Whilst a number of stocks featured here since last year have performed very well during the pandemic, Pennant International by contrast has been significantly impacted.
I highlighted this one as a recovery play at the back end of last year and although the shares retraced yesterday on the delivery of full year results, they are nevertheless still slightly ahead of my entry point.
Indeed, back in January of this year they were trading at 51p against yesterdays close of 39.5p, which shows that the shares can move very quickly depending on news and sentiment.
I’m not going to dwell on the numbers as reported in the results yesterday, as they can be viewed elsewhere and were largely as anticipated.
Moreover, I am interested in what lies ahead, where recovery remains the name of the game here and longer- term prospects by and large appear positive.
Following the announcement yesterday morning, I was able to catch up with CEO Phil Walker and again, rather than concentrating on the results, I was more inclined to hear of the future growth elements and what may drive the share price northwards once again. Walker is an open and engaging CEO who was keen to run through a number of areas relating to the business, but obviously felt extremely frustrated by the impact of Covid on Pennant.
He says that out of last year’s significant challenges they have quickly built a more resilient business, particularly across areas such as home working, that in keeping with others, was a new format for the company. As a result of that process, he says that Pennant was nowhere near impacted on the third lockdown as with the first and where, as a result of restructuring there will now be cost benefits to be recognised this year. “We are actually in a healthier position now, cash has improved which is a positive, although on the business front where a lot of that is export, we saw customers particularly on the training side defer investment decisions for twelve months”. On a more promising note, Walker also adds that Pennant currently has a contracted order book for this year of £14m and following a good recovery in the second half of last year he feels momentum is now beginning to build.
He also says that the current year has started better and the overlay is now to convert some of those pipeline opportunities and create some positive news flow throughout the year.
As a company predominantly operating in and around the defence space, my mentioning government commitment on defence spending isn’t lost on the CEO, who has been keeping abreast of the situation.
He expands, “following the PM’s commitment to defence expenditure last year, in March of this year we had the publication of the integrated review and the defence command paper. From this, I take three things, the first of which is continued investment in certain platforms such as Ajax and Wildcat. Pennant has been involved with these for some ten years now and that will continue, so for our core business that is certainly good news”.
Walker points to the second aspect concerning the focus on technology where in particular, reference to simulation caught his eye and clearly aligns with the group’s strong capabilities.
The third area noted is an increasing focus on assisting people leaving the services and transitioning into commercial industry which requires specific training support and plays to the companies strengths. Given such a vast spending commitment from government, Pennant looks well placed to win its fair share of business, particularly as a well established and highly regarded player operating in the space.
One cloud though that has been hovering over the business creating for uncertainty relates to a major (delayed) contract that is currently included in a £50m pipeline.
As I often say, having a pipeline is one thing, converting on it is another and to this end, doubt around the specific contract referred to has prevailed.
However, Walker is very upbeat on this, despite the frustrating timing issues and commented, “the defence review reaffirmed commitment to that, although it was quiet on numbers and timing. Since the review was published though, I’m pleased to say that the platform concerned has come through the process unscathed and remains very much part of the defence strategy. What we haven’t seen yet is how that proceeds through, but there is going to be a contract and its part of the defence strategy and we remain the preferred supplier”.
What is as yet unknown, is just when this contract will land, which would be extremely welcomed by the company and would no doubt provide for an uplift in the share price and prospects for the business and profits. Aside that specific contract, the CEO also adds that a building momentum and renewed confidence is echoed overseas and with Pennant lending itself to business in and around strategic platforms the opportunity is there to be executed.
Although the specific major contract mentioned in terms of announcements looks to be at the back of the pipeline, Walker says that there are other areas and markets that could deliver contract news in the nearer term. “Although none of those are likely to set the world alight, a million here, or two million there, are likely to trickle throughout this year. The longer term success rate though is based on bigger and major programmes and we just can’t predict the timing on those”. Looking at broker WH Ireland’s forecasts for the year in progress, the bar doesn’t appear to have been set particularly high, so a run of smaller contract wins in the coming months could provide for additional support or even share price uplift. The CEO is, however as part of the wider business also keen to refer to ADG which was acquired last year for £3.4m and appears to be performing very well.
He says that this part of the operation which is software and services focused is seeing a pipeline blooming where it enjoys high margins and high recurring levels of income.
In contrast to other areas of the business, Walker says that here, a one million pound contract certainly makes a difference given the key indicators and any such wins would make for a positive impact on the company performance. “Although we aren’t going to see say a five million contract there”, the CEO says, “we could get a couple of half a million pound contracts and that is the exciting bit for me, as I can see two or three of these landing in the next six months”.
Having made the ADG acquisition last year, we also touch on the potential for further additions to the group which could provide for a further broadening out of the business and a reducing of the lumpiness. “Yes, acquisitions are very much part of our strategy” says the CEO, and we were very close to completing two last year, but they are probably on the back burner now”.
They are, he tells me, in the commercial aviation space which has been through an extremely difficult time, so no doubt the decision to delay on any commitment there was a sound one given the recent and prevailing climate. The other aspect of acquiring such additional businesses though is very much determined by finances and something in the desired software/services arena which has largely performed well throughout Covid would probably involve a fund raise.
That isn’t likely to happen around current levels at which the share price resides and it would appear, getting the business back into growth mode is more on the immediate agenda.
Walker does however add that a small purchase sub a million could be achieved as they have an improved cash position and a bigger borrowing facility, but for anything above that, Pennant would have to raise money. The derailing of the company and its prospects by Covid thankfully appears temporary, and the signs for recovery indicate that it remains on course for that. Investors taking a longer term view could well be rewarded further down the line in this writers view and on that basis they continue to merit my interest. Expanding on past and present, Walker says, “we were just beginning to get some momentum into the business and then Covid came and it was like being hit by a bus. The second half of the year things started to get back on track, despite temporary issues and now this year things clearly feel better than last year. We are more resilient and things are ok, but we do want to really get back on the front foot now and it would be great to land a big one, which will come at some point”. Looking at Pennant’s current share price and market cap it remains an attractive potentially undervalued recovery play, with much of the downside seemingly factored in at these levels.
For now, broker WH Ireland is forecasting full year revenue of £16m with a small adjusted pre-tax profit of £0.1m, which clearly is no great shakes. It isn’t until 2023 that it sees revenue increasing to £18m providing for a pre-tax profit of £1m and EPS of 2.8p.
On that basis there would seem no reason to rush out and buy the shares, certainly not for those looking for fast returns as is often the case today.
But, fortunes can change quickly at Pennant where one or two smaller contract wins can make a difference, whilst a larger key successful announcement can provide for marked improvement.
The shares look destined to trade in a narrow range in the near term, but could, be one to tuck away or build a reasonable holding for longer term appreciation.