High Assurance Cybersecurity Regulation Will Drive Durable Long Term Demand For This Identity Provider

Catalysts

About Intercede Group

Intercede Group provides high assurance cyber security software that replaces weak passwords with scalable, credential based authentication for governments and regulated enterprises.

What are the underlying business or industry changes driving this perspective?

• Escalating frequency and severity of global cyber attacks on critical infrastructure, government and regulated industries is pushing organisations toward non discretionary, high assurance identity solutions. This is supporting durable double digit revenue growth and resilient margins.
• Regulatory tightening in the U.S., EU and Asia, including frameworks such as NIS2, DORA and FIPS 201 alignment, is expanding mandatory security spending and reinforcing Intercede's positioning in compliant authentication. This is underpinning recurring revenue and long term earnings visibility.
• The structural shift from on premises perpetual licenses to multi year subscription and annual recurring revenue, including new products offered only on subscription, is improving revenue predictability and lifetime customer value. This should support higher margins and smoother earnings over time.
• Expansion from personal identity into broader enterprise credential management for machines and autonomous AI agents leverages existing IP to address a larger addressable market as device and workload identities proliferate. This offers a pathway to accelerate top line growth and scale operating leverage.
• Growing demand for data sovereignty friendly, hybrid and on premises deployments in regions such as the EU and Middle East aligns with Intercede's architecture and partner footprint. This is supporting geographic diversification of revenue and reducing earnings dependence on the U.S. federal cycle.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Intercede Group's revenue will grow by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.9% today to 16.1% in 3 years time.
• Analysts expect earnings to reach £4.1 million (and earnings per share of £0.07) by about December 2028, up from £3.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 42.3x on those 2028 earnings, up from 21.2x today. This future PE is greater than the current PE for the GB Software industry at 33.3x.
• Analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.75%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Intercede remains heavily exposed to U.S. federal and defense budgets and has already experienced funding gaps and administrative delays on large programs. Any renewed slowdown in U.S. public sector decision making or a shift in spending priorities could further suppress deal timing and constrain revenue growth and earnings.
• The transition from perpetual licenses to multi year subscriptions is being managed gradually in order to avoid a hard pivot in public markets. Missteps in this shift, such as cannibalising upfront license sales faster than subscription revenues scale, could depress top line growth, reduce net margins and pressure earnings.
• Expansion into converged enterprise credential management for machine identities and agentic AI requires new capabilities and possible acquisitions. If product execution, integration or M&A choices are poor, Intercede could lose share to better funded or more agile competitors, limiting revenue growth and long term profitability.
• Intercede is choosing not to hedge foreign exchange exposure despite a large proportion of revenues being denominated in U.S. dollars. Continued sterling strength or increased currency volatility could erode reported revenue, compress net margins and weaken earnings even if underlying demand remains solid.
• The strategy relies on regulation driven demand and a concentrated base of high end government and regulated customers. Any relaxation, delay or unexpected change in cybersecurity and digital identity standards, or a loss of key accounts due to changing vendor preferences, could slow recurring revenue expansion and diminish earnings resilience over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £2.25 for Intercede Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £25.4 million, earnings will come to £4.1 million, and it would be trading on a PE ratio of 42.3x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of £1.29, the analyst price target of £2.25 is 42.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.