Earlier this week, Concurrent Technologies (CNC) delivered its full year results to December 31st 2020, which came out slightly ahead of broker Cenkos expectations.
It was therefore perhaps a surprise to see the shares moving in sharp retreat that morning from recent positive territory, before recovering some of the lost ground, closing around the 96p level. In order to gain further insight into the current situation and the prospects at CNC, I have been fortunate enough to catch up with both the MD and Chairman.
First up, MD Jane Annear, who expressed disappointment in the market reaction on results day as she thought that CNC had actually delivered decent numbers, and felt that perhaps they hadn’t conveyed the message very well.
In terms of the numbers delivered, Annear believes they were a good set of figures and pointed out that the 2019 results had been flattered by a one-off which bolstered the pre-tax profit, whilst 2020 by contrast had seen a substantial £0.9m intangible impairment charge.
Importantly, from an investor perspective and what is clearly apparent from both the MD and Chairman Mark Cubitt’s tone, is that the CNC board has serious ambitions to grow the business, where there is a cautious degree of optimism prevailing.
Speaking of where the business is currently at, Annear says, “what we had noticed in previous years was that revenue was tracking up, but perhaps not as fast as we would like to have seen. And although that was moving up, profit just wasn’t going with it, so over the last 18 months we have had a long hard look at that. What we found was that gross margins were actually very consistent on the top line but our return from India really wasn’t going with it and that was something which had to change”.
A firm decision was taken to exit from India and the MD says that cost them a bit in profit for 2020. But the upside from that move should now really begin to come through and that they were already seeing some of the savings materialising.
Looking ahead, Annear says that the business is now doing what they want it to do and that some things have been brought in-house including stock, making it easier to manage with the likes of logistics.
From an investment perspective, CNC appeals not merely as it is a well run fundamentally sound dividend paying operation, but, because its products are right up at the top of the range and growth opportunities exist.
This sees it serving firstly the vast defence market along with exposure telecom’s that right now embraces 5G and both areas look set for an acceleration in activity.
In terms of its geographical reach, the US is a major market for the company and the MD says that having an operation there which has been the case for many years is imperative, as customers in the US like to talk with and deal primarily with American’s.
To date, CNC has performed well in the region and that looks set to continue given the embedded nature of its well established operation and the connections.
There isn’t a reliance on one or two large customers either, as Annear comments, “we are pretty well spread and sell both direct and in- direct through distributors across Europe and the ROW”.
Defence is clearly a key driver of revenue though and the MD says,” defence may sound like just one small word, but within that you have the likes of land, air and the navy so there are many, many applications that we can serve”.
Following on from the PM’s upbeat message last year on defence, I am keen to hear whether this sees CNC standing in good stead as we move forward. “By pulling out of India we have got everything now being designed and manufactured in the UK, so we are in a great position to take advantage of that drive”.
The MD also points to globalisation and the effect Covid has had on supply chains and sees CNC has having absolutely made the right choice in focusing on its UK operation. “We recognise that we have to grow the UK business more and that is one of our objectives and we are in actually in the right place at the right time to take advantage of that. We are already designed into several UK projects, but I think we could do more, particularly by upping our services offering”.
Speaking of the companies AI product launched last year, Annear says that they have Intel software running on it which puts them in a good spot as being an Intel partner, CNC will be referred to potential customers.
In terms of delivering on growth - which is what investors clamour for - both organic and acquisition driven means appear to be firmly on the agenda as Annear comments. “We have got to do organic growth and we are getting on with that through our restructuring, but if we want to do some of the other things in the box, we really have to look at adding other skills and that is what we are doing”.
Acquisitions, it’s seems, are also very much now part of the strategy moving forward, although the MD cautions that they aren’t about to go out on a spending spree and buy up a number of businesses. “that isn’t what we are about, so the ideal will be something strategic with say a complementary software that can be applied to our hardware and our markets, and there are a couple of companies out there like that”.
CNC certainly has the cash to execute on such a strategy, but Mark Cubitt says that funding such an acquisition would depend on the structure of any business they may purchase. “If it was a privately owned operation then there could be a mix of cash and paper, whilst if it was owned by another company then they would probably be less inclined to take shares. But, as we are a quoted company, in such a situation we could also go to the market to raise a bit, although if any acquisition was around £4m to £5m we could just write the cheque for that. So, it really depends on the size and nature of a business”.
His preference however appears to be one of acquiring through shares or at least in part, as it provides for alignment to CNC.
Much will of course depend on the circumstances and he adds that existing major shareholders have already indicated that they would be supportive in upping their shareholding in light of any future raise should it be pursued.
CNC already has some decent and notable Institutions on board and Cubitt points out that Miton and Liontrust account for a quarter of the shares in issue, with other well known names also on board.
Looking to the future, in the results earlier this week CNC stated that the year had started well with the order book growing strongly in Q1 and Telecom activity recovering strongly after what had been a slower H2 in 2020.
Broker Cenkos has however taken a prudent view to the year in progress regarding timing on aspects in both Defence and Telecoms, but at the same time also adds that as such, its forecasts could prove over conservative.
This sees it anticipating full year 2021 revenue of £20.5m giving adjusted pre-tax profits of £3.7m and adjusted EPS of 5p accompanied by a total dividend of 2.65p.
That translates into the shares standing on a PER of 18 at the current price which, given what looks like cautious numbers appears attractive, particularly given that the company ended the year with a thumping net cash position of £11.8m and no debt.
CNC is, as mentioned previously, a well established and quality player that is extremely well run and conservative by nature. The goal, it would seem now, is to kick on and drive profitability to new levels which can be achieved through a mix of organic and the right acquisition assisted growth.
Cubitt, who has only as recently as March 2020 stepped in as the Chairman, certainly sounds positive and optimistic on the prospects for CNC and the seasoned Chartered Accountant is keen to expand. “I have been involved in a lot of technology companies and what I really like about Concurrent is that it’s a UK based business that is high end and top quality which isn’t competing with ASIA. It has a fantastic opportunity here that it can take across sectors we are in, defence and telecoms where there is a huge amount of growth”.
The Chairman believes that CNC can now take a bigger slice of its markets championing the fact that it is UK based producing absolute top end quality that is sitting in the right markets.
He adds, “We already have good products, but we also have the capability to add to that”. And a last word from the MD also suggests confidence and belief where she says, “over the last 18 months we have made lots of changes and things have actually changed quite a bit as we have to evolve”.
Even on the recruitment front there has been something of a shift, with a focus on bringing in more graduates to work alongside the more established heads, perhaps bringing in some additional enthusiasm and setting the runway for the future.