It is close to a year now since I last commented here on Pennant International and where I then concluded that there didn’t appear to be any rush to go out and buy the shares.
Fast track to the present and that view has largely been born out, as the shares have, as I felt at the time, subsequently traded in a fairly narrow range.
Although the company has understandably been somewhat off of the wider investor radar in recent months, I feel now is perhaps an ideal time to have another look and catch up with where the company is presently at.
Based in Cheltenham here in the UK, Pennant is something of a niche, specialist business operating across defence, aerospace and rail sectors, where it works with and for the likes of the MOD, along with major blue chip names such as BAE.
As a technology company that has been operating for some sixty years, Pennant has more recently evolved to become a global player, providing a range of specialist services from the UK, to mainland Europe, Australia, N. America and the Middle East.
Over the years it has worked on numerous sizeable contracts, the most recent of which announced earlier this week sees it now participating in a major project concerning the UK’s new Apache Helicopter fleet.
Pennant will be working on this with Boeing Defence UK, which is a new customer and where the AIM quoted player will be providing significant redesign and upgrades to several Apache training devices in order to support the new fleet.
It is worth a significant £8.8m over three years and thus, arguably underlines the potential for the company, which is currently valued at just £14m, with the shares sitting at 37.5p.
Within its mix, Pennant also provides software and analytical services that complement the more historic technical engineering services, where alongside the Boeing announcement there were also wins revealed from this area.
These, included a contract signed for the supply of software and services to a new N. American customer in the civilian space and is worth around $1.8m. This is an area that the company has been actively looking at for some diversification and as such, the win serves to underline the growth prospects ahead.
The major Boeing contract win does however also highlight the lumpy nature of the business, with sizeable contract awards taking some considerable time from the commencement of being selected, to the signing off, which has been the case with this particular contract.
Still, the software business is beginning to mitigate that lumpiness to an increasing degree and accounted for more than a third of total revenue for last year.
In any case, much of that lumpy element is clearly already factored into the price at these levels, which provides potential for significant upside to the share price, if further wins of size continue to land from either area of the business.
Whilst nothing is ever certain, right now Pennant International does look to be in a good spot, having emerged from a lean Covid induced period intact and now appearing well placed on the back of economies opening up.
Additionally, the inevitable increased defence spending should, in light of recent events provide significant opportunities ahead for the company and it is interesting to note that the company is winning business from new clients and in extended territories.
Looking firstly at the order book, this is now up to a substantial £32m, providing decent visibility to support broker WH Ireland’s expectations for £17m of revenue to be delivered this year, followed by £18m in 2023.
Those numbers could however prove conservative moving forward, given a swelling near term pipeline that the broker cites as standing at a significant £50m-£60m.
In its note, Ireland comments, “we make no changes to forecasts at this point, but are excited about the optionality within this business, particularly in the light of combined increased visibility and a consistently strengthening mix”.
Clearly, with an increasing offering and expanding geographic footprint, it looks possible that if further significant contracts do drop through in the coming months, then upgrades to the current 2022 pre-tax profit of £0.6m and next year’s £1m could follow.
CEO Phil Walker, sounded delighted that the major contract as announced had finally come through after first presenting itself back in 2018, thus highlighting the lumpiness element of the business, highlighted above.
Commenting on the recent performance across the business, he said that in the last couple of years the UK operation had really suffered and that the major contract news had given the team a real boost, adding that there is a lot of positivity and improving confidence.
In contrast to the UK performance though, he said that overseas had, during the same period performed really well with both Australia and N. America being highlighted.
In terms of the current pipeline of opportunities, Walker says that there is roughly a sixty-forty split between training and software, where on the former, Pennant has a win rate of around one in three of those that it targets.
Software he says, differs in that they have a much larger win rate ratio and the pipeline is also growing at a much faster rate.
Both areas present important opportunities though and it’s a mix that Walker is comfortable with going forward, which brought me on to the current defence climate in light of the recent tragic events in Ukraine.
Commenting on the prospect of upside for Pennant, the CEO said, “Unfortunately we do see that, as uncertainty is always a good thing for defence and in the last couple of years you have seen some big commitments from the likes of Australia and Canada with defence and naval programmes etc, which flow into training and training requirements.
Obviously, we aren’t directly involved in military equipment, so it isn’t going to have a short term impact, but, as countries invest in their military and defence infrastructure such as platforms and programmes there is always a training requirement that comes alongside that.
Although it won’t have a short term effect, over a three to five year period, it will definitely have a positive impact for us”.
With Pennant’s now extensive footprint and the positive comments sounded from the CEO on Australia and N. America, I have to delve a little deeper on these territories.
“Australia is a real success story for us, because it’s the one market globally that we are able to deploy all of our capability. That is, whether it is training delivery, training product or software solutions and that business is probably going to account for 30% of our revenue this year.
Equally, N. America is now proving to be a growth market and in crude terms, I would expect sixty per cent of our total revenues for this year to come from those two regions”.
Given that in the past, much of the company’s business was derived largely from the UK and the Middle East, the extended reach must surely bode well going forward, as with a broadening offering such as the growing software arm which is clearly making strong progress.
Although on current prospects Walker says he is optimistic, I am really keen to learn if there are other potentially sizeable prospects within the pipeline that could emerge and drop through in the coming months.
The CEO says that they do have such opportunities, but whether that will impact this year or not is a question of timing. “We have another land programme and a middle eastern opportunity both of which are of significant values” he says, “and as far as we know we are the single source of that, but until we get something more concrete, I would rather not speculate on that now”.
That is perhaps understandable, given that some of Pennant’s previous contract wins have proven lengthy in terms of full confirmation, but it nonetheless resonates positively for the business moving forward.
In its update earlier this week, the company also drew attention to the disposal of a warehouse facility along with accompanying offices that will be vacant for possession from July of this year.
Speaking on this, Walker explained that the property in question is the company’s original HQ which was acquired way back in 1986. “What has happened over the last few years, is that we have built up a portfolio of property on two sites in Cheltenham. One site is on a campus and is all together, whilst the original HQ which is a big detached building is elsewhere”.
He expands by saying that given the nature of how business has changed and evolved, particularly with an increased focus on software, the connected site which consists of modular type buildings has largely rendered the original HQ surplus to requirements.
“We own the freehold on all of the property in the portfolio which is valued around £5m and in addition to the property on the connected site, we also own the land around it and we have planning permission to develop that land.
The plan is to consolidate all of the business on the newer site, which is built to a higher spec, being well insulated with a better environment rating along with better rates”.
Referring back to the UK market, the CEO says that after a tough time it isn’t back yet, but there are now signs of recovery and activity which he is encouraged by and Boeing is a great win, as that is a UK programme.
That said, Walker points out that it is still at present proving difficult to really progress contracts, which shouldn’t really be the case as it is a market where people can now easily see each other face to face.
And on that point, Walker says that the majority of the workforce here in the UK are back in the office as opposed to other territories where there is still a remote element.
Touching on the cash position and balance sheet strength, Walker says that the £2m outstanding from the General Dynamics programme has now been received and looking beyond that to the second half of this year, the cash position will improve massively.
This should result in a reduction from £3.5m of net debt to one of £0.5m net cash by the 2022 end, improving further next year to a positive £1.6m.
The company has in place a debt facility with what the CEO describes as a very supportive bank up to £4.5m and with its property portfolio, Walker is comfortable with its current position.
The company reports its full year 2021 numbers in May which will provide for a fuller picture on the last year and the prospects moving ahead.
It is however conceivable that between now and then further news on either aspect of the business could emerge, which would continue the more recent signs of momentum building.
Major shareholders at Pennant are headed by former Chairman Christopher Powell, followed by Gervais Williams Miton along with a host of others with smaller stakes including Downing and Tosca Asset Management.
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