James Faulkner on WatsHot in cyber security: NCC, GB Group and Accumuli

Here at t1ps.com, we like to seek out investment themes that are built on solid foundations, then identify individual companies within that space that look undervalued. With this in mind, the proliferation in cyber threats to businesses and governments has led to the rise of a huge growth industry in cyber security, said to be worth $60 billion in 2011 (source: PriceWaterhouseCoopers).

The market is currently growing at a rate of around 10% per annum and the UK is the third largest player after the US and Japan. According to figures from Deloitte the annualised cost of cyber crime to UK companies surveyed in 2013 was just under £3 million per firm. While high profile cases such as the recent theft of customer data from eBay and Barclays are more well known, smaller companies are also under threat, with the Deloitte survey showing the cost of cyber crime ranging from £378,000 to £17 million per annum. As technology becomes more complex and permeates more and more aspects of daily life, this looks like a trend that will run for some time.

NCC Group (NCC)

For the UK investor there are several companies available in order to tap into this investment theme.

Perhaps the most well known of these is NCC Group (NCC), which stands for National Computing Centre. NCC pinpoints and eradicates security flaws in applications using penetration testing, reverse engineering and code reviews, while providing assurance over security and vulnerabilities for all information held, software and applications used, as well as the web environments. It also works to plan for and manage the impact of a potential hack and a rapid response forensic team. With its talents in high demand among many high profile organisations, NCC Group is fast becoming a truly international business, with operations in four continents and associated benefits of scale. In particular, its Total Assurance offering is considered to be unrivalled within the industry.

Of particular note for the future is the firm’s investment in .trust, generic top level domain (gTLD) which aims to create a universal environment for end users to operate and navigate the internet with complete safety and security. The group established a new wholly owned subsidiary, Artemis Internet Inc. in San Francisco, to develop the critical infrastructure and know-how to deliver this project. Although it believes it is too early to start modelling any revenue or profit contribution from .trust, broker Canaccord said it believes that, “if successful, .secure could prove transformational to the business and its valuation.” However, with forecast consensus pointing to mid single-digit earnings growth in FY14 and FY15, the current rating of c.20x does not look particularly attractive although there is undeniable quality here given the track record and strong operating margins.

GB Group (GBG)

Moving on, GB Group (GBG) specialises in identity management, primarily generating revenues from software that helps consumer-facing businesses identify their customers. The firm is particularly exposed to the growth of online commerce via its ID verification business as the reliable identification of remote users becomes ever more important to business. In the UK there are significant opportunities for growth as automated processes replace manual checks. Meanwhile, although a relatively small amount of revenues are derived from overseas at present, international expansion is seen as a major avenue for growth in the coming years. The group has access to multiple data sets, many of which are exclusive to GB and are major competitive barriers to entry. The group is organised into two divisions: DataAuthentication, which is the group’s ID Verification business; and DataSolutions, which provides its ID Customer Registration, ID Marketing Services and ID Tracing Services.

GB’s technology places it firmly at the forefront of online commerce, which continues to grow at a breakneck pace. In particular, it continues to build a valuable strategic asset in the form of its international ID verification capability; during the course of FY2012 it more than doubled the number of countries where it has the capability to carry out verifications that satisfy stringent anti-money laundering legislation. Together, these countries account for 44% of global GDP and approximately 22% of the world’s internet users, moving it closer towards its vision to provide verification of “Anyone, Anywhere in the World, Anytime”. The firm reports having received “significant new interest” in response to its addition of six new countries into the service, pointing to strong growth potential as the service gains traction.

As with NCC, GB Group has all the attractions of a fast-growing, profitable, cash generative business, with an element of strategic value stemming from its technological capabilities. However, trading on a current rating of c.26 times, the market seems to be well versed on the company’s merits. It is worth noting that both NCC and GB Group boast hundred million pound market caps, with the former worth £383 million and the latter valued at £185 million. They can no longer be considered ‘under the radar’ of the investing public.

However, one company that may well still be ‘under the radar’ is Accumuli (ACM), currently valued at just under £43 million.

Accumuli (ACM)

Accumuli is developing its offering as a one-stop shop for businesses looking for tailored solutions to meet the threat from cyber crime. We believe there is particular value in Accumuli’s agnostic approach, which incorporates elements of owned IP with third-party product sales. The firm sees itself as a niche player bridging the gap between the fragmented market of security resellers, among whom it identifies resale and acquisition opportunities, and the larger players such as Xchanging and Computacenter, whose large sales bases the company looks to exploit. At the same time as driving growth through acquisitions, the firm is generating enough cash to pay shareholders a meaningful and growing dividend. We also note it is one of the few companies on AIM to state an explicit dividend payout ratio, which is aimed at distributing up to 30% of pre-tax group EBITDA via dividend.

Revenues for the year to March 2014 grew by 18% to £16.6 million, with group EBITDA up by 21% at £2.9 million. Recurring revenues continued to increase, with 61% of gross profits now coming from predictable managed services, software support and maintenance contracts, up from 51% in 2013. On an underlying basis (ignoring one off items) 100% of group EBITDA was converted into cash and Accumuli ended the period with net cash of £3.63 million, down from £7.2 million (due to spending on acquisitions). The dividend was increased by 15% to 0.46p per share.

We continue to be attracted to Accumuli’s acquisition strategy, in what is a fragmented and growing market. Cyber crime is continuing to grow and it is becoming increasingly important for businesses to protect themselves against it – including the SMEs which are serviced by Accumuli. In particular, we note that 85% of Accumuli’s 700 customers take just one product from the portfolio, which suggests there is significant scope for cross-selling going forward. The market consensus is for underlying earnings of 1.7p per share for the current year, implying a P/E multiple of c.15.7 times, which looks reasonable value against forecast EPS growth of 25%.