1. UK Technology Industry Landscape

The Technology sector encapsulates a list of companies engaged in the manufacturing of semiconductors, creation of software, computers, or products & services relating to information technology. The technology sector has emerged as a defensive sector since the remote working environment amid the Covid-19 pandemic encouraged the requirement of cloud computing, artificial intelligence, technology tools to abstain from cyber-attacks, internet-of-things, among others.

Over the last ten years, the industry got expanded tenfold, with London inched closer to Silicon Valley. Moreover, the number of British unicorns with a value of more than USD 1 billion rose from 8 in 2010 to around 81 in 2020. In addition, the rapid growth was supported by increased levels of investments from £1.2 billion in 2010 to £11.3 billion during 2020. The strength of UK technology firms can be seen across sectors such as fintech, food delivery, e-commerce, and digital health. Also, UK has narrowed down the gap with the tech hotspots in the US and China. In terms of the number of technology unicorns and startups, London reached fourth behind the Bay Area, Beijing, and New York. Fintech became the most successful tech subsector, boasting 32 unicorns in the UK and securing £3.2 billion of new investment during 2020.

Key Trends in the Technology Sector

Risk Exposures to the Technology Sector

• Shortage of Semiconductors: The global chip shortage had triggered massive disruptions around the globe as companies failed to meet rising demand levels.
• Digital Business Interruption: The failure of systems and technology may cause a headwind in the digital business. It may happen because of cyber-attack, software or design error, or other technology issue without any physical cause.
• Cyber Crimes: The increasing number of cyber-attacks across several industries had posed serious threats, and the technology industry had tried to combat these attacks.
• Workforce Shortage: The shortage looming for the information security workforce would lead to the other emerging risks in the sector.

SWOT Analysis

Benchmark Index Performance

Based on the last two-year performance, the FTSE All-Share Software & Computer Services index has outperformed the FTSE 100 and FTSE 250. The FTSE All-Share Software & Computer Services index generated a return of about 14.61%; however, the FTSE 100 generated a return of around negative 1.15%, and FTSE 250 generated a return of around 12.74%

Figure 1: Two Year Benchmark Index Performance

(Source: Refinitiv; Analysis done by Kalkine Group)

Technology Sector Outlook

The UK technology industry had shown resilience boosted by the rising investment deals and accelerated job creations even after facing several operational headwinds presented by the Covid-19 pandemic during 2020. Moreover, according to the leading industry expert, the UK technology companies had shown the highest levels of optimism during Q1 FY21 since the second quarter of 2019. The digital boom experienced in 2020 had opened doors for several jobs across the entire UK. Furthermore, the global expenditure on IoT will reach USD 1.10 trillion in 2022. In addition, the global Augmented Reality (AR) and Virtual Reality (VR) market will reach USD 209.20 billion by 2022. In a nutshell, the growth of the UK technology industry would depend on bringing innovation in several sub-sectors such as software, semiconductors, AI, FinTech and IoT.

2. Investment analysis and stocks under discussion (KNOS, NCC, D4T4)

After gaining insights into the Technology sector, we would look at the business model of three Technology players listed on the London Stock Exchange.

A. Kainos Group PLC (LON: KNOS)

(Recommendation: Buy, Potential Upside: 15.63%, Market Capitalization: GBP 2.24 billion)

Kainos Group PLC (LON: KNOS) is an FTSE 250 index listed company that provides IT services under two divisions: Workday Practice and Digital Services.

KNOS will announce its six months ended 30 September 2021 results on 15 November 2021.

 

 One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is trading between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 15.63% over the closing price of GBX 1,814.00 (as of 12 October 2021).

B. NCC Group PLC (LON: NCC)

(Recommendation: Speculative Buy, Potential Upside: 27.79%, Market Capitalization: GBP 781.42 million)

NCC Group PLC (LON: NCC) is an FTSE 250 Index listed leading independent global cyber security and resilience adviser that serves over 1,500 clients worldwide.

The Company will pay a final dividend of GBX 3.15 per share on 4 November 2021 (Ex-Dividend Date: 14 October 2021)

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the 14-days RSI of ~22.95 indicates an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 27.79% over the closing price of GBX 252.50 (as on 12 October 2021).

C. D4T4 Solutions PLC (LON: D4T4)

(Recommendation: Speculative Buy, Potential Upside: 22.10%, Market Capitalization: GBP 140.30 million)

D4T4 Solutions PLC (LON: D4T4) is an FTSE AIM All-Share listed provider of data solutions. Established in 1985, the Company has global sales and delivery in 26 countries.

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the 20-days EMA of GBX 348.28 indicates an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 22.10% over the closing price of GBX 348.50 (as on 12 October 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 13 October 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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