Manchester-based NCC (NCC) is showing genuine signs of
stability and recovery after a difficult period in late 2016 and early 2017.

Investor sentiment is starting to improve towards the company and its prospects, and we believe there could be at least 20% upside to the share price over the next year.

NCC is a cyber-security consultant and provider of software escrow services, which basically means it keeps safe vital code for enterprise software and applications.

The two sides of the business complement each other. While escrow is slower growth, it supplies the bulk of the company’s profit and cash generation from a globally dominant position.

The ‘assurance’ side of its business brings a high value cyber advice arm, plus web site and software performance and security testing, sometimes called ethical hacking (although these latter bits are up for sale).

Cyber security consulting should represent the faster growth engine in the future given that organisations and individuals are increasingly under threat from various hacking attacks.

A painful year

A combination of acquisition indigestion and contract delays sparked a profit warning just over a year ago. Over-optimistic management then extended the bad news in January 2017 after revealing a lacklustre third-quarter performance, triggering more earnings downgrades.

Those issues now seem to have gone away. With a (relatively) new chairman and chief executive, NCC has been steadied, streamlined and readied for a return to real growth.

The signs are encouraging. In its most recent trading update (for the three months to 31 August) the company hinted at a return to double-digit organic growth, if you strip away various one-offs.

The company also gave a clear signal to the market that it is confident of meeting full year expectations.

What the market expects

Current forecasts for the 12 months to 31 May 2018 anticipate mid-teens growth in earnings before interest, tax, depreciation and amortisation (EBITDA) and about a 12% improvement in pre-tax profit to £30.3m.

At first glance that leaves the shares looking fairly expensive on a price to earnings multiple of about 30. But we believe that the cyber security demand drivers are in place for NCC to perform beyond the realm of current expectations.

Part of that will come from strengthening profit margins as NCC moves away from reselling third party products and develops more tools of its own.

Some analysts believe a share price of 265p is feasible in the next year. But having traded beyond 300p prior to last year’s warning, we think a return to those levels is quite possible. (SF)

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