Defense Systems Shift And Capacity Expansion Will Support Long-Term Upside Potential

Catalysts

About Concurrent Technologies

Concurrent Technologies designs and manufactures embedded computer boards and systems for defense and other high-reliability applications across air, land and sea platforms.

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

• Defense spending remains very large in core markets such as the United States and NATO, and Concurrent Technologies is securing design wins and orders within this sector, which can support sustained demand visibility and future revenue growth.
• The shift toward open systems architectures in defense programs is reducing lock in by larger incumbents, which gives Concurrent Technologies more access to land vehicle and radar upgrades and can broaden its addressable market and long term order book.
• A growing portfolio of current, high performance embedded products and systems, including security and thermal management features, positions Concurrent Technologies to participate in technology refresh cycles, which can support product mix, pricing power and gross margins.
• The build out of systems capabilities, including the Phillips Aerospace acquisition and profitable progress in the systems unit, increases exposure to higher value system level contracts, which can raise average selling prices and support earnings over time.
• Recent investments that lifted Colchester board manufacturing capacity to an estimated £80m of annual output and expanded engineering and office space give Concurrent Technologies room to fulfil multi year design in wins and large backlog, which can help translate pipeline into revenue and support operating leverage and net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Concurrent Technologies's revenue will grow by 17.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.9% today to 14.1% in 3 years time.
• Analysts expect earnings to reach £10.8 million (and earnings per share of £0.1) by about September 2029, up from £5.2 million today. The analysts are largely in agreement about this estimate.
• 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 34.0x on those 2029 earnings, down from 43.4x today. This future PE is lower than the current PE for the GB Tech industry at 56.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.05%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Concurrent Technologies is exposed to defense budgeting cycles and procurement pauses in the United States, which have already led to slow order placement in some quarters and a very back end loaded order intake pattern. Prolonged delays or changes in defense priorities could reduce order visibility and affect revenue timing and growth.
• The company relies on long life semiconductor components from suppliers such as Intel. An early last time buy on one processor shows that sudden product end of life decisions can force large, one off orders and redesigns, which may compress pricing flexibility, disrupt programs and weigh on gross margins and earnings if repeated.
• Supply chain constraints across the electronics components industry, including higher DRAM and broader component pricing and availability issues, may require more advance purchasing and higher inventory. This could limit Concurrent Technologies ability to maintain current gross profit levels and could pressure net margins if costs cannot be fully passed through.
• The shift into higher value systems work depends on access to specialist engineering talent and successful integration of acquisitions such as Phillips Aerospace. Any difficulty hiring niche skills or managing further acquisitions could slow systems growth and restrict the improvement in overall profit margin and earnings that investors expect.
• Concurrent Technologies is increasing its operational footprint and capacity, including substantial capital expenditure on facilities and equipment. If the long term design win pipeline or defense electronics demand does not convert into sustained orders at the expected level, the business could carry underutilised capacity, which would dilute operating leverage and weigh on net margins and cash generation.

Valuation

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

• The analysts have a consensus price target of £3.26 for Concurrent Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.85, and the most bearish reporting a price target of just £3.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be £76.8 million, earnings will come to £10.8 million, and it would be trading on a PE ratio of 34.0x, assuming you use a discount rate of 9.0%.
• Given the current share price of £2.6, the analyst price target of £3.26 is 20.2% 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.