It has been some time since I last commented here on Concurrent Technologies (CNC), that being back in April of 2021.
Since then, quite a lot has happened across the company, with a new CEO being installed shortly after my piece, along with more latterly the shares unfortunately heading sharply southwards.
Nobody wants to catch a falling knife and in the current climate sentiment can be paramount to the short or near-term direction, so it is perhaps understandable there is caution here as with other stocks.
In the case of CNC though, I believe there could be considerable upside from the current 57.5p and that the recent retrace has been overdone in a company that is well placed for both organic and selective acquisition driven growth.
There are of course reasons aside general market malaise for the CNC shares having dropped away as there always are and they are at present well below the 52 week high of 92p.
Before touching on exactly what has been going on at the Colchester based business though, it is worth running over where the company stands, what it produces along with and its end markets.
A very long and well-established business going back to the early 80’s CNC is focused on designing and producing high-end embedded single board computers and other associated products for critical applications with a big emphasis on the defence market.
A large part of the attraction here is that the company is already highly regarded and largely viewed as an expert in its field by both customers and partners, where it is active across the globe.
Other notable markets include aerospace, communications and various industries along with scientific sectors, so it would appear to be in a ripe spot for growth.
CEO Miles Adcock who was appointed in June of 2021 has a wealth of experience including holding senior roles at QinetiQ, GEC and BAE and he has a vision to seriously drive the CNC business forwards and has assembled a strong support team.
In the past, the company is perhaps best described as being something of a plodder, or a Steady Eddie, with limited growth and aspirations, but conversely a consistent dividend payer along with sporting a sound balance sheet.
Indeed, speaking with Adcock soon after his appointment as CEO he stressed to me the potential for growth across the business, particularly in relation to the UK which had been in his view historically underserved.
To date, things haven’t exactly gone to plan, as CNC in keeping with others has been hit by semi-conductor and component supply chain issues that impacted on last year's revenues and profits.
To make matters worse, the company was run to the wire on delivering its full year 2022 results due to a late run on the audit along with a specific historic reporting issue emerging.
Collectively, those two issues combined to unnerve some investors, although my understanding is that on both counts, management was largely at the mercy of factors outside of their control and it shouldn't erode confidence.
The good news though is that CNC is now extremely well placed to execute on its mission and having enjoyed a period of strong order intake, the trend is expected to continue to grow.
A backlog of some £26.7m exists in the current period which underpins broker Cenkos’s forecasts and which in turn point to full year 2023 revenue of £25m being achieved with an expected pre-tax profit of £2.7m.
The return on capital employed (ROCE) is also set to register a more acceptable performance, with close to 10% for this year increasing to 12.5% and 15% in subsequent years.
In terms of earnings per share, the current year's forecast of 3.65p should then pave the way for 5.25p next year, whilst the PEG stands at an attractive 0.3.
That sees CNC at today's price standing on a PE of 15 falling to 11 next year, although it is quite possible that these numbers could yet prove conservative.
In order to hear more of what is happening and the prospects ahead for the business, I have been fortunate enough to catch up again with Miles Adcock, along with the CFO Kim Garrod.
At the outset, I remind the CEO of our previous conversation around the tapping into UK opportunities and importantly how that is now proceeding.
Adcock is keen to expand and says that in a post Brexit environment across the areas CNC serves it was doing almost no business across the UK, which seemed incongruous.
He also says that in the home markets if you can secure contract research that is government funded, be it MOD or others, they are likely to go on to affect the outcomes of that research and the requirements that they subsequently place on the product.
Adcock adds on the back of this that CNC is now starting to make progress in the UK and on the background of having been doing around £1m a year, he believes that they will do at least £3m this year.
He also refers to the news from last month concerning a £1.25m systems win with a UK Mid 250 company as evidence of CNC starting to demonstrate progress.
However, whilst there is plenty to now aim for on these shores with further progress anticipated, Adcock says that the US is a much faster accelerator for the company.
“The US already accounts for 40% of what we do” Adcock says “and we have employees in the US. The US is a very early adopter of technology products, so if you go there with the very latest tech, then they are likely to be very rapid adopters and that is certainly what we are seeing.”
Expanding, he says that the pipeline growth, by which he means getting design opportunities in, that subsequently result in purchase orders in two years or so is very positive.
The pipeline growth in the US the CEO adds really eclipses all of the growth anywhere else and it would appear there is strong momentum now in play.
Additionally, CNC reached an important agreement with an outsourced US manufacturing partner, Nextek Inc, which has added considerable new manufacturing capacity, particularly for sales of product into the considerable US market.
In terms of major design wins related specifically to the US which can ultimately prove quite lucrative, Adcock says, “this business would typically chase two or three major design wins per annum, but this year we are chasing in excess of twenty.”
Clearly, he accepts that they won’t win all of those, but it nevertheless provides for more colour on the prospects for the business and the significant opportunities ahead, where partnerships will likely play an increasing role.
Being well spread geographically CNC has numerous customers and is far less exposed as it would have been a few years back to any one large customer or specific major contract coming to an end.
Adcock says that the mindset is now shifting to running a number of design wins at any one time, so the business is far less exposed than it would have been historically, when something singularly large drops out.
There is also now an emphasis and shift to a differing customer base with positive margins in relation to the design and contract wins, making an altogether more broader and profitable business.
Given that supply chain issues continue to ease, coupled with what appear to be more positive tones emerging from the company regarding both near and medium term prospects, it is clearly disappointing to see the shares continuing to languish at the current levels.
No doubt of course investors or watchers from the sidelines will want to see actual delivery on meeting market forecasts and continued progress being demonstrated, which in turn would then no doubt help the share price reverse the recent trend.
Commenting on the current market guidance,
Adcock adds, “given the existential threat of the supply chain issues which we are partly but not fully through, it would be absolutely reckless to be anything other than appropriately conservative and cautious.”
That sounds like a sound view and the CEO is hopeful in the coming months of striving to enhance the prospects further, whilst remaining cautious.
Aside from the supply chain issues that impacted last year, I briefly touch upon the audit issue again and enquire as to whether CNC may look elsewhere.
On this subject it would appear that the CEO is clearly aware of the bitter taste it left with shareholders, but in relation to my specific question, he declined to comment.
As anyone else familiar with the business will be aware, CNC has consistently boasted a healthy net cash position which reduced sharply last year from £11.8m to £4.5m, whilst the dividend was also passed.
CFO Garrod, who herself is a more recent recruit to the business but with extensive and impressive experience is happy to expand on the cash position.
She explains that the second half should see the cash swinging back after they had continued to build inventory where they currently have around twelve months-worth in stock.
There have, she explains, been challenges, not least around two specific components, but that they are now seeing deliveries on that front, which if they continue as hoped for, then the stock should quickly start to reverse.
Another aspect of the growth proposition is the previously mentioned move for potential acquisitions, which when bolted on can quickly become earning enhancing.
Equally however, there are numerous examples of companies getting it wrong on this front and biting off more than they can chew, which too often ends in tears.
Adcock says that given the turning point in terms of operational performance, the team's clear priority at present is to absolutely execute on the improved performance through H2.
As a result, he gives no hint on timelines for any potential addition to the company, as it is he says, all about delivering on the core business in the short term.
Anything that is considered though would be absolutely aligned to the company strategy and would also be something small which could be easily integrated.
The CFO also tells me that she has dealt with many acquisitions over the years and as part of that process has invariably seen some go wrong and she is not prepared to see that happen at CNC.
As a result, they will be making absolutely sure anything bought will be right and go on to being a success.
Looking ahead to both the near and medium term, Adcock says that it really is all about defence for growth and around the high end requirement.
This brings with it value regarding price along with decent margins and he adds that the assembled team CNC has in place has extensive experience and knowledge across the field.
Aside from defence, other sectors aren’t deemed as less important, but given where the growth and requirements currently exist, then defence is clearly where it's at for the near-medium term.
An example of future potential wins for the company can be taken from the previously mentioned recent announcement for a system delivery with a Mid 250 company, which is extremely important going forward.
Here, Adcock explains that this involves a client coming to them and asking for a specific problem or issue to be solved and the contract concerned is effectively the first large customer systems order.
The CEO sees this as just the beginning around the specific system orders space and the plan is to grow the aspect of the business to be equal to that of the board's business over time, so it seems reasonable to assume that more news on this front will be forthcoming due course.
For now, the shares remain at 57.5p appearing unloved with little in the way of trading volume, where, given the recent retrace I enquire about any Institutional selling such as from major holder Miton.
Adcock informs me that Miton were met last week as part of the post results briefing along with others and it remains very supportive and he is unaware of any selling down of its large position.
The CFO echoes this and is also unaware of any majors selling, whilst Adcock adds that he was aware of one relatively small private shareholder selling out for their own reasons.
On a personal level CNC shares appear attractive to me, hence I have added to my position in what I see as a well run and ideally placed business with a real growth path ahead.
As revenues increase, profits should also appreciate quickly, where looking ahead to the broker forecast for 2025 pre-tax profits of £5.6m would deliver EPS of 7p.
Net cash is also forecast to rebound sharply with an expectation of £10.6m next year moving to near £12m by 2025.