Share of the Week: On the long road to recovery

Sometimes, the road to recovery can seem an insurmountable challenge. You'd certainly think that would be the case after a quick glance at the share price chart of NCC.

A profits warning back in late October hammered the cyber security expert and the stock slumped 38% in 24 hours. It had been trading at an all-time high of 377p just 16 days previously.

The following February it was hit again when a third-quarter trading update showed cash profit would be down by 20% and the group had initiated a strategic review of its poorly performing assurance division.

All told, NCC lost three-quarters of its value in four months, diving to a six-year low 88p.

Since then, it's been busy getting its act together. The episode cost chief executive Rob Cotton the job he'd held for 17 years. The search for his replacement continues, with chief financial officer Brian Tenner taking the helm in the interim and Chris Stone, chairman at AIM-listed CityFibre, joining as executive chairman.

And NCC shares have bounced back, filling the gap-down last February and very visible on the chart. They closed last week at 167p, ahead of hotly anticipated final results and update on the strategic review due Tuesday.

And NCC didn't disappoint, with shares up 9% on the day and 18% for the week to 196p. Clearly challenges remain, but broker Jefferies says Tenner and Stone have "quickly cleaned house" and "set a credible course for recovery".

Unsurprisingly, the numbers did not make for pretty reading, but they were in line with revised guidance: group revenue rose 17% year-on-year at £244.5 million, with operating profit down a third to £27.5 million.

However, lower-than-expected net debt of £43.7 million – down from £48.8 million – was a pleasant surprise and the dividend was maintained at 4.65p per share.

The strategic review threw up some positives, too – markets and customer views of NCC's services are good, while its Escrow division "remains an attractive business and stabilises the group". It will sell its web performance and software testing businesses and write down £62 million worth of intangible assets, as well as improving internal organisation.

"Our strategic review has identified the business's unique opportunity," said Stone. "But we need to change how we organise ourselves and improve our internal business processes.

"When we have successfully managed our way through this transitional period, improved our organisation and how we go to market, we see significant upside opportunities and material value creation."

While N+1 Singer analyst Oliver Knott reckons the current share price is "up with events", Jefferies' Ken Rumph remains positive, albeit with a target price reduced by 7% to 252p.

NCC shares aren't cheap, and clearly on a recovery rating - a revised earnings per share forecast for 2018 of 7.1p puts them on a forward price/earnings (PE) ratio of 27.7 times.

That said, NCC's inherent strengths and its 2.3% yield should support shares, while the new management team's master plan is put into action.

Rumph admits the recovery story is "far from a no-brainer" and notes many investors will prefer to "wait and see". Management certainly isn't, though. Five directors, including Stone and Tenner, picked up a total of 227,543 shares at around the 180p mark.

At a combined total of over £400,000 spent between them, that suggests their confidence in the business is high. It's already a very profitable trade.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.