NCC – profiting from  security focus

IT security concern NCC Group is profiting from an increased focus on the sector as high-profile attacks on a number of governmental and private sector organisations heighten the importance of protection from hackers and other malicious groups.

Founded in 1999, the Manchester-headquartered venture provides a variety of solutions to clients interested in their security. Its services include software escrow storage, which enables customers to access their data and software in the event that a software supplier goes down or is unable to provide data, software verification and what it calls ‘Secure Discovery’, a process for protecting intellectual property.

NCC also runs a software testing division for both online and offline systems. Its most exciting work, however, is its security testing division. This carries out a variety of services including the unusually named ‘penetration testing’, which tests the security capabilities of customers by launching attacks on them to find their weaknesses and assess their vulnerability to hacking. For those that have already fallen victim to attacks it offers ‘information forensics’, which aims to both protect the customer from further difficulties and attempt to identify the source of the attack.

It has been a busy year for the IT security industry, which has transformed itself from being an area of little interest to laymen to one that has taken on national importance amid the attacks that have taken down sites belonging to bodies such as SOCA (the Serious Organised Crime Agency) and which are said to be the work of groups such as Lulz Security, a collection of hackers that originated on the 4chan message board.

NCC recently reported a strong set of results for the year to May in which it declared a 21 per cent increase in adjusted pre-tax profits to £17.3 million on turnover up 49 per cent to £71 million. A full-year dividend of 13p was also unveiled, an increase of 21 per cent on last year’s dividend of 10.75p. Sales in its escrow divisions rose by 8 per cent to £24.85 million. Its assurance division performed particularly well, growing sales by 49.2 per cent to £70.1 million.

Finance director Atul Patel is unsurprisingly keen to emphasise the importance of IT security: ‘This is a big market that we are operating in which has more and more people becoming aware of the importance of protection in relation to software and business information.’

Concerning the wave of high-profile attacks on companies such as Sony, Patel notes that NCC does not disclose the names of its clients. However, he does remark that ‘some very high-profile victims’ have become clients of NCC after being attacked, adding that the area of ‘emergency security’ is a growing one for the business.

Future opportunities are to be seen in both protecting customers from attacks on their tablet computers, such as the iPad, and in protecting those that are moving to ‘cloud’-based systems, with Patel arguing that ‘most people are not considering the security risks of cloud computing’.

Analysts at Altium are forecasting adjusted pre-tax profits of £20.1 million (EPS: 43.4p) on sales of £84.1 million for the year to May 2012. In 2013 it sees profits climbing to £22.1 million (EPS: 47.3p) on revenue of £91.8 million.

A company that has experienced numerous reratings as analysts realised the importance of the security sector amid the well-reported attacks (which have most recently claimed News International, the company behind The Sun, as a victim by redirecting its site to the Lulz Security Twitter feed), NCC is well placed to grow further through both domestic and international customers.

Though investors may be worried that they have missed their opportunity, we think that the shares could have further to go as spending on IT security ramps up in the coming years. Buy.