NCC nosedives after warning of major contract cancellations
By Oliver Haill
Date: Thursday 20 Oct 2016
(ShareCast News) - NCC Group warned that profits growth will be hit by "a number of setbacks" in its core IT assurance division that included the cancellation of three large contracts, the deferral of another and delays with renewals of some contracts in managed services.
The FTSE 250-listed cyber security and risk mitigation group said its profit expectations for the full year remained in line, but that profit growth would be "more biased towards the second half of the year than initially expected".
Nevertheless, shares in NCC, having hit an all-time high above 376p early this month, plunged 33% in the first half-hour of trading on Thursday to 232p.
Chief executive Rob Cotton tried to reassure that the assurance problems were "unrelated" and that, overall, the company was making good organic growth progress across the business in what remained a fast growing market.
"Despite this, we will continue with our measured acquisition strategy and anticipate acquiring additional boutique cyber security consultancies over the next few months.
The forward order book and renewals stood at £108.8m, up from £71.9m this time last year.
Cotton said he was taking action to mitigate the setbacks and NCC remained on course to sustain our double digit organic revenue growth".
Outside of the assurance issues, the company generally saw its strong trading continue in the first four months of the current year, with group organic growth sustained at 21% rate and total group revenues were up 36% to £79.6m.
Organic growth was stronger than broker Shore Capital forecast but analysts accepted that caution would prevail with the contract issues in assurance "potentially impacting the group as it enters its seasonally stronger H2 period from December".
"These 'icebergs' must clearly be navigated to meet full year forecast expectations. Management state that guidance is being retained for the present, but we anticipate a need for caution, likely leading to downgrades to our numbers. Clearly, a lack of visibility is set to weigh on the share price."
Canaccord Genuity said it expected the contract issues will have a significant impact on first half margins and that the company's belief it can recover in the second "will be challenging given the expectation of group margins improving this year".
The broker expects consensus estimates for the full year to be cut by circa 10% "if only to be conservative and believe the downside could ultimately be greater if recovery is not achieved".
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