PENNING A PIECE FOR RECOVERY - 20/11/20

Pennant International is a very familiar company to me, as I bought in on a few occasions around four years ago at similar and slightly higher levels that it stands at now. I subsequently sold out at the back end of 2019 - earlier this year in the 80p- 90p range with some achieved at over a pound, but didn’t manage what proved to be its top at around £1.40p.

Yesterday morning I elected to buy back in though, not least as the news on increased government defence spending should bode well for the company, although I hasten to add, it has continued to be on my radar for a while now, particularly after the share price dropped sharply away. The main issue that I and others no doubt have with the company, which provides specialist services primarily for defence and rail markets with specific support and computerised training systems, is that much of its earnings can be lumpy.

This effectively means that executing on contracts can take time, with an often lengthy process from the point of discussion to actual delivery and where in many cases work secured can be spread over a number of years, with stage payments. That latter point has its plusses too though, providing for visibility and more reliable revenue streams for the company over an extended period, particularly when it boasts some big named customers.

The most recent fall and significant reduction in the share price which sees it sitting with a market cap of just £13m came about on the back of Covid woes, which had an immediate and unfortunate impact on the business, although it is only more recently that it actually hit a low point of 30p. A buy yesterday for me, is very much on the basis of recovery and the company has already outlined that it expects a much improved second half of the year, with further progress coming to the fore next year, which if achieved as envisaged should see some kind of notable rerating for the shares. At present, like many companies there is no guidance in the market for Pennant, but its more recent track record has at least demonstrated an ability to generate decent profit and earnings which two years back delivered a significant pre-tax figure of £3.3m and EPS of 9.2p.

Of course, the past as is often said is no guarantee of future success and Pennant now has some way to go to gain investor confidence once more and buyers of the shares will be looking beyond the loss making year in progress.

That said, despite the current year proving extremely difficult, the current valuation looks paltry on a few fronts and as a result also has the added taster of a potential would-be suitor taking a close look, alongside the recovery in its own right.

Importantly, the business is very well established and works with and for, both major blue chip companies alongside various government agencies, where much of its works and technology is specialised, with Pennant operating where there is often a high barrier to entry.  

As the pandemic unfolded, the Pennant board quickly introduced a number of measures to control costs, much in keeping with other businesses and have to date achieved cost savings of some £1m.

  There has also, in the first six months of the year been cash generated of £3.8m, which includes payment from a major customer in the shape of US based General Dynamics which has resulted in a welcome positive management of working capital.

At the time of the interim announcement in September the company had £2m in net cash and alongside that, there is also should it be required a £4m banking facility with HSBC which is to date undrawn, so Pennant appears stable on the financial front given these extraordinary times.

Despite obviously trading through a difficult backdrop, it has secured £2m of contracts post the Interim period and overall it maintains a year-on-year order book at £36m.

What I and no doubt others will now be looking for however is confirmation of further contract wins as the wider economy opens up and projects move forward and to this end these could come at any time as is often the case with the company. The pipeline of live opportunities appears to remain strong and in the Interim report it was cited that £20m worth of single source contracts remain in play and this could in my view if successful, provide the shares with a serious uplift.

The company works for customers and partners across the globe, with the Middle East playing a key part of that and there is a specific slant on the UK and Australia where increased defence spending is now set to emerge, whilst more recently the US has featured via the way of General Dynamics.

Importantly and reassuringly at this juncture, Brexit does not concern the company, given where its end markets are and the OEM’s it works with.

Returning to the issue of lumpiness, it is also worth noting that as part of its endeavour to mitigate this, the company now has an increasing recurring revenue stream thanks to its OmegaPS software product that is used to reduce the cost of major capital equipment outlay across the defence and transportation markets.

The product is tailor made for assisting in the cost and maintenance related expenditure for assets such as a tank, aircraft, trains and rail infrastructure, where the Oracle-based software package is considered as being the world’s leading Logistics Support Analysis package. Existing contracts are now worth some £6m in annual revenue to Pennant and the PS product will also now benefit from a significant acquisition that was concluded earlier in the year, this being Australian based Absolute Data Group.

The purchase looks a decent one where there are clear synergies and cross overs with the PS product, whilst it also provides potential for Pennant to leverage other aspects of the business as ADG is not only active across defence and rail markets, but nuclear and shipping too. In other areas of the business a £3.5m contract award last year that is seeing the company both design and build a full sized replication training aid for Leonardo Helicopters provides for a flavour of the company’s expertise.   Returning to the share price, as Institutional holder Downing has sold down, the respected Miton has increased and sits on 13.2% which is slightly higher than another shrewd small cap growth fund BGF, which holds 11.2% of the stock. The next set of results (preliminary’s) are due out at the end of March, but it is quite feasible that the company is successful in announcing further contract wins prior to that, which may provide for an uplift from the current depressed levels.

In the past I have spoken with the management team and will perhaps look to engaging with them again, should any psotive news break.