ANOTHER CATCH UP WITH PENNANT - 30/04/25

Whilst Pennant International (PEN)is a company that I have both held shares in and covered here for a number of years, returns for investors in recent times have been somewhat wanting.

The company, as many will be aware, is something of a niche player, primarily serving the defence sector where it provides system support services along with technical and training solutions.

Over the years it has won significant contracts, such as more recently supplying the Apache helicopter fleet with technology training and in the coming months, the expected contract award with the UK MOD technology upgrade to the RAF's GenFly training systems.      

Historically, the company has been reliant on these often large, but lumpy contracts related to well-known defence projects that have resulted in swings from periods of profit and promise to one of losses and frustration.

More recently however, there has been a concerted pivot away from the dominant historic hardware element of the business to that of a software focused model which provides for growth opportunities not merely around defence, but other markets such as aerospace and rail.

Importantly, this move results in much improved margins, the  building of a strong recurring revenue stream and a more defined  operation with a lower cost base.

A key and driving aspect of the roadmap here lies in the board, which has been significantly strengthened over the last year with bags of experience, whilst there are also some notably punchy supportive investors that have bought into a story which may at last be on the cusp of delivery.  

The company has recently delivered its full year 2024 results, which saw revenue of £13.8m resulting in adjusted EBITDA of £1.7m and an adjusted pre-tax loss of £0.4m.

Although those numbers hardly inspire confidence or suggest that the shares are a buy even at the current depressed levels, I believe the results need to be viewed in the context of where the business now stands and the prospects on offer for the goal of sustainable growth and profitability with a considerable reduction on the lumpiness.

In order to hear more, I caught up again with CEO Phil Walker and CFO Darren Wiggins, who were happy to talk me through various aspects of the business and what may lie ahead.

At this juncture, it is perhaps worth mentioning that despite the call lasting a full thirty minutes there were areas that couldn't be touched upon given the time restraints such as aerospace or rail,  so I concentrated on what I felt was of immediate interest.

Having streamlined the business, which has resulted in surplus property being sold, headcount reduced and certain aspects of its operations being outsourced, Walker was happy to refer me to the company’s potentially exciting Auxillium software system.

This has seen significant investment undertaken by the company and is an initiative the board has high hopes of delivering on scale, in order to provide for growth, along with the important aspects of ongoing margin improvement and cash generation.  

The CEO said that for many years the company has provided and sold various tools to support the design, build, operation and maintenance for specific assets. These, he said, are the likes of an aircraft carrier or a tank, which sees PEN’s offerings primarily  used all the way through the life cycle of the specific unit.

In terms of the value to the company itself, these he said reside in new programmes such as a new fighter jet where from day one, PEN’s services assist with mission critical data and data management amongst other aspects.

One of the key issues that NATO as a body or specific provider in countries encounter, is how to manage the data and ensure that it can be used and applied where strict industry regulatory requirements  are laid out.  

Auxillium, Walker said, is able to bring everything together regardless of nation or language, ensuring that it is completely compliant with industry protocol and easily accessible which can then be distributed and utilized across the supply chain.

CFO Wiggins added that as a part of looking to sell their software into both existing and new customers, aligning with partners will be a key aspect moving forwards and he added that they are currently working with one such player right now.

Whilst customers both existing and potentially new will be using legacy products, Walker said that PEN is able to provide a seamless transition, which should put them in a positive position to secure increasing adoption of its offering.

The CFO added that the picture is really about defence catching up with commercial in terms of the way it looks at data and the importance of the data supply chain, which he says sees PEN providing such services in an attractive offering.

As mentioned at the outset, the company has been something of a niche and clearly a relatively small player in its field, so I was keen to hear of competition in relation to its current pathway.

Walker said that it has often been something of a difficult story to convey given the breadth and spread of its product range, but that the software and technical service focus now really helps, as while they still retain the training capability it is no longer the core business.

Operating in the support space Walker acknowledges that it is unsurprisingly competitive, with the much larger business of Raytheon probably its main competitor, alongside others in Germany and the US.

However, he added that the differentiator is really on the capabilities, which sees PEN bringing everything under one roof or in one place as opposed to separate integrations.

In short, the CEO added that the space is very much a specialist discipline within defence or aviation, but that their offering is also applicable to rail, shipping and automobiles where the key principle is that of managing assets.

One aspect investors or watchers will no doubt have picked up on, is the “go-to-market” phrase that has been applied in relation to the growth journey that has been implemented, so I was keen to hear more on the sales strategy.

Walker confirmed that their own sales team remained small with a number of just six people, who are located across the globe.

Traditionally, PEN has sold direct to its customers, a number of which are major names which Walker explained has worked well on the technical training side.

However, on the software side, it requires scale in terms of coverage and this is where partnerships and specific integrations come into play.

On this aspect he refers to Klaas van der Leest the CEO of Intercede who recently joined the board of PEN as a NED and who appears to be providing valuable insights for the business into driving scale through partnerships.

That strategy, both Walker and Wiggins said, is going to be key in driving sales growth, where the CEO added that they hope to have some good news to release on that front in the next three to six months.

The challenge of course is delivering in terms of numbers on the transition path from its historic base to that of software and the strong recurring revenue that comes with it.

Wiggins said that they are getting there now after the programme of change that was initiated, but that the partnership focus will be crucial going forwards, where he also reiterated that there should be good news to come in the near future.

Despite now having increased opportunities away from Defence, it nevertheless remains a highly important sector that should provide for opportunities across the business going forwards.

Europe in particular is committed to increased spending which should provide for future opportunities, although Wiggins also pointed to the likes of Australia and Canada, where PEN is already well placed, along with the US where he said they do not see any issues or concerns around tariffs.

Returning to Europe, Walker added that they have really struggled in the past to sell into that market, but more recently the likes of Poland, Germany and Austria have all purchased their software, which was previously unheard of.

The issue of course for investors eyeing the broker forecasts is that there is little in the way of projected delivery until 2026, which then sees PBT moving to £1m on revenue of £14.2m.

CFO Wiggins said that they would rather be in a position to under promise and over achieve as opposed to the other way, but that it is a tricky one, given they have been through a difficult period regarding the transition and streamlining process.  

But, he continued, they had now achieved what they wanted to on the balance sheet and the cost base, so the challenge now really is to concentrate on sales and drive the top line.

Walker added that in the past PEN had secured various large contracts, but they frustratingly never resulted in upgrades, so it would be good for them to be able to announce a win and actually be in a position to experience some uplift.

Time will tell here no doubt, but with a much-revamped board and an increasing element of recurring revenue from a sticky product base, with firm market trends then it would appear that all is to play for.

One issue that has shackled the business though is what has been a weak balance sheet, thus restricting the ability to acquire strategic buys that may provide for increased opportunities.

To that end, although not yet perfect, the situation is much improved with the surplus properties sold or marketed.

Walker said that the final two units are now under offer, but that in the short term the company will be undertaking a sale and lease back facility. This is to ensure there is no disruption at a pivotal point in its transition and they will relocate to a more suitable base further down the line.

The end result of the disposals will be a welcome one, of seeing debt paid down which Wiggins said also sees their own internal projections anticipating what will be a cash positive business by the end of the year.

With a market cap of just £13m shares in PEN will perhaps understandably not feature for many investors, given it resides very much in micro-cap territory.

Despite that, it still has a reasonable private investor following, alongside as previously mentioned Institutions such as Rockwood and Miton who sit on decent sized holdings.

No doubt though, investors will, in  the coming months, be looking for evidence of contract wins across the various parts of the business and an accelerating adoption of its Auxilium product.

If the company can now secure contracts from both existing and new customers, then the future could prove a bright one and bring some welcome rewards for investors.