NCC Group PLC

NCC Group PLC (LON: NCC) is a FTSE 250 listed entity that provides cybersecurity solutions globally and serves over 1,500 clients worldwide.

On 27 January 2022, NCC expects to report its half-year results for the six months to 30 November 2021.

Investment Rationale – SPECULATIVE BUY at GBX 228.00

• Strong Fundamentals: The trading remained robust during FY21 as revenue and gross profit jumped 2.6% and 5.9% year-on-year, respectively. Moreover, it delivered excellent cash conversion of 88.2% in FY21 that resulted in free cashflow of £34.6 million. At the end of FY21, net cash after lease liabilities stood at £48.9 million (FY20: net debt: £42.4 million).
• Resilient Market: The cyber and software resilience markets shall continue to offer excellent long-term growth prospects.
• Acquisition: The Intellectual Property Management acquisition of around £157 million is expected to be earnings accretive and shall transform global Software Resilience business in the USA.
• Technical Indicator: From a technical standpoint, NCC’s stock price is approaching towards the lower Bollinger Bands, reflecting an oversold scenario. Meanwhile, 14-day RSI (~35.12) is also reiterating the same.
• Valuation Multiples: On a forward 12-month basis, valuation metrics – EV/Sales, Price/Earnings, and Price/Cash Flow are quite undervalued against the Technology sector.

Risk Assessments

• Weak Service PMI: The IHS Markit/CIPS UK Services Purchasing Managers' Index fell from 59.1 in October 2021 to 58.5 in November 2021, reflecting the impact of strongest inflation pressures in the past 23 years.
• Covid-19 Pandemic: As the Omicron variant is spreading rapidly, it can ripple across the operating territories.
• Operational Uncertainties: The ongoing supply chain shocks, and rampant ransomware attack can create significant operational difficulties for the Company.

AGM Trading Statement (as on 4 November 2021)

• Strong Trading: NCC continued to trade ahead of the last year in FY22 so far. Therefore, it is tandem with the management’s expectations for the full year.
• Acquisition: The acquisition of the Intellectual Property Management business performed as expected and integration progressed well.
• Growth Prospects: As the global economy continued to recover, its assurance and software business capabilities are likely to deliver further growth.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

Conclusion

NCC demonstrated solid financial performance despite the pandemic and reported another year of excellent cash management. Moreover, it has undertaken an acquisition of strategic and financial importance.

Despite increased global costs from inflationary pressures, FY22 revenue is expected to be higher than FY21, while the Company targets a double-digit revenue growth in the medium-term. The stock made a 52 week High and Low of GBX 348.00 and GBX 215.00, respectively.

Given the solid financial position, robust cash management, recent acquisition, and the favourable valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on NCC Group PLC at the closing market price of GBX 228.00 (as on 3 December 2021), with lower double-digit upside potential based on 23.28x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

FD Technologies PLC

FD Technologies PLC (LON: FDP) is a FTSE AIM UK 50 Index listed Software & Computer Service Company, which provides consulting services.

Rationale for Valuation – HOLD at GBX 2,050.00

• Solid Pipeline and Guidance: FDP won several new contacts in key markets that bolstered the Company’s pipeline. Hence, the Company expects FY22 revenue to be in the range of £255 million to £260 million, with adjusted EBITDA in the range of £31million - £33 million.
• Improved Stronger Financial Position: FDP slashed its net debt by 62% year-on-year at the end of H1 FY22, reflecting stronger financial position to pursue growth opportunities.
• Technical Indicator: From a technical standpoint, NCC’s stock price is approaching towards the lower Bollinger Bands, reflecting an oversold scenario. Meanwhile, 14-day RSI (~38.31) is also reiterating the same.
• Valuation Multiples: On a forward 12-month basis, valuation metrics – EV/Sales, and Price/Cash Flow are quite undervalued against the average of the Technology sector.

Key Risks

• Macroeconomic uncertainty: Surging inflation has curbed growth in the UK services firms, and consequently, the UK Services Purchasing Managers' Index fell from 59.1 in October 2021 to 58.5 in November 2021.
• Pandemic Induced Restrictions: Due to the concerns induced by Omicron variant, travel restrictions can have an impact on new business and pipeline opportunities. Similarly, lengthening of the sales cycle could have an impact over cash flows.

Recent News

Appointment of Adviser: On 18 November 2021, FDP appointed J.P. Morgan Securities PLC, as joint Broker to the Group with immediate effect.

Financial Highlights for the six months ended 31 August 2021 (as on 2 November 2021)

 (Source: Company Website)

• Strong Momentum: FDP witnessed an increased momentum across the business and reported a 7% year-on-year revenue growth in H1 FY22.
• Operational Achievements: It undertaken 41 KX subscription deals, signed 12 new customers, and launched KX Insights during the first half of FY22.
• Stronger Financial Position: The debt stood at £11.7 million on 31 August 2021, reflecting a 62% reduction against the position at the end of H1 FY21.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (FY22) (Illustrative) 

 Conclusion 

During H1 FY21, the financial performance remained in line with expectations and accelerated its growth strategy. Moreover, the rebranding of three businesses - KX, First Derivative and MRP as FD Technologies PLC shall create a distinct value proposition for its respective market. Moreover, the growing demand for digital acceleration has created ample opportunity for the Group. The release of the 4.0 version of Kx shall increase the Company’s competitiveness. FDP looks confident about its business and market opportunities, since it has significantly invested in the product, technology, and people. The stock made a 52-week High and Low of GBX 3,425.00 and GBX 1,894.00, respectively.

Based on the current trading, revenue guidance, accelerated growth strategy, strategic investments, favourable valuation conducted above, we have given a “HOLD” stance on FD Technologies PLC at the closing price of GBX 2,050.00 (as on 3 December 2021).

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

*All forecasted figures and Peer information have been taken from REFINITIV.

*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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