CONCURRENT TECHNOLOGIES ON A GROWTH FOOTING - 02/05/24

Concurrent Technologies has been a very good investment for me over the last year and the shares now at £1.03p are standing at more than double my average buying price.

Needless to say, following very positive full year 2023 results announced this morning, I am sticking with the story here, which looks set for further momentum across the business in the coming years.

A quick reminder for anyone unfamiliar with CNC, that there are previous articles here on the blog to view for further info, but in short, the company is a designer and manufacturer of high-performance embedded computing solutions for some of the world's largest OEMs, serving  :Defence :Aerospace :Telecoms :Transport : Industrial.

Over the last year, I have spoken with management on a number of occasions in order to hear more on the turnaround and growth story that has been building here and yesterday was no exception.

CEO Miles Adcock sounded positive, along with CFO Kim Garrod, as I delved a little deeper on the performance and prospects ahead and where broker Cavendish has now extended its horizon by installing forecasts out to 2026.

That should be pleasing for investors here, suggesting good visibility, particularly as Adcock told me that he was comfortable with those estimated numbers that the broker has now laid out.

Before looking at the projections for this year, along with 2025 and 2026, it is perhaps worth just recapping on the numbers released for last year, which saw revenue increasing significantly to £31.7m, a 73.2% jump on the prior period and which delivered a pre-tax profit of £3.5m.

The order intake during the year proved very strong at £28.2m, whilst cash, even after investment across the business increased to £11.1m. Additionally, dividends are also now firmly back on the agenda with a 1p per share payout being announced.

Whilst that could be viewed as pretty low ball, particularly in the context of CNC’s historic reasonably chunky yield, it needs to be viewed in the context that the dynamics are much changed here and that the company is very much in growth mode.

Therefore management is striking what appears to me the right balance with the intention of pursuing a progressive dividend path.

Within the results release as a whole there was much to like, including a sterling performance across the UK, which historically has contributed little for CNC.

The £5m of orders recorded was significantly higher than anything previously achieved by the company, so despite still being a region dwarfed by the US, it was nevertheless a good starting point for my catch up.

Commenting on this aspect, Adcock said, “we won more than five million pounds worth of business in the UK last year, which begs the question how. Candidly, we hired people who understand the UK, which historically the company didn’t necessarily do.”

This, he went on to explain, has seen CNC successfully building a sales and a go-to market team that understands just who are the prime contractors for defence in the UK and how exactly the procurement process works with the MOD.

The strategy is a complete contrast to how CNC previously operated and is now clearly bearing fruit, which looks set to continue on a positive path according to the CEO.

The US is of course the main thrust and concentration for CNC though, where with such a massive defence spend the company has not only already benefited, but looks ideally placed for further profitable growth.

Speaking of a recently announced $1.9m win with a US Prime Contractor, Adcock again sounded upbeat. Commenting he said, “in some senses the absolute value isn’t what is interesting about this piece of work. What is really interesting about it is that it is different, being different in nature from what we have done before, as we are not just selling boards, we are adding additional value to the customer.”

Worth noting too, is that this particular deal took more than a year to come to fruition being close to eighteen months from start to conclusion providing for valuable insight into the nature, speciality and complexity of the area CNC operates in.

This, Adcock explained, took a lot of upfront relationship building, much understanding of the customers particular needs and all in an environment where CNC was new to the customer.

Initially, some work was done upfront to demonstrate CNC’s credentials which was delivered well and subsequently led to the much larger order. “For the same programme there will be more work” added the CEO “may be as much again, or perhaps a bit more, but it is more a proof point about us doing something differently to how we used to work.”

Whilst that specific contract suggests something of an inflexion point to this writer, Adcock said, “the bigger inflexion point, or proof point is the number of design wins that we secured last year in the US, unlike anything we have done before. We don’t really see the significant benefit of that until perhaps 2026 as that is just how long it takes customers to do their upfront work, but that is the real thing we achieved last year which will be substantial in terms of this business.”

Although CNC has had a footprint in the US for many years, there has been a clear and significant acceleration under Adcock’s guidance, which also saw a more recent acquisition in the form of Philips, potentially opening the door to further significant opportunities.

To this end, I was keen to hear more on just how that has gone or is proceeding, particularly in terms of any potential teething problems.

Adcock said, “there have been no negative surprises at all and we had the luxury of a year to build a relationship before we bought the business.”

As a result, the culture and drive has proven notably pleasing for the board with an extremely positive drive and on the back of that, they are doing a good job of continuing to bid for some early-stage work.

Adcock added, “We have a degree of optimism about winning a handful of meaningful opportunities in the short to medium term and I look forward to being able to talk about them in due course, so it is going well.”

There is also much ongoing activity in and around the Philips arm of CNC, with various recruitment ongoing, along with CNC’s engineering director currently out there, whilst they are doing well in identifying a facility that is much more fit for purpose to move the business into.

Spending on this new facility for Philips will come from the money raised last year and Adcock reiterated that it is going very well, where they have not had anybody quit, which he said is always a risk.

Although CNC serves other markets including communications, the CEO says that it is really all about defence, which last year made up 85% of total revenue and which was up from a previous 73%, so the focus is very much on the defence space.

This sees it producing secure, embedded processor solutions that are manufactured for long life cycle use, with processor boards that can be used in armoured vehicles deployed in extreme conditions of heat or cold.

Products are also deployed across a variety of platforms, including command, control, cyber defence, intelligence, surveillance and reconnaissance, radar and signals.

Despite the core defence concentration which also sees a large European revenue stream, further opportunities elsewhere will no doubt emerge and Adcock said that naturally they will be ready for those. As an example, a couple of years ago they secured a notable contract across the medical space where they now expect to get a repeat order.  

Having been through and emerged from a tough supply chain disrupted period, cash is once again building, although I was keen to learn of the working capital requirement and the moving parts within that.

CFO Garrod said that they are quite happy with where they are at on stock and payment terms, where she explained that customers pay CNC within thirty days, whilst they pay suppliers within ninety days.

That provides a positive impact on the working capital which runs around £3m and is a figure that both execs are happy with, particularly given previous headwinds that are now well beyond them.

Garrod went further adding, “previously the business had been very cash rich, but hadn’t been through the Covid and components crises, which made things quite tough operationally. So, now we have got a really strict control on cash and it’s working out well for us and we will keep doing that, as cash is king in this business.”

One aspect also worth touching upon was that of inventories that had understandably been built up due to the previously mentioned headwinds around component supply chains.

Regarding this, Adcock was more than keen to explain and told me that inventory in 2023 was driven up by the need to increase stock levels to navigate the global components shortages in 2022 and 2023. Within that, a one-off last time buy of $4.5m of a particular component was made, where they elected to buy around five 5 years worth because it is in almost all of their products.

Rather than having to redesign all products very quickly and incur the cost along with customer disruption of doing that, they committed to a significant last time buy to give them time to design out dependency on the component as they saw fit.  

Going further the CEO said that they are consuming this product faster than planned and have created design out options for many products, so that is progressing well. The company revenues are much higher than the previous norm which subsequently drives a pro-rata upwards pressure on inventory.  

As lead time from suppliers reduces in line with general availability, this does present an opportunity to reduce overall holdings, which Adcock said is happening.  However, the new increased throughput of the business means that inventory norms will be higher than previously.

With the business very much in that growth mould,  broker Cavendish is forecasting net cash to swell to £16.5m by the end of the current financial year moving to £19.9m next year, so it is not surprising to see the dividend reinstatement and that progressive path being put in place.

But, given the increasing cash, what about further acquisitions, in light of what appears to be much boosted fire power coming down the line.

Adcock said, “we say we are acquisitive, but we also say we are going to take the time to get the benefit of the Philips acquisition. Nothing is going to happen on that front anytime soon, but that doesn’t mean we aren’t doing background work to develop a reasonable pipeline of what we could do.”

That sounds like a sound and measured policy which will no doubt resonate with other shareholders, particularly given the strong and visible runaway for organic growth.

With Cavendish now issuing guidance for 2026, despite his cautious nature, Adcock repeated that he is pretty comfortable with that, as he confirms that the goal is to grow the business into a significant one of size.

Clearly contracts take time though, not least due to the complexity, nature of security and other moving parts within defence programmes and CFO Garrod adds that there has to be a degree of patience.

That said, Cavendish is now forecasting 2026 revenues of £46.4m against this year’s £34m and next year’s £38m, whilst adding that they see their growth forecasts as conservative.

Pre-tax profit is also expected to hit £7.1m by full year 2026 with EPS increasing to 7.5p, showing positive traction from the forecasts for 2024 and 2025. Importantly, net cash is set to progress strongly too, increasing from last year’s £11.1m to £16.5m-£19.9m and £23.4m in the subsequent years.

CNC’s share price has recovered well over the last year on the back of real and tangible progress, but whilst some may elect for taking an early profit, perhaps concluding that the share price is up with events, I'm happy to stick with the story and am hopeful for further significant upside.

Given the momentum, there is clearly the chance of further upgrades and alongside the US, CNC has significant European exposure along with a now increasing UK presence.

Defence spend isn’t going to slow anytime soon and sad as it is, global uncertainty and aggression on many fronts should provide for significant opportunities for CNC in the years ahead.