Concurrent Technologies (CNC) is a much covered company here on the blog, so it should come as no surprise that given further positive news I am returning to this Colchester based business once more.
I won’t go into detail of the company's operations, as I assume most reading will already be familiar, whilst for anyone new to the company, they can find plenty here to look back on.
Suffice to say though, CNC has been going extremely well, with the shares proving highly rewarding for me to date, following a raft of positive news flow.
The latest on that front saw a pre-close trading update being delivered to the market last week for full year 2024, where the company announced that both revenue and pre-tax profit will prove to be records for the company and will now come in around 10% higher than previously upgraded numbers.
The shares responded positively and now stand at £1.70p each as more investors tap into the story of a company that has been significantly transformed in just a few years and is now benefiting from operational gearing as revenue scales.
Not that CNC was a lame duck, more a case of it being very conservatively run with what often seemed to be an inward looking focus at expense of really leveraging its growth potential.
As part of my coverage of CNC in recent years, I have spoken with management on a number of occasions, so it was clearly worthwhile my catching up once more, in order to firm up on a few aspects of the business that may assist other private investors.
At the outset, I reminded both CEO Miles Adcock and CFO Kim Garrod of my first conversation with Adcock, which was undertaken soon after his arrival at the company back in 2021, where he outlined a vision of a transformational path for CNC.
Adcock, the undoubted architect behind the changes that were implemented here rightly expressed a lot of pleasure when we spoke earlier this week, on what has been achieved over the last year or two, as he commented.
“I’m really pleased with things and its obviously really very gratifying when the things you said would happen, do in fact go on and happen”,
Those words which were echoed by Garrod, who has also been instrumental in the accelerating change, having joined the team a year after Adcock along with others, providing for a significantly strengthened team.
The really impressive aspect of the delivery at CNC though has been the considerable success in achieving organic growth, which has seen revenue increasing from the £18.3m delivered in 2021 to an expected £39.6m for the year now ended, that is also forecast to deliver a pre-tax profit of £5.2m.
Given the strength of that organic growth path, backed up by a small strategic acquisition that was made in the US, I had to ask as to whether the previous signaling of additional bolt-on-buys was still in the frame.
There was no hesitation from Adcock on this aspect, as he told me it is still very much in play and part of the strategy, stressing that they have always said that they will pursue M&A opportunities.
Equally though, he added that they were and had been clear that they wanted to ensure their US acquisition which was loss making last year was proven and fully up and on its feet first, which I was informed should happen within the next six months.
”I have structured the team and how it functions with acquisitions in mind” said Adcock, “in order to really liberate the horsepower for the people that are recruited on that, so we now have a business unit model.”
The UK and the US has, the CEO added, always been earmarked as the areas to concentrate on, particularly the US given the relative strength of that market and he stressed that the latter in particular retained that feel and attraction.
Of course, given its US Los Angeles based arm (Philips Aerospace) the extensive fire issues was something that I was keen to learn more on, particularly in relation to any potential issues for CNC’s operation.
To this end, Adcock said, “we have one employee there who has had to evacuate from their property which is obviously traumatic and a couple of others who have had to assist relatives.
But, they are working full time regardless and the business is not impacted as we are about thirty miles away from the epicentre.”
That should allay any niggling worries investors may have had on the operational front across the pond in what is an increasingly key area of complementary growth for CNC.
In previous conversations, we had touched on the System side of the business which clearly possesses exciting growth prospects for CNC, but it was what Adcock then described as being early stage, which also saw his adopting a cautious tone.
Commenting on where it is now at, he said, “we are still a bit cautious and there is still plenty to do, but now it is actually very different. The huge difference between now and six months ago is that we now have a material backlog, so it is really about mobilising for delivery now.
When we bought Philips Aerospace there were about twelve employees, but we are up to about twenty at the moment and we are continuing to recruit.”
The CEO also added that it has been all about taking the business from scratch which they are well on the way with and that will see Philips moving into a new facility in the first quarter which he said is quite a big thing in terms of change and progress.
They are, as part of that process, hiring some extremely experienced people and importantly getting what he describes as a pretty meaty backlog behind them along with a strong pipeline of opportunities through the year.
This, he describes as all being very positive for CNC, although he stresses that probably the most important thing to do, is establish a proven track record.
That is secured by the delivery and rubber stamping of their tech, which Adcock says enables them to put a tick into the box and firm up on that track record and ability to deliver, which is what this year is all about and which in turn further validates the offering, thus opening up more doors.
As a result, the plan is for that business to move to break-even this year, which will take away the drag on the group, therefore adding further to the positivity and expanding the picture ahead.
CFO Garrod added that Philips is a bit like CNC of the early days, where some really good functional capabilities have been built, but that it has required investment, which has been made in order to place it in the growth position it now occupies.
Clearly, with a notable backlog and a vibrant pipeline in a massive market, the opportunities for serious growth across the Systems space provides for significant traction for the business, which will further assist an already strongly performing board's operation.
Staying with Garrod, we also touched upon the potential dollar/pound currency issues, where she told me that it has been really good for them as a group, where, given that they report in sterling, they gain on the translation into money that is held.
They do however still have a natural form of hedge element that can work both ways for the company, depending on currency movements.
Probably the most key and driving question to the execs though had to be the subject of the overall addressable market, not least as so many ideas and numbers can be bandied around in this field.
Adcock was keen to expand where he commented, “it’s a kind of telephone number really, so it is really very, very big, but most importantly is that the government defence systems total market is many, many billions of dollars. So, I find a more meaningful measure is just how much opportunity do we have in our pipeline that we manage.
Of course, you don’t win everything that you have in a pipeline, but the pipeline of opportunity that we can see is roughly a billion pounds, which I mentioned a few months ago and that is over the next decade. More of that is firming up, as we get the design wins we talk about and we got twenty two wins last year, ten of which were really quite big.”
Leaving Adcock's assessment aside, according to various market insights the global customized avionic system market is estimated to be valued at circa USD 77bn this year, increasing at a CAGR of in excess of 7% in subsequent years.
Perhaps the most striking point to note regarding the performance and opportunity at CNC, is that when Adcock came in, the company really talked in terms of just tens of millions relating to a visible pipeline and it appeared very much restrained and confined in what it provided.
So, the billion that is confidently stated and which is clearly in sight and increasing, offers a realistic opportunity for seriously notable and sustainable growth in the coming years, where the lifetime of specific contracts offer clear visibility.
Garrod added, “that pipeline includes both early and latter stage prospects that we are actually going after and we are physically pursuing all of those opportunities. It is a really important metric and I believe it will continue to strengthen over time.”
That sounds extremely exciting, particularly as many companies often use the “pipeline” terminology somewhat loosely, that can often be taken with a sizable degree of salt pinching.
Given the building momentum and the previous upgrades, it was also worthwhile my mentioning the H1 and H2 split, which can often be indicative as to how a company is fairing operationally.
Adcock said that it wasn’t really worth reading much into that regarding CNC and was nothing to be concerned with, as the nature of defence was very much one that was notorious for lumpiness.
Looking ahead to the coming months and the rest of the year, Adcock said that he hopes to able to announce further contract wins, whilst the previous mentioning of increasing the factory capacity and additional machinery investment, also appears to be firmly in the frame ,with what he describes as clarity on that in the coming weeks and months.
One last point to touch upon, which I had visited previously prior to the US presidential election, was the prospect of tariffs being applied by Mr Trump and any impending impact on CNC.
Adcock reiterated, “its an area defence, where I hope that a UK defence company or product will not be high up on the list.
And if it did happen, I would hope that it would be pretty temporary in nature."
Additionally, if something should emerge on this front CNC has, he added, the facility to manufacture in the US, although he was keen to point out that he doesn’t see the tariff situation as an exponential threat or believe that it will transpire to be an issue.
With plenty of cash which continues to build, CNC is in a decent spot, with ample working capital along with some firepower for another strategic purchase when the opportunity arises.
Although it can rightly be argued that the shares are up with events at the current price, it appears to me that the runway is extensive and the business has a long way to go as it continues to scale up.
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