Cybersecurity attacks are on the rise, from the Colonial Pipeline incident to email hacks and data breaches. Our increased connectivity has widened the surface for potential bad actors. In 2021, the world saw a 105% surge in ransomware cyberattacks, which were designed to cripple businesses until money was paid. Thus it is no surprise Fortune Business Insights says the global cybersecurity market is forecasted to expand at a rapid 13.4% compounded annual growth rate between 2022 and 2029, reaching $376 billion by the end of the period.
As investors, it makes sense to invest in companies that are poised to ride growing trends. In this case, I will cover NCC Group PLC (LSE:NCC, Financial), a London Stock Exchange-listed cybersecurity company. Let’s dive into the business model, financials and valuation to see if the stock offers good value after the recent pullback in share price.
Business model
NCC Group is a U.K.-founded cybersecurity company that specializes in cyber consultancy, prevention and detection. It assesses cyber risk, develops cyber maturity and manages cyber operations for companies. Founded in 1999, the company went public in 2007. Today, it employs over 1,800 people across North America, the U.K., Europe, the Middle East and Asia. It offers a range of services split across two main divisions.
The first is the Assurance segment, which helps to verify an organization's systems and ensures processes meet the specified security requirements. These requirements vary by industry (automotive, fintech, etc.) and act as security goals for an organization.
The second is Software Resilience. This unit helps to ensure organizations are safeguarded from software vulnerabilities and supplier failure.
Source: NCC Group presentation.
The company has executed an extensive acquisition strategy over the past decade. Here are some notable examples:
- Fox-IT (November 2014)– a leading provider of high-end cybersecurity solutions.
- Virtual Security Research (VSR) (November 2016) – U.S.-based cybersecurity consultancy.
- Iron Mountain Intellectual Property Management (IPM) (June 2021) – U.S.-based software resilience and escrow business.
Stable financials
NCC has a stable financial profile. In its 2021 annual report, the company reported revenue of 270 million pounds ($329 million), up 2.6% year over year. The gross profit jumped by 5.9% to 110 million pounds.
NCC’s operating profit increased 37% to 17.3 million pounds and earnings per share grew by a meteoric 52%. The company’s gross margin has been strong at 40% and the operating margin was 11% in 2020 before dropping to 6% in 2021 as the company invested heavily in research and development. As a consultancy business, lower margins would be expected as people are the product to some extent. This is in contrast to pure software companies such as CrowdStrike Holdings Inc. (CRWD, Financial), which has an impressive 73% gross margin.
NCC has a strong balance sheet with 116 million pounds in cash and just 33 million pounds in long-term debt. The company pays a healthy 2.33% dividend. In terms of valuation, the GF Value Line indicates the stock is fairly valued relative to historic multiples, past financial performance and future earnings projections.
Final thoughts
NCC Group is a great company that is poised to grow along with the cybersecurity industry. Its revenue has been fairly stable over the past several years with small upticks. This is very different to a high-growth software-as-a-service cybersecurity company such as CrowdStrike, which is growing at an approximately 50% clip.
Regardless, the company is profitable, pays dividends and is very mature in the market. The valuation is fair after the recent pullback and, therefore, this could be a great value opportunity for those who want exposure to cyber consultancy. However, be aware the global talent shortage, especially in areas such as cybersecurity, could be a headwind for the business moving forward.
