Cybersecurity and risk mitigation specialist NCC group’s (LON:NCC) share price is currently facing the classic challenge of being a smallcap stock. Namely, exceptionally sensitive price movements to news flow. In this case, the price fell sharply by 31% in a recent session late January session to 125.6p from the previous day when it released its latest half-year results.
Mixed results take a toll
This is despite the fact that the results themselves weren’t all bad. For the six months ending November, 2018; NCC showed an increase of 8% in revenues and 7.2% increase in operating profits adjusted for individual or other specific items.
It seems that the investor reaction was driven by a sharp decline in net cash flows from operations, which more than halved to £6.6m as its working capital requirements increased sharply. Further, the large debt levels in consideration during the period might have played a part as well.
As per the latest update, net debt has increased to £17.3m, sharply up from £0.7m during the corresponding half of the previous year. This is on account of acquisition related expenses worth £9.9m, which have increased from £1m for the first half of the last year. It is worth noting, though, that the closing net debt has not seen any particular changes.
Promising prospects
Based on this, there appears to be an overreaction considering both the credentials as well as the future prospects for NCC. The company operates in the promising cybersecurity segment, which is expected to grow at a healthy 11% compounded annual growth rate from 2017 to 2023. It has also capitalised well on the opportunity, reporting a steady increase in revenues, which are expected to be at £233m in 2018.
The fact that pre-tax earnings have been less consistent is a downer. The company reported steady decline in profits over the past three years, ending in a loss in 2017. However, it is expected to be in the green once again, going by both the interim results as well forecasts.
From a longer-term perspective, the fact that the company has a geographically diversified business is a significant positive. While its largest market is the UK, accounting for 43% share of the revenues; the remaining is 57% is split up almost equally between US and Europe and the rest of the world. With Brexit likely to pose challenges to the UK economy, even if temporarily, it could tell on NCC’s business.
The critical nature of the service provided is also noteworthy, since it guarantees immunity to dips in business cycles. As a result, the company can witness continued stability in revenues even when other industries face growth slowdown.
Excessive share price correction
Despite this, NCC’s share price is trading at below the five year average price of 205p, which is a definite over correction. While the company’s indebtedness can make investors nervous, on balance, there is more going for the company than not. In other words, this stock is worthy of investor consideration.
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This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.
Manika P.