NCC Group – All Credibility Gone?

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NCC Group is a FTSE-250 company operating in the “cyber security”and “risk mitigation” areas primarily, and the former is surely one of the “hottest” sectors of the market at present. But it’s hotter in other ways for NCC at present it seems.

Yesterday at 4.16pm (always a bad time to make announcements) they issued the latest of a series of profit warnings. In addition they announced a “strategic review” and that the capital markets event scheduled for today was cancelled. The share price fell 30% before the market closed yesterday and was down another 30% this morning. The share price was about 365p last October. It’s now about 90p at the time of writing.

Looking back over the recent history of the company, the long-standing Chairman Paul Mitchell announced he was stepping down in January, and in the same month a new CFO was appointed. In that month the company also announced the sale of the “open registry” group of companies that was trying to establish the use of trusted web sites in which the company had invested a lot of money without success.

The company has made a number of acquisitions in the cyber security area including Accumuli for £55m and Fox-IT for £126m in 2015. These were expected to generate rapid growth in sales and profits and the forecasts have turned out to be optimistic while the cost base has grown and hence damaged margins. Indeed the latest announcements says that sales levels are “unlikely to utilise fully the cost base deployed across the Assurance Division in the current financial year”.

In October last year the company announced the loss of three large contracts and problems with retention of others. Clearly the company has acquired businesses that have lumpy revenues with large projects that are subject to cancellation or implementation issues.

Meanwhile the Escrow Division “continues to perform in line with expectations” according to the latest announcement. This side of the business is very attractive in that the customers are very “sticky” and a very large percentage will renew each year, so there is very high and reliable repeat revenue.

So in essence the company has appeared to make dubious acquisitions which have turned out badly. This is undoubtedly a massive management failure for which the long-standing and previously successful CEO Rob Cotton must surely take part of the blame. Is he the right person to sort out this mess? We shall no doubt see in due course but any shareholders who have an opinion on that might like to comment.

Note: I have to admit to holding this stock, but I sold most of my holding in January. Simply did not like the emphasis on EBITDA in the reporting and the large number of reported “adjustments”. It was also clear that the nature of the business had been changed substantially by the acquisitions, and the previous trading update in October gave a way too optimistic view of the future with comments such as the rate of growth of profitability “remains in line with the Board’s expectations” and that “we remain on course to sustain our double digit organic revenue growth”. This was surely pure hogwash in essence.

As Mr Cotton was presumably responsible for these announcements, I doubt many investors will continue to believe that he should lead the company.

Roger Lawson

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