credentials in cybersecurity services and a track record of delivering significant growth. A reassuring trading update confirms both Assurance and Software Resilience showed good organic progress in H2. Trading on 15x May'23 P/E with a 6% FCF y
Trading update FY22 revenue and EBIT are expected to be in line with management expectations, which we understand is in line with consensus, pre (£50.9m) and post (£46.5m) the deferred revenue haircut. Our £45.8m in line with post deferred revenue haircut. Assurance is expected to grow c15% from increased volumes and day rates, which is ahead of our c13%, and would imply rising costs (wages) considering profits appear to be in-line. Software Resilience will post modest revenue growth in H2. The division has started an operational review which is expected to improve contribution by c£5m during FY24. We had been concerned around the profit delivery of the underlying (ex IPM) Escrow business in H1, so we assume this review will help strengthen the overall profit capability of the business. Net debt is expected to be in line with management expectations. FY22 results expected 6th September. CEO Change Adam Palser has decided to step down in mid-June with Mike Maddison taking over as CEO, who is currently EY’s cyber security head. In our view, Adam significantly improved the quality of the business during its turnaround and led it successfully through the pandemic period. The change of leadership appears to reflect the desire to drive further growth out of the business from the platform it has now built up. View When we struck our forecasts at H122, we sensed these were slightly below consensus, reflecting our concern around Assurance wage inflation and Escrow profit delivery. However, with the deferred revenue haircut treatment, it is difficult to see if consensus has nudged down during the period, with our forecasts now seeming in-line with consensus. Assurance revenue growth is strong, which is a key positive and has driven profits, despite the naturally rising costs, although the Escrow review, while ultimately positive, does reflect the need to improve the underling profitability. The new CEO is also likely to bring some changes, and we stay at Hold ahead of hearing any news on these.
Strong trading update – from turnaround to growth If there was any unease in the market about NCC’s ability to deliver 2H22E growth in Assurance or escrow, the trading update puts this to rest across growth, margin and cash. While we are not touching our numbers yet, ‘Assurance’ volume + price trends into FY23E, and ‘Resilience’ cost synergies into FY24E seem likely to drive upgrades. It is therefore fitting that the CEO batten is being passed to push forward the, largely cybersecurity driven, growth agenda. On c.10% CY23E FCF yield, NCC is one cheapest tech stocks around. With the growth agenda, we think it will be one of the best alpha opportunities. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
Exploiting the cyber ‘debt’ From regulators like the FCA, to ratings agencies such as Fitch, there is awareness of increased cyber-risk due to geopolitical uncertainty. Meanwhile, from WFH to eCom, Covid-19 has seen increased threats surface. However, companies have struggled to tighten cyber-security, leaving many a Fortune 500 vulnerable, Nvidia being the latest example. NCC already works with large tech giants. Zoom, for example, turned to it when security became the number one issue. In our DCF we account for some FX headwinds on revenue and the rising rate outlook which increases our WACC, reducing our TP from 363p to 330p. Buy. Damindu.Jayaweera@peelhunt.com, Oyvind.Bjerke@peelhunt.com, James.Lockyer@peelhunt.com 3-page note
Fears that wage inflation and higher attrition rates will impact gross margins appear to have driven a further 10% decline in the share price since the interim results on 27th January. Whist we believe that the increase in day rates and higher utilisation rates should help offset negative pressures, nevertheless we have cut our underlying FY22 PBT forecast by 10% as weak H1/FY22 performance from Software Resilience may have left trading in H2/FY22 with too much to do. This, together with the 19% fall in HACK since our last update in October, has driven a 22% reduction in our TP to 289p. We retain our BUY recommendation as growth drivers are still intact and the downside risks appear to have been fully discounted.
The cyber and software Resilience specialist provided a mixed set of interim results in the eyes of many on 27 January. However, we see ample scope for underlying progress and for the Group to build on the strategic delivery that we do believe is being achieved. The pandemic caused delays to client project delivery and cost inflation in service delivery is apparent. Escrow services have also borne the impact of additional costs to better position this business. The impact of these is set to ameliorate through H2 and into FY23F, in our view. We foresee better times ahead and retain a BUY stance.
Having reached 348p in Sept 2021 (a 5-yr high), NCC's share price has fallen 45% despite no meaningful change in consensus expectations. Whilst some KPIs in the recently reported interims were still "amber", there were other areas to cheer. Software Resilience may have seen the bottom and the group
Assurance positives. Revenue growth of 9%, gross margins +1.2% yoy (from a weak compare), 2% price rises (first time in two years), utilisation up 6.5% (from a low base) and headcount up 12% were all encouraging takeaways. Assurance concerns. EBITA only grew £500k, to £14m, with cost increase dampening leverage, which carries through to H222E. While gross margins improved with price rises and utilisation mitigating wage inflation, we still question the ability of both these metrics to continue to expand from now high levels, to counter building wage inflation. We forecast stable sequential gross margins at the already high level of 36%. Combined with the opex dynamics this does not build in cushion, unless revenue beats materially. Escrow poor. Due to sales issues flagged previously, revenue declined 3.3%, better than H221 declines, but still not great. Sales hires now made, growth is expected in H2, off a weak comp. EBITA was disappointing at £5.3m vs £8m last year, reflecting the revenue decline but also increased investment to support future planned growth. Margins are now at c.30% (50% a few years ago), which raises questions about long term profitability levels. IPM in-line. Adding back £2.7m of fair value adjustment, EBITA was £6.7m, in-line with deal projections. This also included c.£1m of integration costs. This year profits will be hit with c.£4.4m of one-time fair value adjustment, so FY23E will see a tailwind. However, we expect cost investment to increase, which may also absorb the integration cost felt this year. IPM muted the Escrow miss but it needs to prove it can sustain >60% margins and not fare like Escrow. View. The self-help recovery over recent years has been a positive journey. Now it is largely organic delivery and we feel profits may be constrained nearer term due to the market backdrop and cost investments. Our FY22E/23E EBITA forecasts sit 7% and 10% below pre-results consensus with our 200p (previously 220p) SoTP based on 15x and 12x FY22E profits for Assurance and Escrow.
Good Assurance revenue traction, softer on profits, Resilience looking to recover Overall H1 revenue was up 14.2% cc to £150.1m including the IPM deal. In terms of divisions, Assurance revenue grew 8.8% to £123.2m and Escrow declined 3.3% ex the IPM acquisition, with reported revenue of £26.9m including IPM. Gross margins in Assurance overall increased c1% yoy to 36%, with UK and Europe up and US down 1% (investment in staff), and declined compared to H221 where gross margins were 37.3%. Gross margins in Escrow declined to c72% from c73.5% due to investment to address execution challenges. Group operating profit was £20.2m, up 10% yoy including £4m from the IPM acquisition. On a like for like basis in terms of accounting treatment, underlying operating profit increased 1% to £16.2m from £16m. Cash conversion was 75% compared to 89% in H121 All to do in H2 The H122 profit performance leaves a lot to do in H222, implying profits move from £20.2m to £29.7m on our numbers which are slightly below consensus. The statement alludes to a building pipeline and orderbooks and activity levels, with a decent start to H2. We await the results presentation to gauge more clarity on the trading momentum, but at this stage we would see modest risk to the profit outlook and also heading into FY23 where consensus assumes material yoy profit growth. Our FY23E profit forecasts are below the £58.5m consensus. Our View We had based our TP/Hold on concerns over forecast achievability (wage inflation, investment, pricing, utilisation, Escrow weakness). There appears to be mixed news on delivering on these elements, with some positive commentary, but we think underlying profits were slightly disappointing. We expect to retain our Hold but place our forecasts under review ahead of the results presentation.
In-line 1H22 results, deftly navigating wages and pricing NCC has delivered an in-line set of 1H22 results with an unchanged outlook. The release contained incremental positives. CER growth in Assurance accelerated from 2H21 levels. Pricing power, utilization and global resourcing led to higher margins, nullifying worries around wage inflation. Net headcount growth was also impressive given market conditions. Momentum had improved from 1Q to 2Q ending Nov, with Dec-Jan seeing both Software Resilience revenue and GMS bookings turn a corner. While c.9% org. CER growth might not be sexy, no other Cybersecurity beneficiary is yielding 11% FY23 FCF. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
The cyber and software resilience services specialist is due to report on its H1 period to end November on Thursday 27 Jan. NCC stated at its AGM on 4 November that it “continues to trade ahead of the same period last year on a like for like revenue basis.” The integration of the intellectual property business (IPM) acquired in June was also said to be progressing to plan. We therefore expect a reasonably robust set of results, noting that an inflationary margin impact, which we expect to be a temporary effect, is likely to be felt in earnings. We expect a strengthening outlook for H2 and into FY23F to be confirmed. Post recent underperformance, we see opportunity, BUY
AGM update: reassuring momentum Today’s statement that NCC delivered LfL growth for the period should assuage those worried that the weak start to the year, as flagged at the FY21 results, might have continued through 1H. While the shape of organic CER growth will be 2H weighted, we sense management is now incrementally bullish about prospects versus the FY21 results. While not much colour was provided in the AGM statement, we believe there is enough here to call out the recent 30% drop from the September highs as an “anomaly”. With management reiterating guidance, we believe pricing and order momentum remain healthy. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com
We believe the 22% fall in the share price in the past month is a great buying opportunity. As this cannot be explained by any change in consensus forecasts, we assume this is a function of the rotation from “growth” to “value” stocks. Even relative to the HACK ETF the stock has underperformed by 14% in the past month. However, few UK stocks offer exposure to the buoyant strategic activity in Security Consulting, Managed Security Service Provider (MSSP) and Cloud Security markets, combined with forecast top-line CAGR of over 10% in the next three years. This growth rate is comparable to 13% average CAGR for the Cyber Security sector, which is dominated by software-led companies, and therefore we continue to believe that a discount of 55% to an average sector multiple of 8.7x EV/Sales is appropriate. This continues to value the shares at 370p, hence we retain our BUY recommendation.
Headline financials. These were strong considering COVID challenges and the business improvement plan was ongoing. Assurance revenue grew 3% in H2, with +10% in UK & APAC and +8% in NA. GMs increased 2pps, driven by strong utilisation of the global resourcing model. Software Resilience fell c2% with steeper H2 declines due to sales attrition with the remote set up not helping. Group orders grew 9%, day rates were stable. Group profits grew 33%. We update divisionals giving a net -2% FY22E group EPS change (see overleaf). Assurance niggles. Attrition increased to 17% from 14%, with NA hardest hit. Wage inflation and increased attrition is now common across IT Services, but NCC has limited price scope with customers in COVID ‘hangover’ mode. The cyber market will be one of the hottest markets spurring the war for talent. NCC is under pressure to build its resource base and pass on wage inflation in due course; if not, revenue will be impacted through lower billable staff than needed and margins compressed from high single digit wage inflation (at least). Being less active in the ‘higher end’ advisory / consultancy area may limit speedy price rises. Combined with rising costs (travel etc) and utilisation shifts off a high base (remote to on-site) we expect margin trends to be constrained. All eyes on Software Resilience. Much effort had gone into stabilising and modestly growing revenues, so the H2 declines were disappointing, albeit driven by remote working forced upon the company driving up sales attrition. However, sales attrition has been a recurring theme and, with modest declines seen for H122 and growth hoped-for in H222, this is not ideal. It places pressure on the IPM delivery and, while we appreciate the deal’s merits, we have previously outlined our concerns around the sustainably of its c65% peak margin, either due to required investment or unexpected sales slippage. View. Our 300p SoTP assumes healthy multiples of 25x FY22E Assurance EBITA and 12x for Resilience and requires these ‘niggles’ to be well contained. We see the share price as capped for now and we stick at Hold.
Headlines Revenue £270.5m, up 2.6% (3.6% cc) with EBITA £39.2m on the new IFRS basis (amortisation adjustment) and £36.2m on a like for like basis, which is in line with the June trading update stating revenue was likely to be slightly ahead of the prior year (£263.7m) and EBITA to be at the upper end of consensus at the time (£33.7m-£36.2m). Cash flow generation of 88% and £75m net debt (post IPM acq). Q1 FY22 was up on last year; there were some unexpected disruptions in buying patterns over summer, but orders were up yoy and pipeline is robust Divisions Assurance was up c6% in NA and EU, with UK and APAC up c4%, with a strong H2 of 9%. Software resilience declined 2.4%, below management expectations, due to remote working impacting the model. Focus is firmly on getting the division back to growth. The Cyber market was growing 8-9% before COVID held it back, and group has seen signs of buying behaviour normalising towards end of year. Outlook For FY22, guidance is for higher revenue growth than that seen in FY21 partially offset by increased costs from inflation and travel resumption and office usage. The mid-term target remains double digit Assurance growth and sustainable Software Resilience growth and the FY outlook is in line with management expectations. We will tweak our forecasts, updating for the results and IFRS amortisation changes as outlined. We expect to maintain our SoTP valuation-based Hold (having moved from Buy in June post the strong share price run).
FY21 results - order-growth ahoy! NCC’s sales orders were up 8.9% during a locked-down FY21, validating the strength of its end-markets and its positioning. Sept is seeing order flow strengthen, which likely means an in-line 1H22E ex-FX. Even with unusually high August holidaying, 1Q22 was up YoY ex-FX. Therefore FY22E outlook remains unchanged (cons adj EBIT £52m, PHe £51m), with management reiterating the medium-term objective for double-digit Assurance growth. Anecdotal evidence around cyber-budgets suggests an ex-FX upside surprise in 2H. We reiterate our Buy on what we see as the best UK play on cybersec. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
New results date to accommodate new IFRS guidance NCC has reiterated its outlook (cf. trading update) and confirmed that the FY21E results will now take place on 14 Sep, to allow sufficient time to accommodate IFRS guidance issued in April on capitalising cloud implementation costs. Initially intended for 1H22E, NCC will implement this for FY21E, with FY20 and FY19 seeing capex to opex restatements. There is no impact on cash or FCF conversion, and for FY22E there should be a small adj EBIT benefit. This is a non-cash technicality, thus we continue to view NCC as the best value play on the ongoing cybersecurity boom, with no R&D risk to speak of. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com
FY21E trading update: beating on profits With greater than expected Covid-19 savings, NCC has beaten our FY21E adj EBIT by 7-10% (PHe £32.8m vs high-end cons £36m). Net cash (ex-deal) was also c.£4m ahead. Headline revenue is broadly in line given the 1% FX headwind. To have had any growth in a pandemic year shows the structural demand for NCC’s main services. With the ‘Resilience’ business up-scaled, widening its strategic choices, we can now expect growth to accelerate in FY22E led by ‘Assurance’. We reflect our comfort with FY22E forecasts by making no changes despite FX headwinds, and reiterate our Buy rating. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
IPM opportunities. NCC paid $220m for IPM, bringing in EBITDA of c$22m. It doubles NCC’s Escrow profits, gives a strong US foothold and a platform to build a broader Software Resilience offering. The strategic logic is clear and appealing; buying the Escrow market leader, giving an installed base to cross-sell verification, building the recurring revenue base (c80% of IPM revenue) and opportunities to drive Cloud EaaS and Assurance cross-sell over time. IPM risks. Margins are at an impressive high water mark of c65% and, while investment will go in diluting margins slightly, this is built into the plan. The prudent (flat) revenue outlook is sensible, as any unexpected slippage would have a material drop-through. Retention is c86%, a core metric, which we understand has been broadly stable over time. It’s a good base, but the carve-out from the Iron Mountain brand could impact new business, albeit management are very confident there will be no loss from the sales funnel due to the independent way in which IPM operated within Iron Mountain. It’s still early days for EaaS and it remains to be seen how it gains pace across both geographies. Financials. Valued at 10x EBITDA with high margins, part financed with paper on >20 PE, low interest rates for the debt trance plus tax benefits, the forecast impact is highly accretive and compelling. Our upgrades are deal-driven, with only slight Assurance tweaks. FY21E: revenue £276.5m (unch), EBITA £33.9m (£32.9m) +3%, EPS 8.2p (7.9p) +3%. FY22E: revenue £316.7m (£295.7m) +7%, EBITA £50.6m (£36.8m) +36%, EPS 11.8p (9.2p) +27%, FY23E rev £338m (£317m) +7%, EBITA £54m (£40.2m) +34%, EPS 12.7p (10.3p) +23%. Valuation. Our SoTP rises by less than forecasts, driven by lower rated Escrow profit which we value at 12x FY22E EBITA, which seems sensible in view of IPM’s valuation. We assume 25x EBITA for Assurance; a healthy IT Services rating due to the buoyant market and business momentum. With net debt, this drives a 300p TP. We move to Hold from Buy, seeing a period of consolidation ahead.
Strategic upscaling of software resilience NCC is emerging triumphantly from Covid-19 headwinds, while delivering on its transformation programme. With cybersecurity becoming one of the top-three board-level priorities globally, the timing of this couldn’t be better. While NCC’s focus is mostly on its Assurance business, we laud the company for recognising the importance of the Resilience business to its current equity story. By acquiring IPM, its larger, number 1 competitor in the US, NCC has transformed the strategic positioning of that business. After factoring in forecast changes, we increase our TP from 325p to 363p and maintain our Buy rating. Damindu.Jayaweera@peelhunt.com,James.Lockyer@peelhunt.com,Oyvind.Bjerke@peelhunt.com 8-page note
Meeting Notes - May 25 2021
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IPM is a leading provider of software resilience services to a large and diverse US market – the combination will provide immediate additional scale to NCC's core software resilience business in the UK, making the US region the largest contributor of the division's revenues and profits. We upgrade
The IT assurance and escrow specialist provided a positive update on trading for the full year to end May 2021 and also announced a significantly accretive acquisition on 13 May. NCC is purchasing the IT escrow operating business, IPM, from Iron Mountain in the USA, materially increasing the scale of operations of the division as a whole and its presence in North America. We estimate accretion in FY2022F (May) from the transaction taking adj. EPS from 9.8p to 11.6p (+18%). Consideration for the transaction is in cash totalling £156m, we allow for transaction costs and integration exceptionals totalling a further £12m. The transaction is backed by a c£70m (gross) fund raise leaving NCC with a Debt to EBITDA ratio of c1.5x, falling in our model to a net zero bank debt position over the next three years. In our forecast assumptions, we have ignored client cross service sales synergies, so with a strong balance sheet and new scale in North America we observe visible opportunities for stronger organic growth to follow across all Group operations. Our fair value estimate for NCC rises from the 300p level to 354p (+18%) on the solid trading and the acquisition, we see more to come: BUY.
Rising tide of cybersecurity M&A The recent acquisition of Proofpoint for over $12bn marks a rapid rise in cybersecurity M&A. This is not just driven by Covid-accelerated demand trends, but also by customers’ need to consolidate their cyber estates. We expect a rising appetite for cybersecurity IPOs – a number of multi-billion-dollar private companies are waiting in the wings. In this note, we point out that growth is valued more than margins for high-growth cybersecurity, and highlight which companies are waiting on the wings for an IPO/SPAC. We believe UK-listed NCC# will benefit from greater attention to the sector. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note #Corporate client of Peel Hunt
The IT security consultant and escrow services specialist published its interim results for the half year ending November on the 4th February. These demonstrated year on year growth as expected, accompanied by a confident statement confirming the Group’s future growth expectations. Across group activities, client wins continue, strongly positioning NCC for the post pandemic environment as client priorities revert to past secular trends, in our opinion. Covid is still having an ongoing impact on the Assurance activities, disrupting the ability to fully service clients as well as the operational disruption being felt by clients. However, we note the building ‘compliance debt’ pointed to by NCC’s management that must be repaid in due course by clients and potential clients – underpinning medium term prospects. Growth continues and is set to accelerate, in our view, at an underlying level; we observe that cyber attacks and breaches continue to increase in volume and threat, cloud and IT infrastructure continue to evolve requiring support and protection. NCC remains very well positioned to serve. BUY.
NCC’s interims showed good financial and operating resilience amidst the challenges posed by the pandemic. Key financial metrics such as revenue, adjusted EBIT, free cash flow, showed y-o-y growth. Both Assurance and Software Resilience (Escrow) divisions had pockets of encouraging data with regard
1H21 results – locked and loaded to target cyber “debt” Having upgraded at the 1H update, we were not expecting a repeat at the 1H21 results. Yet we find incremental positivity in the detail. NCC is doing the right thing by further investing to fully leverage the rising momentum. On balance, we therefore leave our FY21E forecasts unchanged, aside from a net cash upgrade from £2m to £6m. Reflecting the rising confidence, NCC is making important hires and investments. With little to fault in the 1H21 results, we reflect on current market dynamics, and assume greater medium-to-long-term growth. This reflects in a new DCF-derived target price of 325p (from 248p). Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com 2-page note
NCC Group reports its interim results on Thursday. Performance has been resilient to date and we believe there will be encouraging data points on both Assurance and Escrow divisions. We believe the group's execution has been more consistent and with efforts to preserve its capabilities through the
The IT security consultant and escrow services specialist publishes its interim results for the half year ending November on the 4th February. The H1 trading update issued on 2nd December confirmed an improving performance through the period encompassing the impact of Covid through NCC’s H1 period since the beginning of June and also the impact of earlier restructuring of the Group. In confirming resilient trading, with revenues “slightly ahead” and FY profitability expected at the “upper end of market expectations”, we retained our high-end forecasts. However, we note that the effects of the pandemic still weighed on activity through the H1 period, though we believe that cyber security was returning to the business agenda as a priority – spurred by the accelerated growth witnessed across economies in digital, on-line services and home working. Since the end of November, cyber awareness within this agenda has certainly increased, driven by the knowledge of the breach in the US as disclosed by FireEye on the 8th December. We expect this to drive a strong H2 performance across the cyber industry, also recognising the Global ‘compliance deficit’. We believe that this illuminates NCC’s growth opportunity and valuation. We eye a 300p+ share price. BUY
H1 21 trading update – tailwinds and upgrades In the AGM update, we noted the trading momentum, and today upgrade FY21E revenue to £270m. This validates our bullishness around cybersecurity spend, where we specifically point to NCC’s undemanding FY21E expectations. Given this momentum, NCC has moved the upper end of consensus adj EBIT expectation to the mid-point of a new guidance range of £31m-£35m. A 13% upgrade means we sit towards the bottom, which factors in planned H2 investments in addressing the employment market that is heating up. This is just the beginning of NCC’s cybersecurity tailwinds. Damindu.Jayaweera@peelhunt.com, James.Lockyer@peelhunt.com, Oyvind.Bjerke@peelhunt.com
The IT assurance services specialist, whilst warning early in the year on the effects likely to be felt from Covid, delivered a robust and better than the market expected set of results in the year to May 2020. On guidance for FY2021F, the message that visibility remained clouded with a wide range of potential outcomes was stressed, with this reaffirmed on the 20th October at the AGM. NCC did confirm that it was performing to plan and ahead of a relatively mild comparative period last year – some encouragement then. We were taken with NCC’s full year comments in respect of the ‘compliance deficit’ building from suspended contracts and projects in secure IT due to the pandemic, the future requirement to address this issue underpinning medium term prospects with a return to secular growth trends then following. For this reason, we remain positive on the outcome for NCC for the current year and beyond and we are happy to run with forecasts that are above consensus. At present, NCC may still feel a little operationally ‘paused’, but in our view the business is ‘poised’ for acceleration. BUY.
Forecast thoughts. We assume an FY20 EBITA of £27.1m, in the middle of the group’s guided range of c£22m-£34m. This implies H220 profits of c£10.4m, which was delivered during the peak of the COVID-19 lockdowns. As economies start to emerge to a more ‘normal’ footing, we expect profitability to increase as utilisation improves. Simplistically, this would imply sequential profits ahead of H220 in H121 and H122 which our model assumes. This drives our FY21E estimates and we expect a snap back in FY22E as improved utilisation leads to positive operational gearing; we see this as realistic considering i) NCC is investing in retaining its consulting staff base, and ii) the demand backdrop should remain strong considering the trends in the Cyber Security market place. Forecast changes. FY20E: revenue £254.2m (previously £239.9m), PBT £24.6m (£18.8m), EPS 6.8p (5.2p). FY21E: revenue £251.3m (£215.9m), PBT £23.0m (£14.8m), EPS 6.4p (4.1p). Our View. We retain our positive stance on NCC seeing value in the group as it emerges from the end of its business improvement plan and also the depths of the COVID-19 crisis. This should drive materially increased profitability over the medium term and ultimately there is still the longer term potential value realisation from driving Escrow and Assurance as standalone businesses, either privately or in the public markets. Our 200p SoTP is based on FY22E EBITA multiples (18x for Assurance and a 12x recovery multiple for Escrow) assuming an equal share of central costs.
A resilient performance Revenue will be higher than FY19 versus our forecast for a modest reduction, with profits set to be between consensus of c£22.3m (we were at £21.3m) and last year’s £33.7m. With the audit ongoing, the company has not given an actual number but mid-range would imply c£27-£28m. We had reset our forecasts at the last trading update, which was just as the COVID-19 crisis was breaking in Europe and the US. At that stage, it was unclear whether NCC’s clients would allow its staff to deliver their work remotely across the board and as such we had built in contingencies of lower utilisation and profits. However, since then clients have allowed all staff to deliver work remotely with NCC systems and processes supporting working from home across the business. As such, this has led to a better Q4 outcome than expected. Net debt was £5m at year end vs our £18m – benefiting from strong cash discipline, cost savings and a £5m tax deferral. Expect consensus to shift up for FY21 The company has not given guidance for FY21 due to the current situation. Next year, we had forecast £16.8m EBITA which was broadly in-line with consensus when we set it at the last update. However, assuming a FY20 outturn of c£27m, this would imply H220 profits of c£10m. We would expect this to be a low point with it overlapping the COVID-19 crisis and, as such, simplistically we would see FY21 to be above £20m considering the global economy is slowly opening back up. The company has not made any COVID-19 redundancies, retaining staff to ensure the business has a strong platform, with technical staff attrition down which is a positive. This should enable the business to emerge even stronger as market conditions start to normalise, but retaining unbillable staff will clearly dampen near-term profits with utilisation still being impacted by the current crisis. View NCC was emerging from the end of its multi-year business improvement / turnaround plan when COVID-19 hit, with the benefits of this work clearly apparent in terms of having the systems and operational structures now in place to manage through the crisis. We keep our positive view on the company, seeing upside both from the benefits of the business changes it has made and as it emerges stronger from the current crisis, and retain our Buy.
The IT Assurance and software Escrow specialist updated on its trading performance and outlook on the 23rd March, to encompass the Covid-19 impact on the business. NCC has seen deferrals, delays and cancellations in its Assurance division core in the Q3 period to end February in the Asia Pacific region, now extending with the spread of the virus into North America and Europe. The Escrow business has not been similarly affected at this juncture, but we must assume a moderate impact from new sales activity, in our opinion. We believe that the overall impact on NCC will largely be felt through the current Q4 2020F (May) period. The Group is likely to beginto pick up with growth rates seeing improvement into Q1 2021F. NCC’s work in protecting clients in IT Assurance from malignant forces, and in Escrow from software/host vendor failure, has never been more important than in these stressed conditions, in our opinion. Indeed, we observe acute need for even greater protection from threats as more people are kept at home, working under new and revised operational procedures and at potentially higher security cost. Thus, we expect to see the return to trend development at NCC in due course. Meanwhile, the Group remains well financed and we expect cash generation to continue. BUY.
Current trading. While NCC expected it would absorb the impact of Asia Pac Q3 weakness, with this now a global basis and with Q4 NCC’s largest quarter (May y/e), the company will be materially impacted by the current situation. Near term uncertainty, longer term intact. The group has material B/S capacity so we see this as a period of trading weakness from which the group will recover once the situation stabilises. The market for Cyber Security services will only increase and arguably remote working, if ingrained in the longer term in corporate practices, will require further cyber resilience. Business model. Around 70% of Technical Consulting (65% of Assurance) is carried out remotely, with potential to move to 100% depending on client agreement. In addition, the managed service business (20% of Assurance) has longer term contracts. While there is this degree of resilience in the business model, the severity of travel restrictions in many areas where the business operates is delaying new projects and limiting on-site client activity. Escrow (45% group EBITA) has longer term contracts, but Verification testing is more project-based so we would expect some impact in this division as well. Actions. We expect cuts in discretionary spend and potentially looking at areas of flexibility in the workforce. With a sound B/S (£100m facility) we would expect the company to limit material reductions of its billable workforce for as long as possible to keep the business intact for when this situation stabilises. Until the company advises on its dividend approach, we make no change. Forecasts. Our initial view, which we will refine as the situation become clearer: FY20E sales £239.9m (£270.8m), EBITA £21.3m (£38.3m), EPS 5.2p (9.9p), FY21E sales £215.9m (£290.3m), EBITA £16.8m (£42.2m), EPS 4.1p (11.1p). Valuation. Looking out to FY22E when we expect more normalised trading and financials, 14x Assurance/10x Escrow EBITA drives our revised 160p SoTP.
NCC’s interim results published on January 23rd revealed continuing strategic progress across the group’s activities in IT Assurance & cyber and software Escrow. We had hoped to see slightly stronger financial metrics, though the direction of travel remains as guided. We note emerging margin improvement in Assurance, but the largest delta on Group financials in the short term has been Escrow’s lower revenues and margins as these activities transition to a new environment encompassing clients’ ‘cloud’ needs. We reassess medium term prospects and conclude that progression is on the anticipated track, but that this should be expected over a slightly longer timeframe reflecting the challenges and opportunities presented in the IT services market. NCC’s services remain in the ‘essential’ category, with a high delivery reputation, in our view; so, we remain confident that NCC remains an attractive accretive asset for investors. We now take a more conservative view on financial progress for the current year and FY2021F, reducing our EPS forecasts by c7% (now forecasting growth in FY2021F of c14%). Growth is resuming across the group and we still expect this to acce
Assurance trends. Revenue grew 6.7% with NA +10.6% and UK +6.9%, the latter benefiting from focused hiring post the flat FY19. Sales orders grew 34% with average order value +30% to £30.3k and 66 deals over £250k vs 43 in H119. Combined with Q2 sales growth accelerating to 10% yoy vs 3% in Q1 (hiring benefits, customer spending patterns, better execution) the business is entering H220 with accelerating momentum. Technical Consulting grew 15%, while Risk Management fell 13% due to a realignment along more profitable service lines. Managed Services grew 6% and helped boost the order value. Assurance profitability. Gross margins were 33.7% (H119 34.3%) with continued investment to increase the technical consultant staff base. We expect H220 margins to benefit from the accelerating top line growth on the back of the strong order book growth which should drive up utilisation of the staff base. The focus on earnings quality in terms of securing reasonable pricing on contracts in the order book should also benefit margins. Escrow. Sales dipped 2.6% with UK down 2.3% and NA down 7.1%. Gross profits declined to £13.5m (H119 £13.9m). Renewal rates were 87% (vs H119 28%) but, with the new management team on board and sales teams fully integrated, the target is for modest H220 growth which should lead to flat gross profits, forming a base for growth into FY21. EaaS (the Cloud offering) saw £0.7m of orders which is encouraging considering it is in its infancy. The sales pitch and business drivers are clear, although channel pricing plans are evolving. Forecasts. We cut FY20E PBT by 4%, reflecting £1m extra interest due to IFRS16, an updated share count, tax and a £0.5m operational trim. New estimates: FY20E revenue £271m (unch), PBT £35.8m (from £37.3m), EPS 9.9p (10.4p). FY21E rev £290m (£292m), PBT £40.2m (£41.8m), EPS 11.1p (11.7p). View. Playing out of the transformation plan creates improved earnings quality and strategic positioning which should support the rating. Longer term strategic options could exist to unlock further value. 270p SoTP-based TP unchanged.
NCC Group plc Ultra Electronics Holdings plc
Headlines and outlook H120 results were largely positive with the FY20 outlook maintained. Group sales up 5.3% to £132.7m with Assurance up 6.7% and Escrow down 2.6%. Operating profit of £16.5m pre IFRS, up 11.5%. This compares to our full-year estimate of £38.7m, which implies some H2 weighting and margin improvement. With Assurance Q2 exit rates being double-digit growth vs low single-digit in Q120, c.30% growth in Assurance sales orders giving visibility on H220 and the continued focus on efficiency improvement should help drive H220 profits. Cash conversion much improved vs H119 at 71% vs 39% and while Q3 saw some softening from an increase in receivables in Q2, 85% is still targeted for the medium term. Assurance North America grew 10.6% and the UK was up 6.9%, with the UK seeing improved growth from 1% in H119. Q120 was slow, but Q2 picked up to double-digit growth giving group confidence in the FY outlook. Technical Consulting grew 15%, benefiting from previous staff hires. Risk Management Consulting was down 13% as the business focused on higher-margin work. Managed Detection and Response grew 6.2%. Escrow Sales fell 2% in the UK and 7% in NA due to a decline in renewal rates (87% vs 89% H119) and verification phasing. However, gross margin was stable. With the new management team on board, the focus will be on delivering growth in H220 and bringing the overall division to a broadly flat outturn for the year. Investment view We maintain our Buy stance and 270p SoTP TP with a view to the business hitting FY20 and seeing medium-term potential strategic value options.
Progress. The main H119 concerns were addressed head on, with good progress outlined. Cash generation improved markedly with end FY19 net debt of £20.2m vs £45.1m at H1. Improved systems and the ‘cash’ culture now installed should deliver sustainable conversion of c.90%. A clear Escrow Cloud strategy was given and, while material financial impact is someway off, strategic clarity was needed. Assurance attrition fell in H2 (FY19 18% vs 25% in FY18) addressing UK Technical Consulting resourcing issues. Crucially, the streamlining of systems and operational practice is on track, essential to delivering margin improvement. Assurance. Sales +9.7% to £212.7m; UK +3% (ex product), NA +23%, Europe +13%. Technical Consulting, 63% of sales, grew 13.5%. Lower H219 attrition & a recruitment drive added 102 to the global headcount giving a good platform for FY20 growth. A refreshed Managed, Detection & Response offering, akin to a new generation Managed Service, and continued focus on reinvigorating UK Risk Management (vertical approach, upselling from Technical Consulting) should move these areas to low double digit growth, from high single digit. Gross margins were 34.6% (FY18 34%) with EBITA margins at 10.6% (FY18: 8.5%). We expect further gradual improvement from improved earnings quality and operational efficiency. Escrow. Sales -3% to £38m with UK -6.5% (H1 -4.4%) from sales force churn leading to less new business. Renewals held steady at around 90%. GP fell to £28.3m (FY18 £29.9m) with EBITA £19m (FY18 £21.9m) at 50% margin. We forecast 47% in FY20E allowing for investment to advance the Cloud strategy, with scope for improvement thereafter. A clear Cloud strategy was given, with routes to market being the Cloud infrastructure providers (MSFT, Amazon) and Cloud ISVs, as well as end customers. Pricing is not expected to differ materially vs current levels. View. Forecasts unchanged. Assuming Escrow stabilisation, we see upside from a mix of market demand and operational improvement; we retain our 210p SoTP TP.
Headline numbers Results broadly in line, with sales of £250.7m vs our £252.7m and EBITA of £33.7m vs our £33.3m. H219 cash conversion was very strong, as outlined in the recent pre-close, with year-end net debt of £20.2m vs £45.1m at H119. Overall, the outlook appears consistent with maintained expectations. We expect to make small mix tweaks to our forecasts, but overall would expect our headline group estimates to be largely unchanged. Assurance encouraging Assurance saw 9.7% growth, in line with H119 trends. While the UK saw -1% decline yoy (implies H2 down -2-3%) this was down to stepping away from product sales. The core parts of the business (Technical Consulting, Risk Management, Managed Detection and Response) all saw high single digit or low double digit growth. The company is targeting low double digit growth across all these areas in FY20 and, with attrition having moved down in H219, this gives additional confidence in the outlook. Escrow – all in the plans to stabilise the business in FY20 Overall declines of 2.8% (H119 -1.6%) which implies a further weakening in H219, with the UK down -6.5% in the year (-4.4% at H119). However the company is making the recruitment needed and has clearly articulated a plan to address the Cloud software market with the ambition to stabilise the business in FY20. Investment view NCC is a recovery play with the plan largely back on track following H119 where numbers were reduced a little. If confidence can be given that Escrow can stabilise and with the increasing operational rigour and improved performance being seen in Assurance, this gives the upside to the investment case. This drives our positive stance and SoTP-based 210p TP.
NCC’s interim results last week showed continued operational recovery, with double digit organic growth in Assurance helped by improvements in both pricing and utilisation. We are making only minor changes to our underlying continuing forecasts and believe the group is well placed to meet full year expectations. We continue to see Assurance as an attractive asset in a key structural growth market, however as a 32% gross margin services business with limited revenue visibility, we believe the current 13x EV/EBITDA rating is full, and already prices in much of the anticipated margin recovery. With plenty of work to do to over the coming years to deliver the target operating model, we would like to see evidence that margins can return to previous levels. Our SOTP methodology uses a DCF model for Escrow and places Assurance on 14x EV/EBITDA, producing a target price of 215p. We therefore remain at Hold.
NCC released a trading update yesterday afternoon highlighting further issues in its Assurance division. Sales growth has been lower than expected in all regions, resulting in a significant reduction in full year expectations. We have reduced our EPS forecasts by 25% in FY’17 and 22%/25% in FY’18/’19 respectively. Escrow continues to perform in line with expectations. In response to these issues the Board has announced a strategic review into all of the Assurance businesses. The results of the strategic review are expected to be announced at the FY results in July. With an extended period of uncertainty on the horizon we believe it will be hard for investors to gain confidence in NCC in the short term. That said we see fundamental value in the stock. Escrow is unaffected by this warning and remains an extremely high quality business, which we value at £353m in our SOTP. At the current share price this leaves Assurance valued at c.5x cal’17 EBITDA. While this appears to be an attractive multiple for a rare cybersecurity asset, we would like further clarity on the underlying nature of the current issues, hence our Hold recommendation. Our 138p target price assumes a 12x EBITDA multiple for Assurance but we apply a 20% discount to the group to account for the current uncertainty.
NCC’s interim results last week held few surprises. The group issued a detailed trading update in December, giving full details of H1’17 trading and the impact of the contract losses/deferrals seen in the period. We make no major changes to our P&L forecasts today and retain our fundamentally positive view on the stock. The announcement that Paul Mitchell intends to step down as Chairman comes shortly after the appointment of Brian Tenner as CFO. We see the refreshed exec team as part of a wider renewal of the investment case, which will continue with the capital markets day next month. We believe that NCC remains a highly attractive asset and retain our Buy recommendation with a target price of 237p.
NCC released a detailed H1’17 trading update yesterday. Group revenue increased 35% in the period to £125.8m (+18% organic) and adj. EBITDA grew 15% to £21.3m. As flagged in October however, three large contract losses and a contract deferral will impact the full year outcome. We proactively downgraded our forecasts in November and reduce FY’17 EBITDA by a further 7% today. While the FY’17 performance is disappointing, we believe that cyber security remains a strong area of structural growth which will drive strong underlying performance. NCC remains a highly attractive asset and we see the current share price as an opportunity. Taking the lower end of our target price range results in a TP of 233p (from 266p). Buy.
NCC’s trading update last week highlighted both the continued strength in the group’s core businesses and the margin drag from recent acquisitions. Escrow is trading well, with all geographies now on an upward trend, while demand for cyber consulting remains strong. We are upgrading our revenue forecasts for the year to May’16 but the higher mix of low margin Accumuli and increased Domain Services losses reduces our adj. PBT forecast by 3%. Net debt is slightly higher than expectations but the group has plenty of headroom for further acquisitions. Trading on 16.0x Dec’16 EV/EBITDA, we believe the upside from further bolt-on acquisitions is already in the price. We leave our target price unchanged at 285p. Hold.
NCC Group has released a trading update for the 10 months to March ‘16. Group revenues are 60% ahead of last year at £166.1m, reflecting 21% organic growth as well as a contribution from recent acquisitions. We expect full year revenue to be ahead of our forecasts but, due to lower margins in Assurance and the bigger losses in Domain Services, expect the group to be broadly in-line with our FY’16 adjusted PBT forecasts, helped by a small FX tailwind. Net debt at March ‘15 is slightly higher than our expectations at £18.5m due to working capital differences but the group still has plenty of headroom for further acquisitions. The recent Fox-IT acquisition is performing in-line with expectations and Accumuli will be rebranded to NCC Group from 31st May 2016. After a recent dip in the share price, the group is trading on 13.8x FY’17 EV/EBITDA which we believe is fair value. We leave our target price unchanged at 285p. Hold.
NCC Group has reported its half year results for the six months to November 2015. Group revenue increased 50% to £93.5m, ahead of our £88.9m forecast, representing 17% organic growth. Group adjusted PBT of £14.9m is behind our £17.5m forecast however, and leaves plenty to do in H2 to meet our £37.8m forecast for the full year. The Accumuli acquisition has been fully integrated and initial reports from the newly acquired Fox-IT are strong. NCC Group continues to be an attractive way to play the strong cybersecurity theme but, trading on 16.9x calendar ’16 EV/EBITDA, we feel the shares are fully rated. We leave our TP unchanged at 285p. Hold.
NCC Group announced the acquisition of Fox-IT for a total consideration of €133.25m on Tuesday. At c.20.8x Dec’16 EV/EBITDA the valuation reflects the escalating price of cybersecurity assets in the current environment. The accompanying placing and open offer to raise £126.3m at 275p means the acquisition is earnings dilutive in all forecast years, although the level of fundraise also provides firepower for further acquisitions. Until the funds are reinvested the shares look expensive on Dec’16 PER and EV/EBITDA of 23.9x and 16.6x respectively. That said, investors have shown their support for the company so with further acquisitions to come, the shares should be underpinned at this level. We leave our TP unchanged at 285p. Hold.
NCC Group has announced that it has entered into an agreement to acquire Fox-IT Holding for €133.25m. Fox-IT is a Dutch headquartered, leading provider of high-end cyber security solutions. NCC Group has announced a placing of £126.3m at 275p and £110m of new debt facilities to fund both the Fox-IT acquisition and provide the firepower for further acquisitions. Fox-IT brings increased recurring revenue to the group as well as increasing its cybersecurity capabilities. 5.4x historic revenue looks expensive and the acquisition will not be earnings enhancing in its own right until FY’18. NCC Group remains one of a limited number of ways to play the key cybersecurity theme however at the shares look up with events for now.
NCC Group has released a good trading update for the first four months of the year. Both of the core Escrow and Assurance divisions have started the year well and we make no changes to our full year expectations at this time. Net debt has increased to £65.3m (Sept’14: £37.1m) post the Accumuli and Open Registry acquisitions but we expect this to fall throughout the remainder of the year. Integration of the Accumuli acquisition is largely complete with benefits starting to come though. After a strong run the shares are not cheap for a largely services business, but NCC group remains the cheapest way for investors to play the attractive cybersecurity theme. We increase our target price to 285p (16x Dec’16 EV/EBITDA) leaving the shares a Hold.
NCC Group announced its full year results to May ’15 last week, which were largely flagged at the trading update in May. Group revenue came in slightly ahead of expectations at £133.7m (N+1Se: £128.5m) and adj. EBIT was in-line at £26.4m (N+1Se: £26.2m). We believe the group continues to benefit from a lack of UK opportunities to play the attractive cybersecurity theme but at the current level the shares look fully valued. We make small forecast upgrades (+3.5% to FY’16 PBT), update our SOTP valuation methodology and increase our target price to 232p (from 208p), Hold.
NCC Group has released its final results for the year to May 2015. The results were largely flagged in the trading update at the beginning of May. Group revenue came in slightly ahead of expectations at £133.7m (N+1Se: £128.5m) and adjusted operating profit was in-line at £26.4m (N+1Se: £26.2m). Assurance continues to drive top line growth with 18% organic growth augmented by one month of the Accumuli acquisition. Escrow revenue increased 5% with the UK and US performing well and Europe stabilising. Domain services has recorded its first revenues however these are due to the Open Registry acquisition and compensation for the withdrawal of .SECURE. Cash conversion was strong at 107% with net debt coming in at £50.6m (N+1Se: £53.0m). Group renewals and order book is now £62.7m and continued strong demand for cybersecurity consulting in particular leaves the group well placed to meet our FY’16 estimates.
NCC Group has released full year results which reveal numbers that are slightly better than the in-line trading update given in early May suggested. Final revenue and profit numbers were ahead of consensus and our own slightly more conservative expectations. The big surprise was the strength of the performance from the Assurance division, which delivered 18% organic growth against our 11% target, easily making up for a larger than expected loss from Domain Services. While it will take some time to digest the two most recent acquisitions, the core engines of growth are clearly firing. Investment in new staff and the Domain Services strategy largely negates the profit impact of a raised revenue profile but the company has clearly demonstrated its growth credentials with this latest set of figures. We raise our Target Price from 253p to 285p to reflect this and the roll-forward of our base valuation year to FY 2016. We reiterate our Buy recommendation.
