Concurrent Technologies has featured prominently here on the blog over the last six months, where I first highlighted it as being a potential turnaround/recovery play https://martinflitton1.wixsite.com/privatepunter/post/concurrent-may-be-ripe-for-a-turnaround-10-07-23.
To date, I haven’t been disappointed with my investment, as positive news flow has seen the shares appreciate around 28% to a current 74p, valuing the business at £63m.
As part of my investment and coverage of the business, I have been fortunate enough to engage regularly with management, who it must be said have been extremely open and accommodating.
Having already made strong and positive progress in recent months, CNC announced a positive Trading Update to the market earlier this week, which shows momentum building with revenues now expected to come in ahead of expectations for the full year 2023.
Being what is described as a world-leading specialist designer and manufacturer of high-end embedded computer systems and boards for critical applications, the company would appear to be ideally placed to prosper going forward, particularly across the area of defence.
In order to hear more on the content contained within the update, I have once again been fortunate enough to speak with management in order to add some additional comment.
CEO Miles Adcock appeared to be in a chipper mood, as he told me that there is a real buzz around the place and that he’s enjoying every moment of what is now a growing operation.
With that clearly being good to hear, I was, as a result, understandably hoping to listen that sentiment resonate throughout our chat, regarding the business as a whole.
Having been through and emerged from a difficult period as a direct result of supply chain issues, Adcock sounded both pleased and upbeat on the recent performance.
“At the start of this year,” he said, “we set ourselves the seemingly impossible objective of securing five million pounds of UK business, where, given it is pretty much December, I can say with a pretty big smile on my face that we have done very well against that objective.
We have really boosted order intake in the UK which is all defence related and where we are addressing a number of defence companies that we haven’t supplied to before.”
Whilst that is clearly positive and welcome news, the previously mentioned US market also continues to feature prominently, where Adcock continued "The other real growth for us is in the US, particularly across defence again, where we also have some companies that we haven’t worked with before and some of these are huge".
There are also not surprisingly within the mix other companies that they have worked with before, although some of the business is now with different divisions or locations.
Adcock concludes, “we have done a really good job and this is where we hired a sales team that knows how to hunt and which has done a truly successful job of getting into defence prime contractors that we haven’t worked with before, both in the US and UK".
The trend in the UK, which historically hasn’t really featured for CNC looks set to continue and gather further momentum as the CEO told me that upcoming, there are some quite large programmes.
“Let’s see whether we get a position on them in the short term, but, it could be that the five million order intake this year is dwarfed by the potential of the future".
CFO Kim Garrod, adds “what is really important to us is that we are a UK manufacturer and it is really very key to us to make a difference in the UK.”
Going on, she adds that when she came in, she really couldn’t believe the low level of revenue and activity CNC had on home turf.
That has now clearly been addressed, where the CFO concludes, “We have concentrated really heavily on that and we have some really good sales people working that market.”
With two clear aspects to the business in play, from boards to systems, I wanted to hear more on the prospects ahead, particularly in the case of the latter.
“Both pipelines are developing very well in terms of multi-million- pound contract wins” says Garrod, where she firstly touches on the boards aspect.
Here, she tells me that some of their new boards have been really well received by customers and are driving a lot of what has been going on.
Additionally, she said that lots of design wins have been happening, more than the company has ever seen before for those new boards coming to market.
Touching on the more recent, but exciting systems offering, Garrod continued, “we have been working on our systems side for quite a while now despite only recently buying Philips and its something we have been investing quite heavily in.
We now have an excellent business developer in the US who we hired and he is building a great programme of opportunities. It is early stage in terms of those opportunities as we aren’t as yet well known for systems, but we are hoping to see some system wins into next year and especially 2025 and 2026.”
With the Philips acquisition now fully supporting the systems operation, prospects on that side of the business looks set to build and the CFO expresses excitement at pipelines across both aspects of the business.
Whilst on a personal level I am always cautious of any reference to the word pipeline - which can often be bandied around often without much in the way of actual delivery - CNC is demonstrating not only success on the latter point, but what would appear to be on a solid pathway for a significant scaling up on the revenue front, which will in future years also see a step change in profitability.
Expanding on that aspect the CFO said, “We have done what we said we would do right from the start of Miles coming in, where we have invested and built a boards business that has the capability to support business of forty million.”
With investment having been and continuing to be made into the systems arm, she adds that whilst they aren’t quite yet at the position where they start to see the maximised level of profitability recognised from the boards business, it will absolutely come through.
With the two aspects of the business being totally different they will, going forward, be reported separately where Garrod sees the boards maximising profit as systems takes off on the back of the investment made.
In the update earlier this week, it was stated that singular order values had increased, so it was naturally an area also worthy of touching on for some further insight.
Adcock commented, “a strategically important decision was taken three or four years ago which was to really lean into an open standard architecture that the US DOD are driving.
The reason that is important, is that historically the big programmes are locked in with providers who have their own proprietary architecture, therefore, the customer is then trapped with those big providers.”
Having successfully pursued and delivered on its direction, CNC has now aligned itself to the SOSA programme (sensor open system architecture) which sees all of CNC’s products meeting requirements, thus increasing the scale of opportunities open to it.
This, Adcock explains further, means the company now get to compete like-for like with programmes, particularly across the US, but also elsewhere too, which brings about openings that are typically larger than those that would typically be seen.
Although defence projects are arguably renowned for some sluggishness or unpredictability in terms of timing and delivery,
Adcock says that where it relates to them, the positive takeaway is that CNC is actually designed into the programmes, meaning they aren’t going away.
Continuing on the defence theme, the CEO also commented, “in the medium term I think we will see our growth absolutely dominated by defence. It is in defence where they have the highest requirement and the most demanding technology, therefore it is a business in which you can make a reasonable margin and return.”
The result is that for now, CNC’s focus is very much on defence, although Adcock adds that this will evolve over time, but they will certainly not be distracted by focusing on sectors that they don’t understand.
Having very recently made the US acquisition, I was also keen to hear more on how that is proceeding along with any other potential additions to the company.
“Garrod says,”It is going well, although we have only had them two months and it is very early days and we said that we would go in with a light touchpaper.” Despite that, she adds that it is probably proceeding slightly better than they expected and that there is a closeness with lots going on in order to execute on the pipeline.
Regarding the potential for future acquisitions, the plan is to ensure that Philips goes well and that is the focus for now, with anything else more likely to emerge in the medium term.
On the back of the Trading Update, Broker Cavendish has upped numbers for this full year and next year, although these are stated as being conservative. That sentiment would appear to play out well with both exec’s who stress that they want to deliver and not over promise.
Expanding, Adcock stressed that 60% of employees and 85% of management joined after he did, where thus far all they have known at CNC was that they were in the midst of a component crisis.
As a result, he believes that it will now benefit from a period of six to twelve months of stabilizing, on which to proceed further forwards.
In terms of the forthcoming numbers, full year 2023 revenue is now pencilled in at £29m with adjusted pre-tax profits of £3.5m which moves to £33.3m and £4.3m next year.
Given the nature of its business, along with the positive defence sentiment and timelines, Cavendish also includes guidance for 2025, which sees revenue increasing to £37.4m and profit of £5.8m.
Whilst is it always best to treat such longer term expectations with an element of wariness, the trend and visibility here looks clearly positive, where given the sector activity, risk to my eye appears to be to the upside.
On an EPS rating, CNC stands on a PER of 16 falling to 15 and 12, which could be argued as being about right for now.
However, if the growth trend continues to gather and further more meaningful upgrades emerge then a case can be made for buying on a higher multiple, which could see the share price head further northwards.
Net cash, which had weakened following the previously built-up inventory, is set to swing back positively, where boosted via the raise earlier this year it is now set to come out at £10.3m for full year 2023 increasing to £13.7m next year.
Commenting on the cash element the CFO added “cash is ok, but not quite where I would have liked it to be, but it is tracking the right way”.
One other aspect worthy of a mention is the intended reinstatement of a dividend which Cavendish is forecasting to come out at 1pper share for the full year.
Adcock says that they believe it is now appropriate to embark on a slowly evolving dividend that can be supported in conjunction with further investment across the business.
Although as I stated at the outset CNC’s shares have performed well since my opening look and investment, I feel that there could be much more upside to come, particularly over the medium term.
Whilst it has always been a well run and highly regarded business, it nevertheless appeared to lack drive and ambition on the growth front.
Miles Adcock’s arrival and his subsequent assembling of a quality board and team has clearly taken the business up to another level, which could see some serious profits delivered in the coming years, if all goes according to plan.