Buy NCC Group (NCC) at 451.25p

A tip from SmallCapShares.co.uk

The experts at Small Cap Shares recommended in the May newsletter that subscribers buy shares in NCC Group at 375p. In just under three months the shares have soared, giving investors who followed that advice paper gains of 20% already. Our team of analysts believe that today's market dip provides an excellent opportunity to top up your holdings! To subscribe click here.

THE BUSINESS

NCC Group is a global provider of IT assurance, security and consultancy services. The firm has over 15,000 clients around the world, including 94 of the FTSE 100 constituents, who use its services to help reduce business risk and to improve the management of technology and information. Operating from 10 offices around the world, the company’s services centre around data security and the accessibility of crucial information and are used by companies in all sectors of the economy.

The group operates through two divisions:

Escrow Solutions:

Escrow applications are designed to assist organisations which rely on the use of facilities which they do not own or control. Companies often outsource the storage of information or let third parties manage their software and key processes. NCC Group’s Escrow segment manages access to these vital assets in line with agreements between the parties and ensures that important material can be accessed in the event of a disaster or a breakdown in the working relationship.

Assurance Testing:

NCC Group operates the UK’s largest independent information security business, which helps companies check that their systems, websites and networks are performing to the best of their abilities and are not vulnerable to security lapses, such as hacking attacks, or vulnerable to unauthorised access. Furthermore, the group also develops software and provides consultancy services, helping companies make better use of information, technology and business processes.

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CURRENT TRADING

NCC Group’s results for the year to 31st May 2010 made for impressive reading. The company reported a 15% increase in revenues to GBP53.7 million, which resulted in a 18% increase in adjusted pre-tax profits to GBP14.5 million. Earnings per share were up by 14% to 29.7p - slightly ahead of expectations - and in light of the strong trading the company hiked its dividend by 16% to 10.75p. Operating cash generation was very strong in the year, it representing 139% of operating profits. Net debt at the period end was GBP11.9 million after GBP13.7 million was spent on acquisitions, with net interest payments covered almost 50 times by operating profits.

We note that the firm has good revenue visibility, it forecasting Escrow renewals to be GBP15.2 million in the current financial year, with the Escrow verification order book at a healthy GBP2.2 million. In addition, the Assurance order book including acquisitions was GBP14 million. On the outlook the firm was very positive and said it "...remains confident in the Group's ability to deliver further sustainable growth and enhance shareholder value."

Recently, NCC further strengthened its Assurance operations through its second acquisition in as many months. The GBP15 million cash purchase of Cheshire-based SDLC Solutions Limited consists of an initial cash payment of GBP7.75 million, with the remaining amount dependent on performance related targets over the next 26 months. The takeover will enable the business to add SDLC's functional testing expertise and its range of software testing services to its operations and thereby provide a "total assurance service".

OPPORTUNITIES & RISKS

A threat to NCC Group’s trading could come from an anaemic economic recovery, which would make companies unsure about increasing IT spend and hinder the firm’s ability to raise prices. While a lack of business confidence could prove a setback to revenue growth the group provides a wide range of non-discretionary services through its Escrow and Data Security operations, offsetting exposure to any one particular area.  Furthermore, its consultancy services (which assist with the optimum use of networks, websites and security services) mean that the group has access to facilities that growing organisations require. 

Another threat to NCC Group’s trading comes in the form of new types of competition. The business has noticed the emergence of a number of low cost, virtual providers offering similar services. Even though these services can undercut the company’s prices the firm believes its clients would be reluctant to trust disaster recovery and risk mitigation services to fledgling operators without a solid track record. In addition, the company has flagged that its growth plans in its Assurance Division have been impeded by rivals poaching important staff.  While these two factors present obstacles to the execution of its growth strategy we remain optimistic about its prospects.

VALUATION

Following the recent results broker Brewin Dolphin raised its target price from 455p to 490p. Considering the growth expected we do not believe that a historic multiple of 15 times earnings is too demanding. The Escrow division continues to provide a strong base of recurring revenues for the group and management's strong track record on integrating new businesses means that the shares are a BUY.

Key Data

EPIC: NCC
Market: AIM
Spread: 446p - 456.25p

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