Pennant International (AIM: PEN) suffered in 2015 from problems with a big contract which sent the company into loss. Phil Walker stepped up to the CEO position earlier this year and is keen to emphasise today’s broader spread of business and reduced risk profile. However he hasn’t been able to banish the issues that can arise in fulfilling long-term contracts. The interims revealed that a four year contract with General Dynamics to provide training for the Ajax armoured vehicle has been disrupted.
Not a disaster
As things stand there’s a downgrade to this year’s earnings as a result. But the re-scoping of the contract could lead to more work for Pennant next year and there’s a prospect of compensation. Phil Walker also says that there are a couple of other outstanding deals that could still lead to him making the numbers this year. So all told it isn’t a disaster and the new business pipeline suggests there’s some good growth to come.
Healthy bid pipeline
There’s a £35 million aggregate order book contracted over the next three years and £42 million outstanding overall. Revenues for 2018 are well underpinned and the company has increased its capacity to handle more volume. The bid pipeline, some of which is uncontested, looks very encouraging. There’s an opportunity to get into Boeing for the first time and a lot of potential work with Leonardo helicopters. Tighter training standards should also allow for an entry into more civil aerospace work.
There’s net cash and working capital isn’t an issue with upfront and progress payments. Revenue recognition could become a bit ‘lumpier’ due to new accounting standards, but this won’t affect the economics of the business.
The shares recovered a good chunk of the initial markdown on the Ajax contract issue and trade on a reasonable prospective p/e of 10.8 times.