Concurrent Technologies (CNC), the AIM quoted business focused on designing and manufacturing high-end embedded single board computers released its Interim Results last week, which I was pleased to see proved extremely positive.
CNC is a familiar subject here on the blog, where I have been invested for sometime now, whilst also speaking with management on a number of occasions.
So, anyone that isn’t overly familiar with business and how things have been evolving can find more comment here on the site that may prove useful.
Chatting once again with CEO Miles Adcock and CFO Kim Garrod on the morning of the results release, it was apparent that there is a clear air of optimism across the business, which has made impressive strides in what appears a relatively short space of time.
Indeed, that was something I put to Adcock, who, whilst acknowledging that much had been achieved over the last few years said that it really belies the extensive groundwork that had been laid.
“We are now really starting to see the benefits of three years of that groundwork, particularly in terms of being better at getting products to market more quickly,” said the CEO. He also added that they have now become adept at building business development with customers, which ultimately yields opportunities such as the impressive $6m contract that was secured and previously announced to the market earlier this year.
One aspect of the Interim results announcement that I was keen to touch upon at the outset, was that whilst the company stressed it was trading in-line with expectations, broker Cavendish had actually increased its numbers in a note on the morning.
Adcock was quick to hold his hand up to the apparent anomaly, explaining that the intent was actually for the in-line phrase to be aligned to the broker release and interpreted as such.
Although it was worth my raising for clarity and had no doubt been picked up on by others, it was nevertheless a minor point in the overall picture, which clearly, I was told won’t be repeated going forward.
More importantly, Adcock said that they have a building track record of being supported by conservative numbers from the broker, which ideally means that they can hopefully go on and continue to exceed on those going forward.
That sounds like the right stance to take, with under promising and over achieving clearly being the preference for investors, as opposed to a raising of expectations, only to disappoint on delivery.
Before taking a look at the numbers, it is worth noting the CEO’s upbeat tone, where he commented, “it is really starting to happen now and the major design wins are a key feature there.
Whereas previously we might have been a little more fixated on in-year orders which of course are important, now, we are not just securing new orders but really the most important thing is building that medium-long-term pipeline and the major design wins.”
Major design wins are a clear and driving aspect for the business moving forwards, where Adcock says that 2026 and 2027 will be linked and driven by these. “We won eight in the first half, which is the same number that we won in the prior year, so that is extremely encouraging.”
The previously mentioned $6m contract that actually has a lifetime value of around $40m, is clearly a testament to the progress achieved and underlines the potential for CNC on its growth journey which provides for a significant opportunity ahead.
Looking at the halfway figures, CNC saw record revenue of £16.8m, representing a 38.4% jump, which in turn saw pre-tax profits increasing by a highly significant 135% to £2.3m.
As a result, broker Cavendish has upped its full year 2024 forecast to revenue of £36m with pre-tax profits expected to come in at £4.7m, whilst net cash is earmarked to end the year at a decent looking £14m.
With an increasing and comfortable cash balance, even allowing for a progressive dividend policy, I enquired as to the strategy on organic growth in conjunction with the potential for further acquisitions.
To this end, Adcock told me that additional purchases are very much on the agenda, although he cautioned that investors shouldn’t necessarily expect CNC to do anything in the very short term.
Expanding he said, “As we move forward, the next acquisition will probably be a lot larger than that of Philips, which was very small.
That suggests we would likely come to the market again and we have certainly had a lot of feedback regarding an appetite for us to do something like that.” Additionally, he said that they intend to do several acquisitions over the coming years, which alongside the existing growth runway could propel CNC into a seriously large player across its markets.
CFO Garrod, concurred that as operational gearing kicks in, the business should gather further momentum, as after a few years where the cost base had been increasing quite heavily, it is now pretty steady, despite continued and necessary investment across the business.
As a global player, there are only three countries where CNC isn’t active, notably Russia, N. Korea and China, whilst on the positive activity front, India provided for the biggest single customer during the period, followed by Italy and Malaysia.
With major design wins by structure providing for many years of growth, there are no concerns in relation to potential changes in the US administration, as Defence spend looks likely to continue on its recent trajectory, which leaves CNC looking extremely well placed to further deliver.
As things stand, Defence made up for some 82% of business with Industrial-Commercial and Health accounting for the remainder.
The US remains the largest market for the company accounting for 35% of revenue, with Europe providing for 30%, closely followed by Asia at 25%, with the UK, which historically has delivered little, now accounts for a respectable 10%.
As with any business it is always worth looking at the exposure to, or reliance on any one customer, so it is reassuring to see that CNC has a very healthy mix as with its global footprint.
The largest single customer is responsible for just 7% of revenue with the top ten delivering 39%, as others see 54% being delivered, giving CNC a decent range.
Clearly the company is in a good spot with plenty to aim for, which sees it now planning for a third surface mount manufacturing line creating a circa £60m capacity for the boards arm.
With demand remaining high and a growing pipeline of opportunities across both boards and systems, more capacity has been and is being made available for additional shifts in order to service demand.
Since taking up the CEO mantle at CNC in 2021, much in the way of change has been implemented and Adcock said that some three quarters of those now with the company arrived at either the same time or soon afterwards his own joining.
As for the current mood, he describes it as being great fun which is a huge plus and is providing for a really enjoyable experience that is generating lots of excitement.
With what looks like being a busy and active second half for the company, broker Cavendish has issued forecasts now reaching out to 2027, which underlines the ongoing activity and visibility for the business, where there would appear to be further significant and sizable growth opportunities.
Those numbers do not of course take account of further earnings enhancing acquisitions, which aligned to what are potentially conservative numbers could provide for a further notable uplift.
For now, Cavendish is expecting revenue of £40m next year with pre-profit of £5.5m and EPS of 6.1p, whilst the dividend is forecast to move to 1.3p.
Although the forward PER of 20, may suggest the shares are now up with events, looking beyond the near term, they appear to have further attraction.
Reaching out to 2027, where profit of £8.9m has now been pencilled in, the shares would be trading on a PER of just 13 and with net cash forecast to swell to £28m by then, CNC remains highly attractive for me.
Of course, much can happen in the next few years, but with defence likely to remain high on the global agenda and acquisitions firmly in sight, then the risks would appear to be skewed to the upside.
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