Thursday, 2 July 2009

NCC tempts fate with pricing challenge

(By Anthony Miller – Thursday 2nd July 2009 9:15am). Self-styled “largest provider of Escrow services in the world”, NCC Group, is clearly exuding confidence in the face of market adversity. A bold statement in today’s FY09 prelims report (to 31st May – see here) that it is “the only provider who mandates quality ahead of price and does not intend to change that philosophy” rather tempts fate, especially as CEO Rob Cotton expects “price increases will be lower than seen in the past”. But, hey, no harm in trying.

But as we pointed out in its April trading update (see Security provides safe haven for NCC Group), NCC’s business seems to be holding up well. Top-line growth of 31% (to £47m) was underpinned by 19% organic growth, and operating margins eased only 130bps to 24.5%, the effect of acquisition dilution (see NCC beefs up security testing). NCC’s Escrow services are by far the most profitable, representing 45% of revenues (£21m) but 77% of segment profit, with margins easing 1pp to 55%. The UK Escrow business topped the group with 62% margins, up 2pp. Assurance Testing margins grew 2pp to 15%, against 49% revenue growth (38% organic) to £19m. Consultancy margins, as you might expect, rather suffered, dropping from 15% to 11% despite 36% revenue growth to £7m. This division will now be rolled in with Assurance.

But what really caught my eye in the report was the headcount mix and cost base. NCC averaged 352 employees in FY09 of which, wait for it, just 93 are “operational” – the remaining 259 being SG&A. Fully loaded average staff costs were £66K per head, up 17% yoy. Indeed, recognising that “Recruitment and retention remains the biggest challenge to growth for a people business”, NCC has neither capped nor frozen pay increases – though I couldn’t find any statement on attrition to see how effective this policy has been. By the way, SG&A accounts for some 19% of group revenues, up 1pp yoy.

And just a final point on NCC’s stock. I mentioned back in November that NCC’s shares were tracking spookily close to those of testing services player, SQS. Well, they continued to do so until SQS’ May profit warning, which leaves SQS’ stock down 30% ytd while NCC is up 8%. Glad I’m way out of the stock-picking business!

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