Canaccord downgrades NCC Group to 'sell'

Canaccord Genuity cut its rating on NCC Group to ‘sell’ from ‘hold on Friday and lowered its target price to 194p from 297p after the cyber security company warned that profit growth will be hit by "a number of setbacks".

In a trading update for first four months to 30 September on Thursday, the group said it experienced a number of setbacks in the Assurance Division including three large unrelated contract cancellations, a large contract deferral and difficulties with some managed services contract renewals.

NCC said it was too early to quantify the likely impact in the current financial year. For the time being profit expectations for the full year remain in line, but that profit growth would be "more biased towards the second half of the year than initially expected".

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. Group revenues increased rose by 36% during the four months to £79.6m, compared to £58.5m the same period a year ago, with organic growth of 21%.

“While revenue in the trading period exceeded expectations in Assurance, Escrow was below target and excluding currency the growth was around 1%,” Canaccord said.

“We believe Assurance revenue was driven by lower margin product reselling. With the dollar appreciating versus sterling post Brexit, US security products are now priced higher and potentially squeezing reseller margins.”

Canaccord said it was “sceptical” of management’s expectation that profitability will recover in the second half and that it will achieve full year profit targets.

The broker said contract renewal issues for Accumuli contracts will result in a delay in revenue recognition and a higher cost of delivery.

Canaccord has lowered its earnings forecast by 16% in fiscal year 2017 and 7% in 2018 and applied a reduced 18x profit multiple to the Assurance business versus 22x previously.

“Besides earnings expectations, we highlight the importance of monitoring free cash flow, which has shown a declining trend in the last couple of years,” the broker said.

“This should improve going forward following the closure of Domain Services but should remain an area of focus for investors.”

Shares rose 2.47% to 228.50p at 1009 BST.