Profits growth supported by one-off effects
Newmark Security (LONDON:NWMS) posted a record reported pre-tax profit in FY15. The result benefited from orders for cash-handling equipment from the Post Office. The value of orders from this customer is expected to reduce during FY16. We introduce forecasts for FY16 and FY17, noting that growth from other activities is not expected to make up the associated shortfall in profits until FY17. Our analysis indicates that the likely dip in profitability during FY16 is already reflected in the share price.
Record FY15 underpinned by two major contracts
FY15 revenues rose by £3.7m (19%) year-on-year. £1.1m of the rise was attributable to CSI, acquired in November 2013, and the remainder primarily to the timing of orders received for time delay cash-handling equipment from the Post Office and accelerated installation of equipment at Post Office sites during H2 to meet the customer’s targets. Pre-tax profit, adjusted for £0.9m development writedown in FY14, rose by 28% to £2.3m. Management raised the dividend by 33%. Net cash increased by £2.8m to £3.9m (c 18% of current market capitalisation).
FY16 a year of transition
As flagged in our March outlook note, the level of activity relating to deliveries of cash-handling equipment to the Post Office is expected to reduce in FY16. During FY15 management instigated several initiatives to generate growth elsewhere in the group. These include opening a sales office in Hong Kong, signing a contract with a major systems integrator in the Middle East, launching the SATEON Pro midtier access control system and gaining government CPNI certification for CSI’s blast-proof doors. As a result of these initiatives, we expect FY16 revenues to be similar to FY15, but the additional cost to result in a reduction in profits. Revenue growth in the year beginning May 2016 should return the group to FY15 levels of pre-tax profit. Since the group is expected to be cash-generative and cash balances are high, we expect management to maintain the dividend at FY15 levels.
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