NCC Group confirms profit warning after contract losses

Cyber-security expert NCC Group has come clean on the details of an expected profit shortfall arising from losses and delays of several contracts in the core IT assurance division.

For the year to end-May 2017, the FTSE 250 group said it now expected adjusted earnings before interest, tax, depreciation and amortisation would be £45.5-47.5m.

It confessed that the gap between expected EBITDA and actual EBITDA in the Assurance division in the first half, "has become too significant to fill in the second half".

"After a full board and management review of the financial forecasts and considering the health of the Assurance business over the longer term, it was decided not to remediate the profit shortfall with short term initiatives."

Total group forward orders and renewals as stated at 12 December 2016 was £112.8m, up from £108.8m in September.

Assurance's order book and renewals base is £88.8m, while the level of Escrow renewals are now forecast to be £21.3m for the current financial year.

Group revenues in the first half of the financial year to 30 November increased by 35% to £125.8m, of which Assurance increased 42% to £104.8m and Escrow by 14%.

Group adjusted EBITDA increased by 15% to £21.3m.

"In our trading update of 20 October 2016, we stated that we had seen three large unrelated contract cancellations in quick succession and one deferral in the Assurance division but it was too early to quantify the likely impact. We can today update the market with full year guidance," said chief executive Rob Cotton.

"Whilst our forward visibility remains strong, we now do not expect to make up this profitability in the current financial year."

He insisted that while the news was disappointing, the contract cancellations "do not reflect any structural change in our Assurance business".

"The long-term outlook for our Assurance business is unchanged and we remain confident in the future prospects for both of our divisions."

Analysts at Shore Capital said the scale of the warning was no worse than had been feared and that the company's balance sheet remained robust, with strong cash generation continuing.

"Looking to the long term, the outlook does still look bright to us. Demand for NCC’s core Assurance services continues to rise, we believe that the issues encountered in the past few months are one-off in nature and reflect ‘growing pains’ to a degree. Strong growth is thus set to resume next year to May 2018, in our view," ShoreCap said.

Broker N+1Singer said it had expected NCC to warn on profits again as the company didn’t change guidance.

"We downgraded our forecasts on the last statement and todays guidance is 5% below our forecasts. We thus expect to revise our numbers today to be in-line with this guidance. The group have thus not been able to replace the three lost contracts which is disappointing but growth in the cybersecurity markets remains intact," said Jamie Constable in a mid-morning note, pointing out that the analyst conference call had clearly gone went well as the share price had recovered during it.

Shares in NCC had spiked as low as 171.5p in early trade before rallying to around 190p by 1130 GMT on Tuesday, for a 7% fall on the day.