Open Standards And Systems Expansion Will Support Long Term Defense Computing Upside

Catalysts

About Concurrent Technologies

Concurrent Technologies designs and manufactures embedded computer boards and systems, selling primarily into global defense programs.

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

• Growing adoption of open standards architectures in defense computing, such as SOSA, is opening more programs to competition. Concurrent's close alignment with these standards and the hire of a leading SOSA engineer positions the company to pursue a larger share of long running upgrade and new platform programs, which could support revenue visibility and margin resilience over time.
• Being early or first to market with Intel based embedded computing products, supported by prestige status with Intel and strong in house design capability, gives Concurrent an advantaged position when customers evaluate boards for long duration defense platforms. This can support future design win conversion into multi year revenue and earnings streams.
• The shift from selling single board computers to supplying full systems, combined with new design services work, moves Concurrent further up the value chain with higher content per program and record systems revenue of £7.3 million. As systems margins improve from the recent small loss and head toward the products business gross margin of 57%, this could lift group gross margin and earnings quality.
• Significant capacity expansion at the Colchester factory, where annual capacity is expected to move from roughly £40 million to about £80 million of output without interrupting current production, gives the company room to service a growing design win book of about £345 million over 2023 to 2025. This can support future revenue scale without requiring equivalent increases in overhead, helping operating leverage and net margins.
• Deepening relationships with global defense primes, a widening customer base across the U.S., U.K., Europe and Asia, and a strong balance sheet with £14.4 million of cash and no debt create room to pursue larger system programs and value accretive acquisitions in adjacent embedded computing areas, which can add new revenue streams while potentially supporting group earnings and cash generation.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Concurrent Technologies compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Concurrent Technologies's revenue will grow by 15.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 11.0% today to 13.1% in 3 years time.
• The bullish analysts expect earnings to reach £9.2 million (and earnings per share of £0.12) by about April 2029, up from £5.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 47.7x on those 2029 earnings, up from 38.7x today. This future PE is lower than the current PE for the GB Tech industry at 59.5x.
• The bullish analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.67%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Concurrent relies on large defense programs where customer testing and contracting can take several years. Any prolonged delays or cancellations in these long sales cycles could push out or reduce the conversion of the reported £345 million of design wins into revenue, which would directly pressure revenue visibility and earnings.
• The systems business is still described as a start up, has recently moved from a small gross loss to about a 16% margin, and depends on custom design work with lower margins before higher margin production phases. If volumes take longer to materialize or mix stays skewed to design work, group gross margin and net margins may remain below what bullish expectations imply.
• The expansion of the Colchester facility, with a capital cost of £5.4 million and an expected worst case running cost of about £2 million per year, effectively doubles capacity from about £40 million to about £80 million. If demand does not fill this capacity, the higher fixed cost base could reduce operating leverage and weigh on earnings and cash generation.
• The company is highly exposed to defense spending, with about 90% of revenue from that sector and a large share from the U.S., where management already reports slowness in order placement and government scrutiny. Any prolonged contracting lethargy or budget changes could affect order intake, backlog conversion and revenue growth.

Valuation

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

• The assumed bullish price target for Concurrent Technologies is £3.85, which represents up to two standard deviations above the consensus price target of £2.87. This valuation is based on what can be assumed as the expectations of Concurrent Technologies's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 £2.5.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be £70.1 million, earnings will come to £9.2 million, and it would be trading on a PE ratio of 47.7x, assuming you use a discount rate of 8.7%.
• Given the current share price of £2.25, the analyst price target of £3.85 is 41.6% 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.